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BPT > 02. BPT - Corp Tax for Single Company > Flashcards

02. BPT - Corp Tax for Single Company Flashcards

1
Q

Who is UK CT payable by?

A

UK resident companies

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2
Q

What are companies assessed on for their corp tax?

A

Payable on taxable total profits (TTP) for acc period (AP)

TTP brings together company’s income and gains from all sources

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3
Q

What must be done if acc period for companies is over 12m?

A

Needs to be split into 2 APs

  • First 12 months
  • The balance
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4
Q

Describe the corporation tax computation

A 
Trading income (Adj TP less CA)
Property income (UK and overseas let prop)
NTLR (Receivable less payable)
Company distributions (div from UK and overseas comps that aren't exempt)
Chargeable gains (gains less losses)
= Total income and gains 
Less QCD (National charity donations)

= Taxable total profits

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5
Q

Do you pay CT on corporation tax?

A

The vast majority of divs from UK and overseas comps are exempt from UK

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6
Q

When are dividends received by small companies exempt?

A
  • Received from UK comp/ comp resident in country with double tax treaty
  • Divs not paid as part of scheme that has the obtaining of UK tax adv as one of its main purposes
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7
Q

When are dividends received by companies which are not exempt from CT?

A

Companies which are NOT small that fall under following

  • Received from a company that is controlled by the recipient
  • Relate to non-redeemable ordinary shares
  • Received from a portfolio holding of the share class concerned (i.e. < 10% holding)
  • Relate to a transaction not designed to reduce UK tax
  • Relate to shares accounted for as liabilities

Therefore VERY rare to see div which is taxable

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8
Q

Define a small company

A

Fewer than 50 employees
EITHER
- Annual turnover under 10m euros (approx £8.5m)
- Balance sheet total < 10m euros

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9
Q

What is the corp tax rate for CT?

A

Depends on financial year the acc period falls
FY20 = 19% and expected to remain for 2021

NOTE: Not the end of the period, i.e. if half was in diff tax rate, would have to split

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10
Q

When do small companies pay corp tax?

A

9m + 1 day after end of AP

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11
Q

When do large and very large companies pay their CT?

A

Quarterly instalments

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12
Q

Define a large company

A

Company with augmented profits of over than £1.5m

Limit is pro-rated for short acc periods
Divided by the number of 51% related companies in group

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13
Q

Define a very large company

A

Company with augmented profits of over £20m

Limit is pro-rated for short acc periods
Divided by the number of 51% related companies in group

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14
Q

What is the relief for R&D expenditure?

A

Depends on the size of the company

  • SME : extra 130% deduction against trading income
  • Large companies can claim a TAX CREDIT of 13% of qualifying expenditure
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15
Q

What are the conditions for R&D expenditure relief?

A
  • Guidelines produced by Der for Bus, Energy and Industrial Strategy define R&D for tax purposes
  • Revenue expenditure (not cap) qualifies for extra deduction/credit. E.g. salaries, consumables, computer software, power, water and fuel
  • Special rules for externally provided workers and subcontracted expenditure
  • Cap expected qualifies for 100% FYA deduction but not the extra deduction/tax credit
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16
Q

What can be done if R&D tax credit is available but there is a trading loss?
What are the conditions?
What are the steps?

A

Company can convert some of the loss into a tax credit

Conditions

  • Company is SME
  • Comp was entitled to extra R&D deduction in yr
  • After extra deduction, there was trading loss
Steps 
1. Calc surrenderable loss 
( lower of 230% x R&D exp or 
trading loss 
CY claim (whether made or not) (X) 
Other loss relief (actual claim (X)
Group/ consortium relief (actual claim) (X)
XX
  1. Calc tax credit = 14.5% x surrender able loss

Trading loss carried forward is then reduced by amount of loss surrendered to obtain the tax credit

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17
Q

What are R&D credits for large companies?

Who else can claim it?

A
  • They are above the line
  • Only relief for large companies for R&D expenditure
  • SMEs who have carried out the work for large companies can also claim this relief
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18
Q

How does R&D credits for large companies work?

A
  • Credit is given at rate of 13% (12% for exp before 1 April 20) of qualifying R&D
  • Credit is above the line, so treated as taxable income in TTP comp
  • Credit is used to pay current tax liability
  • Effectively, if comp spends £100 on R&D, only £87 is deducted from trading profits in acc period, but other £13 is deducted from CT liability
  • Any remaining credit is capped at CY credit less notional CT liability (i.e. 81% * CY credit)
  • Any remaining credit is further capped by PAYE and NIC paid by comp is respect of worker eng in R&D
  • Subject to caps, remaining credit is paid to comp
  • Amount subject to capping can be used to settle liabilities of subs periods/ surrendered to group members
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19
Q

What are the caps to R&D credits for large companies?

