Business Taxation - Corporation Tax (8) Flashcards
What is corporation tax?
Corporation Tax: Corporation Tax is a tax levied on companies total taxable income and chargeable gains, and must be paid according to the law. See Corporation Tax Calculation to see how it is calculated.
What are the rules about close company loans?
Close Company Loans: ‘Close’ companies are subject to additional tax provisions when making certain types of loans, to limit tax avoidance.
(1) Close Company: This is a company controlled by: a) 5 or fewer participators; or b) any number of participators who are directors/shadow directors.
Control: Participators collectively own or have the right to own >50% shares or voting rights.
Participator: Shareholder, or person with exclusive right to acquire shares.
>I.e. A company where 5 or fewer shareholders own >50% shares, or at least 50% of the shares are held by directors.
(2) Loan Restriction: Loans made to a participator (or their close relative/business partner) require the close company to deposit additional money to HMRC.
Deposit: Deposit equivalent to 33.75% of the loan value, refunded once paid off or discharged.
Effect: Restricts company from making a tax-free loan by writing it off (i.e. a tax free salary).
(3) Exception: The deposit is not required where:
Business Purpose: Loan is made in the ordinary course of business.
Small Loan to Employee: The total value of loans to the participant does not exceed £15,000, and the participant is a full time employee of the company, who owns less than 5% ordinary shares.
What are the rules on receiving dividends and paying corporation tax?
Receiving Dividends: Companies who hold shares in other companies (i.e. investment companies) are typically exempt from paying corporation tax on the dividends it receives.
(1) Purpose: This prevents double taxation.
>Any profit the company would want to extract would need to be paid to an individual at some point, who would then be taxed.
(2) Effect: Tax is already levied on the company who has paid the dividends, as ordinary profits have been taxed, and the dividend payments are not tax-deductible.
What are the rules on corporation tax and buyback profit?
Buyback Profit: Companies who hold shares in other companies must pay corporation tax on the profits of any ‘bought back’ shares. This is charged either as a chargeable gain or income, depending on the circumstances (See CGT).
How is corporation tax paid to HMRC?
HMRC Payment: Corporation Tax must be paid to HMRC using the correct procedures.
Notice Requirements
Notice Requirements: Companies must keep HMRC informed.
(1) New Company: A new company must inform HMRC of the start of its first accounting period in writing, within 3 months.
(2) Self-Assessment: All companies provide a yearly self-assessed corporation tax return, within 12 months of the end of the accounting period.
Payment
Payment: The payment procedure differs by company.
(1) Default Position: Corporation tax is payable 9 months and 1 day after the accounting period ends (this is before the tax return deadline). Companies estimate their liability and make balancing payments if required at a later date.
(2) Large Companies: Taxable profits of between £1,500,000 and £20,000,000 are due in four instalments.
(1) 6 months and 13 days into the period.
(2) 3 months after first payment.
(3) 3 months after second payment.
(4) 3 months and 14 days after end of period.
(3) Very Large Companies: Taxable profits exceeding £20,000,000 are due in four instalments.
(1) 2 months and 13 days into the period.
(2) 3 months after first payment.
(3) 3 months after second payment.
(4) 3 months after third payment.
Tax Avoidance
Tax Avoidance: HMRC has many powers to adjust liability to counteract abusive tax avoidance arrangements (GAAR).
