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BL&P > 11. Corporation Tax > Flashcards

11. Corporation Tax Flashcards

1
Q

Corporation tax financial year

A

Corporation tax financial year runs from 1 April to 31 March

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2
Q

Corporation tax rates

A
  1. Companies with taxable profits up to 50 000 are subject to standard small profits rate of 19%
  2. companies with taxable profits of more than 250 000 are subject to main tax rate of 25% (on all taxable profits)
  3. Companies with taxable profits above 50 000 but not exceeding 250 000 are subject to marginal rate, tapered in between 19% and 25%
    i. Generally apply 19% to first 50 000 and 26.5% to the balance
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3
Q

Corporation Tax calculation steps

A
  1. Calculate income profits
  2. Calculate chargeable gains
  3. Calculate total profits and apply reliefs
  4. Calculate tax at appropriate rates
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4
Q

What does income profit include

A
  1. Trading Profit
  2. Property Income
  3. Certain income associated with loans
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5
Q

Calculating Chargeable Gains: Steps

A
  1. Identify a chargeable disposal
  2. Calculate the gain (or loss)
  3. Apply reliefs
  4. Aggregate remaining gains or losses
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6
Q

What are chargeable assets + where do they feature in a corporation tax calculation

A
  1. Same as CGT, most likely land, buildings, shares in other companies etc.
  2. They appear in the first step of calculating chargeable gains (as they are chargeable disposals)
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7
Q

Calculating Chargeable Gain Step 2: Calculate the Gain (or Loss) steps

A
  1. calculate net proceeds of disposal

Net proceeds of disposal = proceeds of disposal - costs of disposal

  1. calculate gain before indexation (or loss)

Gain (before indexation) = net proceeds of disposal - other allowable expenditure (initial and subsequent)

  1. Calculate gain (after indexation)

Gain = gain (before indexation or loss) - indexation allowance (multiply to subsequent and initial costs and subtract these figures from gain)

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8
Q

If a company gives away an asset at an undervalue, what value will be used for ‘proceeds of disposal’ in the calculation? When else would this value be used?

A

The market price
- Also used when company sells to a connected person

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9
Q

Definition of Connected Person

A
  1. Controls company alone or with others connected to them
  2. Company is connected to another if they are both controlled by the same person or a combination of that person and others connected with them
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10
Q

What is the indexation allowance? When is it relevant?

A
  1. Used when calculating gain on an asset owned for any period from 31 March 1982
  2. Apply percentage increase in Retail PricesIndex to initial and subsequent expenditure from the date the expenditure was incurred to the date of disposal (or 31 December 2017 if earlier)
  3. After getting the allowance, you deduct it from the gain before indexation to give you the gain after
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11
Q

What reliefs are available for Corporation Tax? When do they apply?

A
  1. Rollover reliefs on replacement of qualifying business assets
  2. Apply them in Step 2 (calculate chargeable gain)
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12
Q

How does rollover relief work in Corporation Tax?

A
  1. Rollover relief allows companies to postpone payment of CT after disposing of a qualifying asset IF consideration received for the asset is used to acquire another qualifying asset
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13
Q

Qualifying Assets for the purposes of CT Rollover relief:

A
  • Mainly land and buildings (and potentially ships)
  • Not company shares
  • not goodwill and other intellectual property
  • applies to plant and machinery (fixed) but these will rarely produce a gain - fixed means not moveable
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14
Q

Time Limits for CT Rollover Relief

A

The company must acquire (or have acquired) the replacement asset within one year before or within three years after it disposes of the original asset, unless HMRC allows the company to have an extended period to acquire the replacement asset.

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15
Q

How is rollover relief factored into the CT calculation?

A

No Tax on that specific qualifying asset as the tax liability is postponed to the point where the NEW asset is sold
- The ‘gain’ which would have been taxed is deducted from the acquisition cost of the replacement asset
- meaning that there will be a greater difference between acquisition cost and disposal cost, allowing tax to be paid at this point instead

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16
Q

Step 3 of CT Calculation: Calculate Total Profits and Apply Reliefs

A
  1. Add together company’s income profits and chargeable gains to get total profits for accounting period
  2. Trading loss reliefs can be deducted from total profits and potentially certain qualifying donations to charity are deductible
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17
Q

If a company’s accounting period differs from the corporation tax financial year - and corporation tax rate changes yearly - how does the company know which rate to pay at?

