Taxes on Profits

Abstract

Most countries tax business profits but they do so in a variety of ways and at different rates. Taxation of profits, like income tax, was first introduced in the UK as a war measure and then became a permanent feature of the tax system. The earliest legislation relating to a limitation of profits was the Munitions of War Act ( 191 5). It contained provisions for a new distinct tax on profits that was to be additional to income tax on businesses. The tax was imposed partly to raise revenue but mainly for psychological reasons. The outbreak of the First World War created a great demand for armaments. Munitions manufacturers made large profits. It was widely felt that it was morally wrong that some got rich because of the war, whilst thousands died in the trenches. The Munitions Levy was imposed to tax profits of establishments making munitions. It was followed in the same year by the Excess Profits Duty that extended taxation of profits to other manufacturers for the duration of the War. By 1937, rearmament had started and a tax on profits was reintroduced in the form of National Defence Contribution that subsequently became the Profits Tax. It continued to be levied until 1965 when it was replaced by Corporation Tax.