11. TC - Additional aspects of corporation tax

Question 1

What tax relief is given to companies for pension contributions?

Answer 1

• E’er pensions ontributions are deductible on a paid basis only
• So disallow accrued contribution at end of acc period

Question 2

When are pension contributions disallowed by HMRC?

Give some examples of specific scenarios

Answer 2

HMRC may disallow contributions which are considered not to eb WEN for the purposes of trade

E.g. On behalf of a controlling director at a disproportionately high level
- In connection with the sale or cessation of a trade

Question 3

What are incidental costs of loan finance?

Answer 3

Expenses in relation to raising the loan finance

Question 4

How are incidental costs of loan finance treated for companies?

Answer 4

Follow the treatment of the loan itself

• If loan is for non-trade purposes, then incidental costs are treated as NTLR debit
• If the loan is for trade purposes, the incidental costs are treated as trading income debit

Question 5

Give an example of non-trade loan purposes

Answer 5

To buy shares or an investment property

Question 6

Give an example of trade purpose loans

Answer 6

TO buy plant and machinery or a building used in trade

Question 7

What are the profit or loss on the disposal of a debt instrument taxable as?

How do you work out the prof or loss on the disposal of a debt instrument?

Answer 7

Taxable as NTLR under the loan relationship rules, rather than as a chargeable gain or loss

Profit or loss = proceeds less cost (indexation isn’t available)

Question 8

How do you work out the prof or loss?

Answer 8

Profit or loss = proceeds less cost (indexation isn’t available)

Question 9

Give some examples of intangible fixed assets

Answer 9

Goodwill
Parents
Copyrights

Question 10

What are Intangible fixed assets taxed under?

Answer 10

Taxed under trading income

Question 11

Give some examples of allowable IFA (intangible fixed assets) trading expenses to include

Answer 11

Payment of a royalty
Loss on the sale of an IFA
Amortisation of an IFA (except goodwill)

Question 12

Give some examples of taxable intangible fixed assets trading income

Answer 12

Receipt of a royalty payment
Profit on the sale of an IFA
Revaluing an IFA

Question 13

How is allowable R&D taxed?

Answer 13

It is a deductible trading expense

But may also qualify for extra R&D tax relief

Question 14

Give some examples of qualifying expenditure for R&D

Answer 14

Consumable/transformable materials
Computer software
Power, water fuel
salaries of staff directly engaged on R&D work E.g. engineers

Question 15

Do all costs relating to staff working on qualifying R&D projects get deducted as an allowable trading expense?

Answer 15

No
Salaries of stafff directly engaged on R&D work are allowable
Staff working indirectly on an R&D project, the expenditure only qualifies if
- It is specifically identifiable as a particular part of the activity of a R&D project e.g. training
- It can be accounted for as R&D expenditure under UK GAAP or IAS

Question 16

How is R&D capital expenditure taxed?

Answer 16

Any R&D cap expenditure except land qualifies for 100% FYA but not any additional R&D relief

If the capital assets are subsequently sold, the proceeds are taxed as a balancing charge i.e. trading receipt

Question 17

What is the taxation treatment if R&D capital expenditure is sold?

Answer 17

If the capital assets are subsequently sold, the proceeds are taxed as a balancing charge i.e. trading receipt

Question 18

What relief can small/medium enterprises claim on R&D/

Answer 18

If they incur qualifying R&D revenue expenditure, they may claim an additional 130% trading deduction on revenue expenditure

Question 19

What can a large company incurring qualifying R&D revenue expenditure claim?

Answer 19

An R&D expenditure credit (RDEC) of 12% of qualifying expenditure
Often referred to as ‘above the line tax credit’

Question 20

TYu3: A Ltd, an SME for R&D purposes, incurred the following exp for qualifying R&D during the year
Staff costs - lab staff £350k
Staff costs - admin & support £75k
cap expenditure £200k
Depn £50k
Consumable stores £250k
How much will A Ltd be able to claim as a deduction in its computation of TTP?

Answer 20

Trading income: 
net profit per accounts: £473,90
Less; NTI 
Prof on sale of land £(22k)
Bank interest receivable £(12.8k)
Total NTI removed £(34.8k)

Add disallowable expenditure 23,840
Trading income £462,230

No adj is required for

• Profit on sale of patent
• Royalties payable/receivable
• Loss on sale of patent (unlike profit on sale of land)
• Amortisation of a patent (unlike for goodwill)

Question 21

What is RDEC?

Answer 21

R&D expenditure credit
Get 12% of qualifying expenditure
Often called ‘above the line tax credit’

Question 22

How does RDEC work?

Answer 22

It is included in the calc for TTP as income

It is deducted from the corp tax liability to calc corporation tax payable

Question 23

Who gets double taxation?

What do they have to pay twice?

Answer 23

UK resident company which has income from overseas

Have to pay

• UK corporation tax on worldwide income
• Overseas tax on overseas profit

Question 24

How is double taxation dealt with?

Answer 24

Same profits are taxed twice, but double tax relief (DTR) is available

DTR should be calculated on a source by source basis as the lower of

• UK corp tax attributable to the overseas income
• Overseas tax suffered

Question 25

How is double taxation dealt with?

Answer 25

Same profits are taxed twice, but double tax relief (DTR) is available

DTR should be calculated on a source by source basis as the lower of

• UK corp tax attributable to the overseas income
• Overseas tax suffered

Question 26

How is DTR calculated?

Answer 26

Double tax relief should be calculated on a source by source basis as the lower of

• UK corp tax attributable to the overseas income
• Overseas tax suffered

Question 27

What does DTR stand for?

Answer 27

Double tax relief

Question 28

How can qualifying donations or other deductions such as losses be offset against profits suffering from double taxation?

Answer 28

They can be offset in the most beneficial manner as follows:

• First against the UK income
• Then against the overseas income

If there is more than one source of overseas income, the qualifying donations should be offset against the source suffering the lowest rate of overseas tax first

Question 29

How can qualifying donations or other deductions such as losses be offset against profits suffering from double taxation?

Answer 29

They can be offset in the most beneficial manner as follows:

• First against the UK income
• Then against the overseas income

If there is more than one source of overseas income, the qualifying donations should be offset against the source suffering the lowest rate of overseas tax first

Question 30

What must you assume about foreign dividends foreign by a UK company unless told otherwise?

Answer 30

Should assume they are exempt from corporation tax unless told otherwise

Question 31

How should foreign dividends be treated if they are taxable?

Answer 31

DTR is available against these dividends in respect of:

• Withholding tax (WHT): the ‘border tax’ is charged on overseas income as it is remitted to the UK
• Underlying tax (UT): the overseas corporation tax paid by the overseas company on its profits before dividends are paid

Must be grossed up by WHT and the UT

Question 32

What is WHT?

Answer 32

Withholding tax - the ‘border tax’ is charged on overseas income as it is remitted to the UK

Question 33

What is UT?

Answer 33

Underlying tax - the overseas corporation tax paid by the overseas company on its profits before dividends are paid

Question 34

When it double taxation relief available on underlying tax?

Answer 34

If the UK company controls at least 10% of the overseas company

Question 35

When including taxable foreign dividends in calculations of TTP, what must be done?

Answer 35

It must be grossed up by BOTH WHT and UT