5. Corporation Tax

Question 1

Within what time after the end of its financial accounting period must a company (1) pay any corporation tax which is owing, and (2) submit its tax return?

Answer 1

Tax due: Nine months and one day
Return due: Twelve months

Question 2

What is the difference between the tax-status of dividends paid by a company and to a company?

Answer 2

Dividends paid out: not tax deductible
Dividends received: usually exempt from tax so not added to taxable income

Question 3

How is the base cost for an asset where roll-over replacement asset relief is claimed by calculated?

Answer 3

calculate the difference between cost of new asset and that of original asset, and then deduct relevant amount from cost of new asset.

Question 4

When might CGT still be due where applying roll-over replacement asset relief?

Answer 4

where proceeds of original sale exceed the cost of new asset.
* Equal the amount by which the proceeds of the original asset’s exceed costs the replacement asset.

Question 5

What are the three ways in which a company can treat its trading losses?

Answer 5

1. Set off against total profits (before donations) in the current accounting period
2. Carry back to set off against total profits (before donations) in the preceding accounting periods
3. Carry forward to set off against total profits (after donations) of a future accounting period

Question 6

What is a close company?

Answer 6

Company resident in UK and controlled by either:

1. Five or fewer shareholders, or
2. Any number of directors who are also shareholders

Question 7

What happens if a close company makes a loan to a shareholder who is also a director/employee and charges no interest on this? What is triggered if the loan is over £10,000?

Answer 7

A taxable benefit arises valued at the current official interest rate. If the loan is over £10,000, the benefit must be reported and taxed as earnings

Question 8

If a close company makes a loan to a shareholder, even if interest is charged, what is the amount of the notional tax payment which must be deposited with HMRC and within what time limit should this payment be made?

Answer 8

The company must pay to HMRC 32.5% of the loan within nine months and one day after the end of the accounting period in which the loan was made

Question 9

Is the payment refunded when the loan is repaid or written off?

Answer 9

Yes

Question 10

Is the notional payment paid to HMRC deductible by the company as an expense?

Answer 10

No

Question 11

What are the various C.T rates, and when are they applicable?

Answer 11

• Profits above £250,000 - 25% (main rate) applied as a flat rate.
• Profits £50,000 or less - 19% (small profits rate)
• Profits between two bands - marginal relief rate of 26.5% on amount exceeding £50k.

Question 12

What is the general rule for offsetting capital losses against trading profits?

Answer 12

Capital losses may not be set off against trading profits of any accounting periods.
- Only offset against chargeable gains of the same or later accounting periods.
- cannot look back

Question 13

When is CT payable to the HMRC, and what is an exemption to this?

Answer 13

CT is payable **9 months and 1 day ** after the end of the company’s accounting period
- Tax return = filed within 12 months of end of accounting period.

Exception - companies with TTP of £1.5 million or more must pay HMRC in 4 installments over 2 accounting periods.

Question 14

When carrying back trading losses, what can they not be offset against?

Answer 14

chargeable gains

Question 15

When carrying forward trading losses, what can they be offset against?

Answer 15

Can carry forward the trading loss and use it to reduce its total profits, including chargeable gains, for the third accounting period

Question 16

What purpose do the special taxation rules for close-companies serve?

Answer 16

Anti-avoidance regime, aimed at preventing individuals from receiving loans which are untaxed (cf. salary or dividend), especially if the loan is not repaid by setting up corporate entities.

Question 17

What are two exceptions to the ‘close-company’ rule, where even if the conditions are satisfied, the company will not fall within its scope?

Answer 17

1) Listed on recognized stock exchange
2) Controlled by one or more non-close companies.

Question 18

How is a ‘close-company’ taxed on loans to its shareholders and their associates?

Answer 18

company must pay a levy to HMRC equivalent to the amount if an individual in a high-band rate for income was taxed for receipt of dividend (33.5%).
- Pay HMRC within 9 months + 1 day after the accounting period where the loan was made has ended.

Question 19

Can a company reclaim the tax-levied on a loan to participators?

Answer 19

1) If loan is repaid - HMRC reimburses tax paid.
- no tax liability for the borrower as an individual either.

2) If loan is written off by company - HMRC reimburses tax paid, but
- borrower is taxed as if ‘written-off’ amount was receipt of
dividends (and thus taxable at its appropriate rate).

