Business Tax - Corporation Tax Calculation (9) Flashcards
How is corporation tax calculated?
Corporation Tax Calculation: Corporation tax is a single tax levied against companies on both their income and chargeable gains during an accounting period, and determined by the corporate tax year (CT Acts 2009; 2010).
(1) Accounting Period: Companies pay tax based on their accounting period. By default, this is the last day of the month in which they were incorporated.
(2) Corporate Tax Year: Tax is apportioned between the corporate tax years that an accounting period may straddle. It runs from 1 April to 31 March. Tax year 23/24 would be referred to as ‘Financial Year 23’.
(3) Calculation: There are 4 steps: 1) calculate income; b) calculate chargeable gains; c) apply reliefs; d) apply tax.
What is Step 1: Calculate Income?
Income: Income is primarily trading profit, but also includes rent receipts and income received on loans.
(1) Trading Profit: Chargeable Receipts - Deductible Expenditure - Capital Allowances (see trading profits).
>Remember companies can ‘fully-expense’ new capital assets.
(2) Non-Deductible: Dividends paid to shareholders, and money paid on share buyback, is not deductible.
(3) Goodwill and IP Receipts: Receipts raised on goodwill and IP are treated as income for tax purposes. Expenditure on these assets is tax deductible. However, disposals can be rolled over for chargeable gains purposes.
Company Group Relief
Company Group Relief: A company within a ‘qualifying group’ may roll unabsorbed income losses into another company within the group to reduce their total tax liability.
(1) Qualifying Group: Company (A) must be a 75% subsidiary or shareholder of Company (B), or both must be 75% subsidiaries of Company (C), directly or indirectly.
(2) Procedure: Company (A) surrenders losses to Company (B) if they are incurred within an overlapping accounting period. This is limited if Company (A) has other profits, or Company (B) other losses.
What is Step 2: Calculate Chargeable Gains?
Chargeable Gains: Chargeable gains are calculated similarly but differently to CGT.
1: Identify Chargeable Disposal
Identify Chargeable Disposal: Disposals of fixed business assets, i.e. land and machinery.
2: Calculate Gain
Calculate Gain: The chargeable gain is the value of disposal, minus costs of acquisition, preservation and sale.
(1) Value of Disposal: This is either the sale price, or the market value for a gift (or gift element of a sale at undervalue).
(2) Incidental Costs: All incidental costs can be subtracted, other than costs of maintaining or insuring the product.
3: Indexation Allowance
Indexation Allowance: Inflation should be deducted from the total gain, as this represents a false profit. However, indexation cannot be used to create or increase a loss.
(1) Calculation: A rate is applied to the costs of acquisition and any subsequent expenditures made by the company during its ownership until December 2017.
(2) 31Mar1982-1Dec2017: Each cost incurred during this period of ownership is reduced by the difference in the Retail Price Index from date of expenditure to date of disposal.
(3) Pre-31Mar1982: Any cost incurred prior to this date is reduced by the difference in the market value of that asset on 31 March 1982 to the date of disposal.
4: Rollover Relief
Rollover Relief: Companies can rollover chargeable gains into qualifying business assets.
(1) Qualifying Business Asset: Fixed business asset used in trade, i.e. land and machinery.
Exception: Not shares, goodwill, IP, or assets with less than 50 years of use (wasting assets).
(2) Application: Gain must be rolled into a good purchased 1 year prior or 3 years after sale.
Company Group Relief
Company Group Relief: A company within a ‘qualifying group’ may roll chargeable assets into another company within the group where beneficial to do so for gain purposes. The qualifying group is different from income loss relief.
(1) Qualifying Group: The qualifying group consists of: a) a ‘principal company’; b) its direct 75% subsidiaries; and c) direct 75% subsidiaries of those subsidiaries. The principal must be directly or indirectly entitled to at least 50% of the profits and assets of every subsidiary to be considered a group (‘effective 51% shareholder’).
(2) Procedure: Company (A), with a higher tax rate, transfers a chargeable asset to Company (B), with a lower tax rate. The transfer is treated as having no gain. Company (B) can then dispose of the asset, subject to lower tax.
(3) Rollover Relief: Company groups can also ‘rollover’ chargeable gains into qualifying business assets purchased by another company within the group.
What is Step 3: Apply Reliefs?
Apply Reliefs: Reliefs can then be applied to the ‘total profit’, meaning the aggregate of all income and chargeable gains. Once applied, the total profit becomes the ‘taxable profit’.
(1) Relief Options: A number of relief options may be applied at the company’s discretion. More than one may be used if unabsorbed losses remain. They must be applied for within 2 years of the accounting period of loss.
(2) Best Practice: It is prudent to elect the relief providing the best cash flow. Carry-back and across reliefs can result in rebates, whereas carry-forward only reduces future liability.
(3) Charitable Donations: Any charitable donations made by the company are deducted from the outset from total profits, as they are not taxable.
Carry-Across Relief
Carry-Across Relief: Trading losses are set against total profits in the period. Losses must be fully absorbed before being applied to the previous year.
Carry-Back Relief
Carry-Back Relief: Trading losses are set against total profits in the previous accounting period, if the company engaged in the same trade. Losses must be fully absorbed before being applied to the current year.
Terminal Carry-Back Relief
Terminal Carry-Back Relief: Trading losses in the final year of trading can be set against total profits in the current and previous 3 accounting periods, working backwards until fully absorbed.
Carry-Forward Relief
Carry-Forward Relief: Trading losses can be carried forward and set against total profits indefinitely until absorbed.
(1) Maximum: A maximum of £5,000,000 may be deducted, and at least 50% of total profits must remain after deduction.
(2) Source of Profit: Losses sustained before April 2017 must be set against profits of the same source. Losses since April 2017 can be set against profits of any source.
What is Step 4: Apply Tax?
Apply Tax: The taxable profit must be taxed.
Rates of Tax
Rates of Tax: The rate of tax will differ by the taxable profit figure of the company. These are not banded, it is a single figure applied to all taxable profit of the company.
(1) Small Rate: Taxable profits under £50,000 taxed at 19%.
(2) Marginal Rate: Taxable profits between £50,000 and £250,000 taxed at a variable rate between 19% and 25%.
Formula: Profits charged at 25% then reduced by a complex fraction as set in the financial year.
Shorthand: To roughly calculate: a) tax first £50,000 at 19%; b) tax rest at 26.5%.
(3) Main Rate: Taxable profits exceeding £250,000 are taxed at 25%.
Apportionment
Apportionment: If the accounting period straddles two corporation tax years with different rates of tax, then profits must be taxed proportionately.
