Chapter 1 Introduction to Corporation Tax Flashcards
1.1 Introduction
Corporation tax charged to any corporate body; generally incorporated businesses registered with Companies House. Companies are charged to corporation tax on their income and chargeable gains. Broadly companies have trading profits, property income and capital gains. Corporation tax also applies to unlimited companies and unincorporated associations like clubs and political associations.
1.2 Residence
A company is UK resident if it is incorporated in the UK or is centrally managed and controlled in the UK. Companies resident in the UK and liable to tax on their worldwide income and gains.
1.3 Accounting Periods
Usually a 12-month period. There are rules to determine when an AP begins and ends. However an AP can never exceed 12 months in length. The AP beings on the earliest of the commencement of trading, the acquisition of trading by the company or immediately after the end of the previous AP. An AP ends on the earliest of the cessation or commencement of trading, the company becoming dormant or the end of a company’s period of account.
1.4 Proforma corporation tax computation
Trading Income
Adjusted profits before capital allowances x
Less: capital allowances (x)
Trade profit x
Other income Non-trading profit (LR) x UK property business income x Overseas property business income x Net chargeable gains x Less: Qualifying charitable donations x Taxable total profits x Corporation tax liability (TTP @ 19%) x
1.5 Corporation Tax Computation
Trading profit – arises from trading activities. This is a similar calculation to a sole trader’s profit calculations. You take the profits then add back disallowable expenditure, deduct income not taxed as trading income and then deduct capital allowances to arrive at the trade profit figure.
Interest expense incurred on a non-trading loan must also be added back, relief is given instead as a non-trading debit in arriving at the non-trading profits figure. Dividends paid by a company as an appropriation of profits and not an allowable trading expense. Dividends received by a company do not usually form part of its trading income and are normally deducted in arriving at the trade profit. Capital allowances are the same as sole traders except they are always calculated for an accounting period so can never be for more than 12 months and private use adjustments never apply to companies.
Non-trading profits (LR) – this tax all non-trading interest receivable by companies, less interest payable on non-trading loans. They are normally calculated on the accrual’s basis.
Other income – includes UK property business income and overseas property business. Dividends received by companies are not normally taxed.
Net chargeable gains – same rules as individuals except regarding the disposal of chargeable assets before 1 January 2018 as companies are allowed a further deduction called indexation allowance. The net gains are included in taxable total profits.
Charitable donations – these are allowed as deductions. They consist of:
• Cash donations to charity (paid gross by a company)
• Gift of quoted shares
• Gifts of UK land and buildings
Companies can still deduct donations to local charities from trading profits; all other charitable donations are dealt with under the qualifying charitable donations rules. For cash donations the amount paid to charity is deducted in arriving at TTP for the period, for gifts of shares and land the market value at the date of the gift (plus any costs of transfer) is deductible.
1.6 Further Provisions
The AIA is available to all businesses, a group of companies is treated as one for AIA, a group will only receive one AIA. A group for this purpose is a parent company and its 51% subsidiaries. The group allocates its AIA as they wish. Companies under common control are treated as one business also for the AIA. Common control means that:
• The companies are controlled by the same person, and
• The companies are related to one another
A company is related to one another if either:
• Their businesses are carried on from the same premises, or
• More than 50% of the turnover of each of the companies is derived from the same economic activities
Structures and buildings allowance -
New buildings and structures, renovation and a conversion of an existing building where construction takes place on or after 29 October 2018 and the building is for a non-residential purpose qualify for this.
The allowance is 3% of the qualifying expenditure (2% per annum before 1 April 2020). The expenditure is time apportioned in the AP of construction/purchase where the AP is less than 12 months. Qualifying expenditure includes construction costs, land preparation costs and demolition costs.
The sellers adds the total amount of SBAs claimed to the consideration received in the calculation of the chargeable gain/allowable capital loss. SBA gives tax relief for the original qualifying expenditure over 33.5 years to the buyer.