A
  • Any remaining credit is capped at CY credit less notional CT liability (i.e. 81% * CY credit)
  • Any remaining credit is further capped by PAYE and NIC paid by comp is respect of worker eng in R&D
  • Subject to caps, remaining credit is paid to comp
  • Amount subject to capping can be used to settle liabilities of subs periods/ surrendered to group members
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20
Q

What happens is a company acquires an IFA?
> Ownership
> On disposal

A
  • Pre 1 April 2002 (chargeable asset)
    > Ownership: amortisation/ impairments not allowable exp against trading income
    > On disposal: a gain arises
  • post 1 April 2002 (trading asset)
    > Ownership: trading income deduction for amort/impairment or if election is made, 4% SL WDA
    > On disposal: trading profit/ loss
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21
Q

How is the goodwill on an IFA dealt with?

A

Depends on IFA
- Pre 1 April 2002
> Goodwill purch/internally generated = capital asset

  • 1 April 2002 - 31 March 2019
    > Purch/internally gen = trading asset
    > Amort is allowable on GW acquired before 3 Dec 14
    > No deduction for GW created on incorp after 3 Dec 14 or purch from 8 July 15
  • On/after 1 April 2019
    > Deduction avail when comp purchases GW from unrelated party
    > Deduction = fixed rate of 6.5% of qual cost (but capped at 6x value of IP rights purch w GW). Qualifying IP assets = patents, copyrights & registered designs
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22
Q

How do you calc the trading prof/loss on disposal of IFA if it’s treated as a trading asset?

A
  • Acc treatment followed (i.e. amortisation/impairment)
    Calc: Proceeds - carrying amount = p/l
  • Tax WDA claimed
    Calc: proceeds - TWDV = p/l
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23
Q

How is TWDV calculated?

A

Cost less WDA to date

24
Q

What happens if a IFA treated as a trading asset is goodwill on which no deductions were available and the item is sold?

A

Profit = sales proceeds less cost

If this creates a loss, treated as non-trade debit rather than trading loss

25
Q

When does rollover relief apply to IFAs?

A

Applies if a company makes gain/trading profit on sale of IFA and re-invests proceeds in another IFA

26
Q

How much can be deferred using rollover relief when selling an IFA?

A
  • If treated as chargeable asset
    > Gain arises; defer into any qualifying asset using normal ROR
    Proceeds fully re-inv then defer whole gain
    Proceeds partially reinvested: chargeable gain = lower of gain/ proceeds not reinv. Remaining gain is deferred
  • IFA treated as trading asset
    > Trading profit arises: can defer into new IFA using special IFA ROR rules
    ROR = proceeds reinvested - original cost
27
Q

How much can be deferred using rollover relief when selling an IFA and IFA is treated as chargeable asset?

A
  • If treated as chargeable asset
    > Gain arises; defer into any qualifying asset using normal ROR
    Proceeds fully re-inv then defer whole gain
    Proceeds partially reinvested: chargeable gain = lower of gain/ proceeds not reinv. Remaining gain is deferred
28
Q

How much can be deferred using rollover relief when selling an IFA and IFA is treated as tradable asset?

A
  • IFA treated as trading asset
    > Trading profit arises: can defer into new IFA using special IFA ROR rules
    ROR = proceeds reinvested - original cost
29
Q

How do you treat it when a new intangible is acquired with the proceeds from a IFA?
What are the conditions?

A

Conditions: buy within 12m before or up to 36m after disposal

Part of the taxable profit may be deferred. Full profit isn’t available for rollover cause a deduction has already been received for any amort/WDA of asset

30
Q

What is the maximum deferral for rollover relief?

A
  • Lower of:
    > Proceeds
    > Amounts reinvested X

less: cost of original intangible asset (X)

= Amount deferred X

Amount deferred is deducted from cost of the new intangible

31
Q

TYU3: Remus Ltd sold intangible asset for £22k. Asset had an original cost of £20k and had TWDV and carrying value of £15k at sale date

Remus Ltd then bought IFA a month later for £26k.

Calc the taxable profit if IFA RoR is claimed

A

Sale proceeds £22k
Less TWDV £(15k)
Trading profit = £7k

RoR =
Lower of proceeds (22k) or amount reinvested (26k)
i.e. Proceeds 22k
Less original cost of asset (20k)

Amount deferred (2k)

TTP = 7k - 2k = £5k

Allowable cost of new asset

Cost £26k
Less RoR £(2k)

Allowable cost for tax purposes £24k

32
Q

What can the gains on the disposals of IFAs can be rolled into?

A

Direct purchase of new IFA

Purchase of shares in a company which holds an IFA

Note: Cost of replacement IFA is lower of cost of shares in company being acquired and TWDV of the intangibles held by that comp at the date of acquisition

33
Q

Which intangibles do you defer rollover reliefs against?

