08b. corporation tax

Question 1

what is corporation tax payable on?

Answer 1

• all income profits and
• chargeable gains
• of a body corporate
• that arise in its accounting period.

Question 2

what is the taxable total profits (TTP) of a company?

Answer 2

income profits

+

chargeable gains

Question 3

Companies are assessed to corporation tax by reference to what period?

Answer 3

financial year: 1 April – 31 March

Question 4

what is the rate of corporation tax for companies with a TTP of more than £250,000?

Answer 4

25%

Question 5

what is the rate of corporation tax for companies with a TTP of £50,000 or less?

Answer 5

19%

Question 6

what is the rate of corporation tax for companies with a TTP between £50,001 and £250,000?

Answer 6

a company may claim marginal relief which has a tapering effect on the tax rate

Question 7

calculation of TTP

Answer 7

sale proceeds
(allowable expenditure)
(indexation allowance)
(capital/trading losses)
= chargeable gains

income receipts
(deductible expenditure)
(capital allowances)
(trading losses)
= income profits

Question 8

what will constitute deductible expenditure for income purposes?

Answer 8

• be wholly and exclusively incurred for the purposes of the trade (eg gift would not be; expenditure needed to produce raw materials would be;
• not prohibited by statute (eg business entertainment and doubtful debts; and
• be of an income nature (eg of recurrence eg rent, utility/energy costs,
  interest paid, wages, repairs)

Question 9

what is the purpose of a capital allowance?

Answer 9

to allow businesses to spread the cost of certain capital assets (focusing on P&M)

deductible against income receipts, despite being of a capital nature

Question 10

other than companies, who else can capital allowances be made to?

Answer 10

individuals and partnerships carrying on a trade

Question 11

capital allowances on P&M: what is the tax written down value (TWDV) of the P&M?

Answer 11

when a company claims capital allowances in one year, the value of the P&M reduces by 18% on a reducing balance basis

when the company claims capital allowances in the following year, it will claim 18% of the TWDV of the P&M after it
has been reduced by the previous year’s capital allowances claim

Question 12

worked example of capital allowances on P&M:

If the TWDV of P&M is £100,000 then the capital allowances figure will be 18% of £100,000, which
is £18,000, and the TWDV for the purposes of calculating next year’s capital allowances will be
£82,000 (£100,000 - £18,000). It follows that next year’s capital allowances figure will be 18% of £82,000, which is £14,760.

Answer 12

Question 13

what is the annual investment allowance (AIA)?

Answer 13

enables a company to deduct 100% of expenditure on P&M up to a specified amount (currently £1 million in each year)

The normal capital allowance of 18% can be applied to the balance of any expenditure above that amount

Question 14

what is the super-deduction?

Answer 14

introduced in the Finance Bill 2021 which allowed companies to claim 130% first-year relief on expenditure incurred from 1 April 2021 until 31 March 2023 on qualifying P&M

this did not apply to second-hand, used or leased assets

it included expenditure on assets eg fire alarm systems, security systems, bathroom sanitaryware, carpets, computer equipment and servers, tractors, lorries and vans, ladders, drills and cranes,
office desks and furniture, refrigeration units and electric vehicle charging points

unlike the AIA, there was no expenditure limit.

Question 15

what is the full expensing regime (companies only)?

Answer 15

available from 1 April 2023 to 31 march 2026

allows companies only to deduct 100% of the cost of new and unused P&M

the amount deductible is uncapped

full expensing is a first-year allowance, meaning that a claim must be made in the period the P&M expenditure occurred

Question 16

differences between companies and individuals for chargeable disposals:

Answer 16

1. there is no annual exemption for companies.
2. indexation allowance continues to be available for companies, but is frozen up to 31 December 2017.
3. the substantial shareholding exemption (SSE) can exempt from corporation tax the whole of a chargeable gain that arises when a company disposes of shares in a trading company (or the holding company of a trading group). The disposing company must have held at least 10% of the ordinary share capital of the company whose shares are being disposed of for **at least 12 consecutive months in the last 6 years. This relief is not available for individual sellers but companies cannot reduce the tax they pay on their chargeable gains by claiming BADR or Investors’ Relief, unlike individuals.

