United Kingdom Corporation Tax - History

History

Before 1965, companies were subject to income tax on their profits, at the same rate as was levied on individuals. An imputation system existed, whereby the income tax paid by a company was offset against the income tax liability of a shareholder who received dividends from the company. With the standard rate of income tax in 1949 at 50%, a company making £1,000 in profits would pay £500 in tax. If the company then chose to pay a £100 dividend, the recipient would be treated as if he had earned £200 and had paid £100 in income tax on it — the tax paid by the company fully covered the tax due from the individual on the dividend paid. If, however, the individual was subject to tax at a higher rate (known as "surtax"), he (not the company) would be liable to pay the additional tax.

In addition to income tax, companies were also subject to a profits tax, introduced by Labour Chancellor Sir Stafford Cripps, which was deducted from company profits when determining the income tax liability. It was a differential tax, with a higher tax rate on dividends (profits distributed to shareholders) than on profits retained within the company. By penalising the distribution of profits, it was hoped companies would retain profits for investment, which was considered a priority after the Second World War. The tax did not have the desired effect, so swingeing increases were introduced in the rates of the distributed profits tax by the post-war Labour government, in an attempt to coerce companies into retaining more of their profits. At the time of Hugh Gaitskell's 1951 budget, the profits tax was 50% for distributed profits and 10% for undistributed profits.

A series of reductions in the profits tax were brought in from 1951 onwards by the new Conservative government. The tax rates fell to 22.5% on distributed profits and 2.5% on undistributed profits by 1957, but the profits tax was no longer income tax-deductible. Derick Heathcoat-Amory's Budget of March 1958 replaced the differential profits tax with a single profits tax measure, applicable to both retained and distributed profits. This gradual decrease, and final abolition, of taxes on capital distributions reflected ideological differences between the Conservative and Labour parties: the Conservative approach was to distribute profits to capital holders for investment elsewhere, while Labour sought to force companies to retain profits for reinvestment in the company in the hope this would benefit the company's workforce.