A

the company must pay tax at one rate on a proportion of its profits and at the new rate for the rest of the profits in the financial year

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18
Q

Reliefs for a trading loss: COMPANIES

A
  1. Carry-across/Carry-back relief for trading loss
  2. Terminal carry-back relief for trading loss
  3. Carry-forward relief for trading loss
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19
Q

If a company claims under one trading loss relief but still have loss not absorbed, can they claim under another?

A

Yes- but they cannot claim for the exact same LOSS twice

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20
Q

Effect of carry-across/carry-back and terminal carry-back relief for trading loss

A

May lead to a refund of tax already paid

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21
Q

Effect of carry-forward relief for a trading loss: Company

A

Reduces the amount of tax the company will have to pay in the future

22
Q

Carry-Across/Carry-back relief for a trading Loss: Company

A

Company carries across their trading loss for an accounting period and sets it against total profits for the same accounting period.
- IF after doing so, there are still losses, these can be set back against total profits from accounting periods falling in 12 months prior to the accounting period of the loss IF they were carrying on the same trade
- IF there are NO profits in this accounting period, same as above ^^

23
Q

Terminal carry-back relief for trading loss

A

When a company CEASES to trade, it can carry back any trading losses and set them against the company’s total profits from any accounting period(s) falling in the three years before the start of that final 12 months, taking later periods first.

24
Q

Timeline for claims for carry-across/back or terminal carry back relief

A

must be made within two years from the end of the accounting period in which the loss was incurred

25
Q

Carry-forward relief for trading loss: COMPANY

A

A company may carry forward its trading loss for an accounting period and set it against subsequent profits in the next accounting period.
- Company must continue to trade
- any remaining losses can be carried forward again

26
Q

Timeline for carry-forward relief for a trading loss: Company

A

A claim for carry- forward relief must usually be made within two years of the end of the accounting period in which the company will apply the losses to reduce total profits.

27
Q

Maximum Amount which can be claimed under carry-forward relief: Company

A

The maximum amount that can be claimed under this allowance is £5 million, plus 50% of remaining total profits after deduction of the allowance.

28
Q

Corporation tax on goodwill and intellectual property

A
  1. Treated as intangible capital assets from receipts from transactions regarding them are treated as INCOME in a corporation tax calculation
  2. expenditure on them is generally deductible when calculating income profits
  3. When disposed of, rollover relief can apply
29
Q

What is a Close Company

A

Closed companies are those controlled by five or fewer participators or controlled by any number of participators who are directors or shadow directors
- Participator: person who owns shares in company / has right to acquire them
- Control: If the participator owns more than half the shares / has more than half the voting power / has right to acquire more than half the shares

30
Q

Tax Avoidance Measures wrt Loans to from Close Companies

A

When a close company loans money to a participator or their associate (broadly, ‘associate’ means a close relative or business partner), the company must pay to HMRC an amount of money equivalent to 33.75% of the loan.

  • The payment is akin to a deposit: payment will be refunded to the company if and when the participator/ associate repays the loan or if the loan is written off.
31
Q

When does a Close Company NOT have to pay tax to HMRC on loans it makes to an associate

A
  1. the loan is made in the ordinary course of a money- lending business, for example, a bank loan by a bank to a shareholder; or
  2. if the loan (added to any other such loan made to the same person) is no more than
    £15,000 and the borrower works full- time for the company and owns no more than 5% of
    the company’s ordinary shares.
32
Q

Does an associate borrowing from a close company need to pay tax in relation to a loan?

A

No, unless the company writes off the debt

33
Q

How are ‘Groups of Companies’ Taxed wrt Corporation Tax

A

Each company is charged tax separately

34
Q

Group Relief for Groups of Companies

A

This relief allows the company to transfer certain losses and expenses to another company within the same qualifying group. The transferee will then use the loss or expense to reduce its taxable profit. Both companies must fit the definition of a group in order for this relief to be used.

35
Q

What constitutes a ‘group’ in a group company for the purposes of group relief

A
  • One company must be the 75% subsidiary of the other, or both companies must be 75% subsidiaries of a third company.
  • The test for being a 75% subsidiary essentially means that the holding company must own, directly or indirectly, 75% or more of the subsidiary’s ordinary shares.
36
Q

How does group relief work?