Question 17

what is rollover relief?

Answer 17

a tax deferral mechanism

Question 18

when will rollover relief potentially be available to companies?

Answer 18

• Where a company disposes of a qualifying business asset and it (or a company in its group)
  buys another qualifying asset (referred to as the ‘replacement asset’);
• Where a sole trader or partnership disposes of a qualifying business asset and buys another
  qualifying asset;
• Where an individual, other than a sole trader, owns a business asset, sells that asset and buys
  another qualifying asset and both assets are used by either:
• A company which is the individual’s personal company; or
• A partnership of which the individual is a partner.

Note that although the new asset is referred to as the ‘replacement asset’, it does not have to be
the same type of asset as the asset which has been disposed of as long as it is a qualifying
asset.

Question 19

what are qualifying assets for rollover relief?

Answer 19

Only certain types of the following assets attract rollover relief, including:
* Land and buildings;
* Goodwill;
* Fixed plant and machinery;
* Ships and hovercraft;
* Aircraft, and
* Lloyd’s syndicate capacity.

Question 20

when should qualifying assets be sold and purchased to claim rollover relief?

Answer 20

The replacement asset must be purchased within 12 months before or 3 years after the sale of
the old asset.

Question 21

how can rollover relief be restricted?

Answer 21

when not all the sale proceeds of the original asset are used to acquire the new asset, the gain to be rolled over is reduced by £1 for every £1 of the sale proceeds not
reinvested

Question 22

what is the general rule wrt payment of corporation tax on dividends received and paid by companies?

Answer 22

all dividends are exempt from corporation tax unless certain anti-avoidance provisions apply

therefore, dividend income is not included in TTP (a company pays a dividend out of profits that have already been taxed)

Question 23

what happens if a company’s accounting year does not coincide with its financial year (straddling)

Answer 23

the TTP of the accounting period must be apportioned between financial years, and taxed at the rate for each year (at a daily rate)

Question 24

what are the four ways that a trading loss occurs?

Answer 24

1. current year profits
2. previous year profits
3. future trading profits
4. group relief

Question 25

what are current year profits?

Answer 25

Trading losses can be set off against all other profits (ie so both income profits and chargeable gains) in the same accounting year.

A claim must be made within 2 years after the end of the accounting period in which the trading loss arose.

Question 26

what are previous year profits?

Answer 26

If trading losses cannot be used in whole or part against current profits, a company can carry back any remaining trading losses against taxable profits (again both income and chargeable gains) from the previous accounting period.

The company must have been carrying on the same trade in both years to be able to carry the
trading loss back to be set off against the previous year’s profits.

A claim must be made within 2 years after the end of the accounting period in which the trading
loss arose. If a company ceases trading, any trading loss in the final 12 months of trading can be carried back and set against any profits made in the three years prior to the start of the final 12 months.

Question 27

what are future trading profits?

Answer 27

If there are still trading losses unused they are automatically carried forward and set against all
the company’s taxable total profits (so both income profits and chargeable gains) in the future.

The company must continue to trade in the loss-making trade in the period in which the losses are used but use of the losses is not restricted to profits of the same trade.
The company may use (ie set off) carried forward losses against taxable profits of up to £5 million
in each accounting period (the ‘deductions allowance’), provided that the deductions allowance
has not already been used for the purposes of setting off carried forward capital losses against capital gains in that same period (see below).

Where, in any accounting period, the company has unrelieved taxable profits in excess of the available deductions allowance for that period, carried forward losses may be used to relieve a maximum of 50% of the unrelieved profits (this is referred to as ‘loss restriction’). Where the company part of a group, the deductions allowance applies to the group as a whole, rather than each individual company within the group.