A
  • Best to defer against the intangible being written off over the greater number of years
  • This gives a smaller reduction in annual amortisation
34
Q

What is the benefit of a patent box?

A
  • Comps that own patents held for purposes of trades can elect for profits relating to those patents to be taxed at a lower rate of CT
35
Q

How does a company quality for a patent box?

A

Comp must carry on qualifying development in relation to the patent
Means either development of the patent itself or of products incorporating the patent

Only treatment of a new patent created on/after 1 July 16 or a comp making an election into the patent box treatment on/after 1 July 16 is examinable in BPT

36
Q

Describe how a patent box treatment work?

A

Company must deal with assets on a sub-stream approach. Means looking at each patent separately and working out the relevant profits

  • Profits of each sub stream are then multiplied by R&D Fraction. Reflects the proportion of R&D exp that is subcontracted, rather than what comp did in-house
  • Figures for each sub stream are added together to give profits of company’s trade relevant to the patent box. These profits are effectively taxed at 10%
37
Q

What are the legislation detailed rules for determining the patent related income?

A
  1. Determine the profit relating to patents for each sub-stream
  2. For each sub-stream, deduct from this a notional return of 10% of routine deductions (i.e. 10% of sub-stream exp). This reflects the profit the comp could make, even without patents
  3. For each sub-stream, make a further deduction for a notional marketing realty made on arms length basis
  4. Multiple this amount by the R&D fraction for each sub-stream
  5. The resulting figures for each sub-stream are added together to give the profits relevant to the patent box. Formula used to determine a deduction from taxable profit
    RP x ((MR - IPR) / MR )
    RP = profits relevant to the patent box
    MR = the main rate of CT
    IPR = the reduced tax rate of 10%
  6. After making the deduction, remaining taxable prof are taxed as normal. Means patent profits are effectively taxed at 10%, whilst other profits are taxed at the main CT rate
38
Q

What is the R&D fraction?

A

R&D fraction is the lower of 1 and
( D + S1) x 1.3/(D + S1 + A + S2)

D = in-house direct expenditure on R&D 
S1 = Expenditure on R&D subcontracted to third parties 
A = Expenditure on purchase of intellectual property 
S2 = Expenditure on R&D subcontracted to related parties
39
Q

What is the R&D fraction?

A

R&D fraction is the lower of 1 and
( D + S1) x 1.3/(D + S1 + A + S2)

D = in-house direct expenditure on R&D 
S1 = Expenditure on R&D subcontracted to third parties 
A = Expenditure on purchase of intellectual property 
S2 = Expenditure on R&D subcontracted to related parties
40
Q

TYU6 Rice plc, UK comp developed a patented process for manufacturing cleaning chemicals and commenced business on 1 April 2020. At this point they spent £12m on buying the patent rights.

During the year they made sales relating to the patent of £25m and the related costs were £10m. These costs include internal R&D expenditure of £6m and R&D costs which were subcontracted to another group company of £0.5m. Notional marketing royalty for comp has been agreed to be at 5% of patent related income.

Calc Rice plc’s profits which would be subject to the patent box deduction.

A

Rice plc

Patent box streamed profit
Income £25k
Exp £(10k)
= £15k

Less: 
Marketing royalty (5% * £25m) = £(1,250)

= £13,750

Less 10% return on costs (10% * £10m) = £1k)

= £12,750

R&D fraction
42.2% * 12,750 - £5,381

R&D fraction = lower of 1 or
(£6m + £0) x 1.3(£6m + 0 + £12m + £0.5m) = 42.2%

R&D fraction is the lower of 1 and
( D + S1) x 1.3/(D + S1 + A + S2)

D = in-house direct expenditure on R&D 
S1 = Expenditure on R&D subcontracted to third parties 
A = Expenditure on purchase of intellectual property 
S2 = Expenditure on R&D subcontracted to related parties
41
Q

What are the implications of being a company with investment business?

A
  • CT is charged on normal way
  • If comp has a trade, the trading profit is calc’ed in usual way
  • Overhead expenses incurred in managing inv are deductible as man exp
  • Man exp are deducted from
    > Prop income if they relate to property management
    > Non-trading loan relationship income if they relate to int income
    > On the face of the CT (before QCD and losses) if they are general man exp
  • Excess gen man exp are c/f and offset against future income and gains, or group relieved in current AP.
  • For exp airing before 1 April 17, the CF was automatic.
  • For those arising after 1 April 17, the offset against future profits is by way of a claim which can specify the amount being offset.
42
Q

When is the gain or disposal on shares of a company exempt?