A

Once it has been established that two companies are in the same group, one company (the transferor) can surrender certain items, including trading losses and management expenses, to the other company (the transferee).

  • The loss or expense must have been incurred in an accounting period that overlaps with the accounting period of the transferee (who will be using the loss or expense from the other company to reduce its profits in that accounting period).
  • There are some restrictions on the application of the relief when the transferor has other profits, or the transferee has losses of its own.
37
Q

What types of losses does group relief apply to?

A

Only income losses (not capital losses)

38
Q

Tax efficiency in groups of companies: Chargeable Disposals

A

Companies in a group may arrange for the company which would benefit most from a tax perspective to dispose of a chargeable asset owned by another in this group

39
Q

Test of ‘group’ of companies for chargeable disposals relief

A

For this relief, the group consists of a company, its direct 75% subsidiaries and the direct 75% subsidiaries of those subsidiaries, and so on. All of the subsidiaries in the group must be effective 51% subsidiaries of the principal company.
- Group can only have ONE principal company
- Principal must be entitled to more than 50% of profits and assets of the subsidiary

40
Q

Groups of Companies: Chargeable Gains

A

Once it has been established that the two companies are within a group for chargeable gains purposes, one of the companies can transfer a chargeable asset to the other on a tax neutral basis. This means that the disposal is treated as giving rise to neither a gain nor a loss by the transferor.

  • The transferee can then use the loss to reduce its own chargeable gains, so, as a group, the companies will pay less tax overall.
41
Q

Rollover relief in groups of companies

A

When a company is in a group for chargeable gains purposes and it disposes of a chargeable asset outside the group, it can roll over its gain into qualifying assets that it acquires (provided it satisfies the criteria for rollover relief)

  • Group relief under chargeable gains provisions are subject to anti-avoidance measures
42
Q

Tax Implications of belonging to a group of Companies: VAT, SDLT

A
  1. stamp duty land tax will not be charged on transfers of assets between companies which are in a qualifying group, provided that certain conditions are met.
  2. in terms of VAT, a group of companies may be able to register for VAT as a group under a single registration.
43
Q

How is corporation tax charged when a seller makes a profit selling shares back to a company doing a share buyback?

A
  1. If buyback satisfies CGT rules, profit will be taxed as part of the selling company’s chargeable gains, otherwise
  2. it will be taxed as income
44
Q

Notification requirements to HMRC for the first accounting period of a company and subsequent periods

A

A company must inform HMRC in writing of the beginning of its first accounting period, and must do so within three months of the start of that accounting period. After that, every year HMRC will issue a notice to the company requiring it to deliver a self- assessment corporation tax return.

45
Q

Deadline for a company filing a self-assessment return with HMRC

A

12 months from the end of the relevant accounting period

46
Q

Deadline for a company paying corporation tax to HMRC

A

For most companies: payable within 9 months and 1 day from the end of the accounting period (so tax return will be filed after CT is paid)

47
Q

If a company must pay its CT before it files its tax return for the period, how do they ensure the payment made is accurate?

A

companies will make a payment based on their anticipated corporation tax liability for the period, and will make a balancing payment (or receive a rebate) once the final figure for corporation tax has been established

48
Q

Which companies are able to pay corporation tax in instalments

A
  1. Large Companies (annual taxable profits of 1 500 000 - 20 000 000)
  2. Very Large Companies (>20 000 000 annual taxable profits)
49
Q

Due dates for paying Corporation Tax for Large Companies (instalments)

A
  1. 6 months and 13 days after the start of the accounting period
  2. 3 months from 1st instalment due date
  3. 3 months from 2nd instalment due date
  4. 3 months and 14 days after the end of the accounting period
50
Q

Due dates for VERY large companies paying Corporation Tax in instalments

A
  1. Two months and 13 days after the start of the accounting period;
  2. Three months from the first instalment due date;
  3. Three months from the second instalment due date; and
  4. Three months from the third instalment due date.
51
Q

Effect of the Finance Act 2013

A

Allows HMRC to make adjustments to a taxpayer’s liability to counteract tax advantages arising from abusive arrangements

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