Note. The fact that the deductions allowance applies for the purposes of both carried forward
trading losses and carried forward capital losses requires a company to make tactical decisions
about how to allocate the allowance between the two in any particular accounting period.

Question 28

what is group relief?

Answer 28

Where a group relief group exists, one company with a trading loss can surrender that loss to another profitable company in the group so that the surrendered loss can reduce or eliminate
that company’s profits

Question 29

what are the anti-avoidance rules wrt trading losses?

Answer 29

There are rules that prevent trading losses being carried forward or back where the company has been sold to a new owner and the nature of the trade of the company has substantially changed
within 5 years after the sale.

These rules were introduced to prevent buyers acquiring lossmaking companies purely to make use of their losses.

Question 30

what was the Temporary extension of carry back of trading losses (COVID)?

Answer 30

As a temporary measure to assist those companies who had suffered losses due to the pandemic,
the Government temporarily extended the period over which the companies could carry back losses.

Trading losses incurred in accounting periods ending between 1 April 2020 and 31 March 2022 could be carried back as follows:

• One year without a cap (same as under current rules); and
• A further two years, but against more recent years first and subject to a cap of £2,000,000 of losses arising in accounting periods ending in the 1 April 2020 to 31 March 2021 period and a separate cap of £2,000,000 losses arising in accounting periods ending in the 1 April 2021 to 31
  March 2022 period.

Question 31

how can capital losses be deducted from capital gains/chargeable gains?

Answer 31

Capital losses can be set off against capital gains in the current year, but they cannot generally be carried back to a previous year.

If there are capital losses unused in the current year, they can be carried forward and set against
any capital gains in future accounting periods.

The company may use carried forward capital losses against capital gains of up to the available
Deductions Allowance in the relevant accounting period, provided that the deductions allowance
has not already been used for the purposes of setting off carried forward trading losses against trading profits in that same period (see above in the trading losses subsection for the current cap/allowance).

Where, in any accounting period, the company has unrelieved capital gains in excess of the available deductions allowance for that period, carried forward capital losses may be used to relieve a maximum of 50% of the unrelieved gains.

Capital losses can be carried forward indefinitely within the company that made them but in order to crystallise the loss, a claim must be made to HMRC within four years from the end of the accounting period in which the loss arose.

Question 32

corporation tax self-assessment procedure - companies with TTP of £1,500,000 or less

Answer 32

Procedure for companies with TTP of £1,500,000 or less:
* Company estimates its tax liability and pays HMRC within 9 months and one day of the end of
the accounting period.
* Company must file (electronically) a tax return within 12 months of the end of the accounting
period to which it relates, together with its accounts. This will show how a company has
calculated its tax liability.
* Unless HMRC examine or make enquiries into the tax return to establish whether or not the
correct tax has been paid, the company’s tax computation will usually be regarded as
finalised 12 months after the filing date for the tax return.
* Interest will accrue on any under or over-payments.

Question 33

corporation tax self-assessment procedure - companies with TTP of more than £1,500,000

Answer 33

Procedure for companies with TTP of more than £1,500,000:
Companies with TTP of more than £1.5 million are required to pay their tax bills in four instalments over the course of the relevant accounting period and the next one.

Question 34

what type of interest is deductible?

Answer 34

interest paid on business loans

ie a company can
deduct the amount of the interest it has paid from its profits to reduce the TTP

Question 35

what are the restrictions on a company (or group) with more than £2million net interest expense in the UK, in any year?

Answer 35

the amount of interest a company may deduct is restricted to, broadly, a maximum amount equal to 30% of its income receipts (corporate interest restriction - CIR).

Question 36

what is ‘withholding tax’?

Answer 36

when tax is deducted at source from certain payments (eg income tax under the PAYE system), the person making the payment (eg for PAYE, the employer) has an obligation to withhold the tax payable by the person receiving payment and pay it over to HMRC

Question 37

when is a company allowed to make interest payments without
deducting tax from the payments (ie the company can make a gross payment of interest)?

Answer 37

when the company pays interest to another UK
corporation tax paying company or a UK bank