Question 20

What are three exceptions where loan to shareholders will not fall within the ‘close-company’ tax avoidance regime?

Answer 20

1. Credit in respect of goods/services normally supplied by company in the course of its business, which lasts no longer than 6 months or company’s
   usual limit;
2. Loan made in course of the company’s business, which includes money lending;
3. Loan that (1) together with any prior loans does not exceed £15,000; (2)
   borrower works full-time for the company; and (3) owns 5% or less of the company’s shares.
   - All three conditions must be satisfied.

Question 21

What is the percentage applicable when calculating the written-down allowance for P&M bought to carry-on business?

Answer 21

18% per year on the total value of all P&M used to help carry on business.

• deduct 18% from OG price, and important to ensure that in the following year you re-calculate relief using written down value (assets’ value once WDA applied).

Question 22

Can the capital allowance for P&M be claimed if it is also used outside of the business?

Answer 22

Yes, but must reduce the amount of capital allowances claimed by the amount asset is used outside business.

Question 23

What are the five steps to calculating corporate tax?

Answer 23

1) Work out income profits
2) Work out the chargeable gains
3) Add the chargeable gains and income profits together
4) If applicable, deduct trading losses from total profits.
5) Apply CT tax rate

Question 24

When can Annual Investment Allowance be applied?

Answer 24

capital allowance
- Deduct 100% on the entire cost of newly purchased P&M for up to £1 million (new, used, refurbished, leased).

◆ If over £1million- can calculate leftover using WDA(18%).

Question 25

What is full-expensing?

Answer 25

capital allowance
- First-year allowance on P&M purchase = 100% relief (uncapped amount)
- P&M must be new/unused.
- must be claimed same year expense is incurred.

➔ If asset is leased/second-hand = can claim AIA instead.

Question 26

What is the formula for calculating income profits?

Answer 26

1) Chargeable receipts - any income made by business (≠ one-off transactions).
MINUS
2) Deductible Expenditure
MINUS
(3) Capital allowances

Question 27

What is the formula for calculating chargeable gains?

Answer 27

1)Sale price
2)Original price of asset
2) Improvement expenditure and costs incidental to acquisition (but not disposal/maintenance costs)
3) If asset before December 2017 - deduct indexation allowance.
4) If applicable - apply roll-over relief on replacement qualifying business asset.
5) If applicable - offset capital gains from current year with losses from same/previous financial years.
- cf. if capital loss is made from sale, you can only offset its loss by carrying forward, and not backwards.

Question 28

What are the three main capital allowances against which trading profits can be offset?

Answer 28

1) Written-down allowance
2) Annual Investment Allowance
3) Full-expensing

Question 29

What are deductible expenses which can be offset against trading profits?

Answer 29

Expenditure wholly and exclusively incurred for trade purposes.
- Not prohibited by statute (ie. business entertainment) and of an income nature/recurring.
- Interest allowance - subject to cap of £2 million, after which maximum deduction is limited to 30% of its UK taxable profits.

Question 30

What are the rule to carry forward trading losses?

Answer 30

Cap - £5 million, plus 50% of remaining total profits after deduction allowance.
- Whatever is still leftover can be moved to the next accounting period.

Question 31

What is the time limit to claim losses carried forward?

Answer 31

Within two years from ‘future’ accounting period where losses are offset, but can be carried forward indefinitely.

Question 32

What are the rules for terminal carry-back?

Answer 32

Applies to a company that is no longer trading.

▪️Go up to three accounting periods before the start of the final 12 months of trade.

Question 33

What is the time-limit against which you can carry back trading losses?

Answer 33

Can offset year’s trading losses against total profits during accounting period(s) in the previous 12 months, provided the same trade is still carried on.

Question 34

What three conditions must be met to apply roll-over relief on business assets?

Answer 34

Applies when replacement qualifying business asset is purchased.

1) Qualifying assets - land/buildings, goodwill, fixed P&M, ships/aircraft;
AND
2) Replacement assets = bought within 3 years of selling or disposing of the old one OR up to one year before;
AND
3) Company must have been trading in both instances, and new asset must be used in furtherance of business.

Question 35

What is a key rule to remember about offsetting capital losses?

Answer 35

Capital losses can generally be set off against chargeable gains only.
- If there are unused capital losses in the current accounting period, these losses can be carried forward and set off against chargeable gains in subsequent accounting periods.
- Cannot be carried backwards.