A

If the substantial shareholding conditions are met

Substantial shareholding is one where the investing company owns at least 10% of the ordinary share capital

For disposals prior to 1 April 2017:

1) Selling comp has held at least 10% of the shares in company being disposed of for continuous 12m period during the last 2 years
2) Both companies were trading companies (or, for the inv comp, a member of a trading group and, for the investee company, a holding company of a trading group)

For disposals on/after 1 April 2017:

1) the selling comp has held at least 10% of the shares in the company being disposed of for a continuous 12m period during last 6m
2) the investee comp only is a trading company (or a holding company of a trading group)

43
Q

What takes precedence when takeover takes place and SH is a company and there is a disposal?

A

SSE rules takes precedent

Means no gain arises and the replacement shares have an allowable cost of MV

If acquiring comp and selling comp within a takeover are in a gains group, NGNL effectively means no disposal takes place

44
Q

TYU7: A Ltd buys 20% of B Ltd on 1 Jan 2015. On 1 Jan 17 A Ltd sells 12% and on 30 June 2020 A Ltd sells the remaining shares in B Ltd

A Ltd is an inv company and B is trading company

Which of the above disposals will qualify for substantial shareholding exemption?

A

A Ltd
Jan 17
First disposal won’t qual for SSE, regardless of fact that A Ltd held 10%+ of B Ltd shares for continuous period of 12m in 2yrs prior to disposal

Disposal took place 1 Jan 17 (before 1 April 17) - for disposals pre 1 April 17 inv comp was require to be trading comp/ member of trading group to be eligible for SSE

A Ltd is an inv company so will be a gain or loss on disposal

June 20
Disposal will qualify for SSE as A Ltd held 10%+ of shares for 12 continuous months in 6 yrs prior to disposal
Requirement for inv comp to be trading comp doesn’t apply as after 1 April 17
Any gain/loss arising is automatically exempt

45
Q

What happens when takeover takes place and SH is a company and there is a disposal and the acquiring company and selling company are in a gains group?

A

If acquiring comp and selling comp within a takeover are in a gains group, NGNL effectively means no disposal takes place

46
Q

What does QII stand for?

A

Qualifying Institutional Investors

47
Q

What are qualifying institutional investors?

A

For disposals on/after 1 April 17, a full/partial exemption could still be poss by virtue of SSE where investee comp isn’t trading comp, providing the following conditions are met:
1. Selling comp held at least 10% (note) of shares in the comp being disposed of for continuous 12m period during 6yr
2. Selling comp is at least 25% owned by QIIs (e.g. charities)
> Full exemption: selling comp is 80%+ owned by QIIs. Full gain/loss = exempt
> Partial exemption: QIIs own 25-80% of shares in selling comp. This proportion of gain/loss is exempt

If QIIs own 25%+ of shares in selling comp, disposals made by such comp of SH less than 10% will satisfy substantial SH requirement provide the cost of the inv is at least £20m

48
Q

How do you determine whether company is large?

A

Augmented profits are compared to upper limit of £1.5m

Augmented profits are calc’ed as TTP + exempt ABGH distributions

In exam: include all UK and overseas divs as exempt ABGH distributions except for those from 51% subsidiaries and consortium comps of which the recipient is a member

Upper limit is scaled down if comp has short acc period or has any 51% related companies at end of last acc period

Means large companies pay their tax through quarterly instalments

49
Q

When do 2 companies 51% related companies?

A
  • One company is a 51% subsidiary of another company
  • Both are 51% subsidiary of another company
  • Dormant companies and passive holding companies are excluded
50
Q

When is a company not deemed to be large?

A
  • Its corporation tax liability is less than £10k

- It was not large in previous acc period and its augmented profits in the current period doesn’t exceed £10m

51
Q

When is a company not deemed to be large?

A
  • Its corporation tax liability is less than £10k

- It was not large in previous acc period and its augmented profits in the current period doesn’t exceed £10m

52
Q

What are the instalment dates for large companies paying tax?

A
  • Pays on 14th day of months 7, 10, 13 and 16 of acc period if its 12m long
  • For acc periods that are less than 12m long, its 14th day of period 7 and final instalment on 14th of fourth month following end of acc period. In between this is paid on 3 monthly basis
53
Q

What are the instalment dates for very large companies paying tax?

A
  • For acc periods starting on/after 1 April 19, CT payment dates are being brought forward
  • For 12m acc period, month 3,6,9 and 12 of acc period
  • For short acc period, 14th day of month 3, month 6 and final date = 14th day after end of acc period
54
Q

When is a company very large?

A

When augmented profits exceed £20m

  • Dividend by number of 51% related companies in the group
  • Time apportion for period less than 12m
55
Q

What are the additional rules for claiming R&D on externally provided workers and subcontracted expenditure?

A
  • Depends on whether it is connected
    > If provider is UNCONNECTED, only 65% of payment made is qualifying (i.e. only 65% of cost gets extra 130% relief)
    > If connected, then expenditure is amount paid, but capped at provider’s own relevant expenditure in providing the staff (i.e. profit element isn’t eligible for extra 130%)

Company can elect for any provider to be treated as a connected company

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