For 2011/12 companies pay corporation tax at 26%. The corporation tax rate is to be reduced to 25% from 1 April 2012. For UK resident companies with taxable profits below GDP 300,000, a lower rate of 20% applies. For companies with tax-adjusted profits between GBP 300,000 and GBP 1.5 million, the full corporation tax applies but with marginal relief which gradually raises the average rate of tax payable to the full rate as profits reach GBP 1.5 million. For corporate entities with associated companies, both profit limits are divided by the number of active companies in the group to reach the threshold at which each company pays the full rate of corporation tax. Corporation tax is payable nine months and one day after the end of the accounting period, but companies with profits over GBP 1.5 million must usually pay tax in installments.
Large companies receive an enhanced deduction of 130% for research and development (R&D) expenditure. From 1 April 2011 small and medium enterprises receive an enhanced deduction of 200% for their R&D expenditure, and the government plans to increase this to 225% from 1 April 2012, subject to EU approval under the state aid rules.
There is also an intangible fixed assets regime for companies under which tax relief is available for intangible assets acquired after 1 April 2002. The government plans to later introduce a "patent box" regime under which companies would pay tax at only 10% on income arising from patents.
Dividends received from UK companies are not subject to corporation tax and foreign dividends are mostly exempt. Income from overseas branches of UK companies is currently taxable, but double tax relief is available for foreign tax paid. For accounting periods beginning on or after 19 July 2011, companies may make an irrevocable election to exempt all their foreign branches from corporation tax on their profits.
The government is consulting on changes to the controlled foreign companies regime, which effectively taxes UK companies on their share of the profits of companies controlled by UK persons and situated in low tax jurisdictions.
The UK has concluded a wide network of bilateral double taxation agreements with other countries to allocate taxing rights and ensure that income is not taxed twice. These agreements also provide for a dispute resolution mechanism known as the mutual agreement procedure whereby the competent authorities in the two countries can resolve situations where taxation arises that is not in accordance with the agreement. Also, the European Union has set up the EU Arbitration Convention, whereby countries can resolve disputes arising for example where one country makes an upward transfer pricing adjustment to the taxable profits of a company and the other party to the transaction is looking for corresponding tax relief in another EU country