Chapter 10 - Corporation tax

Question 1

Who is chargeable to corporation tax?

Answer 1

Corporation tax is charged on the income and gains of a company. These are known as taxable total profits.

Question 2

What is a company?

Answer 2

A UK company is formed by incorporation under the Companies Acts. A company is a legal person. It has a separate legal entity from its owners (shareholders) and its managers (directors).

Question 3

Under what circumstances is a company liable to corporation tax on its worldwide profits?

Answer 3

A company is liable to corporation tax on its worldwide profits if it is resident in the United Kingdom.

A company is resident in the UK if either:

1. it is incorporated in the UK; or
2. it is incorporated outside the UK, but its central management and control are exercised in the UK.

Question 4

Corporation tax is charged with respect to which period?

Answer 4

A company is charged to corporation tax in respect of an accounting period.

Question 5

What is an accounting period?

Answer 5

The accounting period will usually be the same as the company’s period of account.

Question 6

What is a company’s period of account?

Answer 6

The period for which the company prepares its accounts.

Question 7

When does an accounting period start?

Answer 7

• when the company begins to trade or acquires a source of chargeable income
• when the previous accounting period ends and the company is still within the charge to corporation tax

Question 8

When does an accounting period end?

Answer 8

An accounting period ends on the earliest of:

• the end of 12 months from the start of the accounting period;
• the date the company begins or ceases to trade; or
• the date the period of account ends.

Question 9

What happens when a company has period of accounting exceeding 12 months?

Answer 9

If a company has a period of account exceeding 12 months, there will be two accounting periods, each giving rise to a separate corporation tax computation.

The first accounting period of such a long period of account will be the first 12 months of the period. The second accounting period will be the remainder of the period of account.

Question 10

Outline the pro-forma for a companies taxable profits

Answer 10

Question 11

What do trading profits cover for a company?

Answer 11

Trading profits cover a companies income from its trade

Question 12

What are some of the key differences when performing adjustments to trading profit calculations for companies when compared to individuals?

Answer 12

1. As a company is a legal entity separate from its shareholders and directors, there is no adjustment to profits needed for private expenses met by the company.
2. For the same reason, there will be no adjustment for appropriation of profits (eg, salary paid to a director).
3. Interest paid by a company in respect of a trading loan relationship will be an allowable expense in the calculation of its trading income
4. Dividends paid by a company are not allowable as a trading expense in the calculation of its trading income.
5. If the company has a long period of account, the tax-adjusted profits should be time apportioned into the relevant accounting periods at this stage.

Question 13

What are capital allowances for companies?

Answer 13

Capital allowances are tax allowable depreciation. They are available in respect of expenditure by the company on plant and machinery.

Question 14

What are some of the key differences when performing adjustments to capital allowance calculations for companies when compared to individuals?

Answer 14

1. Capital allowances for companies are computed for accounting periods, not periods of account. This means that capital allowances for companies can never be computed for a period longer than 12 months.
2. Capital allowance computations for companies never include private use adjustments.
3. A 100% FYA is available for expenditure incurred by a company on new (not second-hand) plant and machinery for use in a designated enterprise zone. The expenditure must be incurred in the eight years from the date the enterprise zone is established.
4. From 1 April 2023 until 31 March 2026, companies can claim a temporary first year allowance at 100% (known as full expensing) for purchases of plant and machinery in the main pool providing the asset: is new and unused (not second hand), is not a car, is not a gift to the company, or bought to lease to someone else.
5. When a company disposes of an asset which was fully expensed, an immediate balancing charge arises (equal to the disposal value of the asset). In the exam you will be told if the asset was fully expensed.

Question 15

What is property income for a company?

Answer 15

A company’s rental income from property situated in the UK is taxed as property income.

Question 16

How is property income dealt with for corporation tax purposes with regards to receival?

Answer 16

Rent received is dealt with on an accruals basis. This means that only rent relating to the chargeable accounting period is taken into account - the date of receipt is not relevant.

Question 17

Is interest payable on a loan taken out by a company for the purpose of buying or improving let property an allowable expense for property income?

Answer 17

Interest payable on a loan taken out by a company for the purpose of buying or improving let property is not an allowable expense for property income.

Instead it is dealt with under the loan relationship rules

Question 18

Are dividends received by companies exempt from the calculation of tax total profits for a company?

Answer 18

Yes.

A company rarely pays tax on dividends received from other companies.

They are therefore ignored in computing taxable total profits - if added on they must be deducted.

For the purposes of the exam, assume all dividends received by a company are exempt.

Question 19

What is the treatment for interest payable and receivable?

Answer 19

Interest payable and receivable, such as investment interest, is allowable and taxable respectively as a loss or profit on non-trading loan relationships

Question 20

What are chargeable gains on disposal for companies?

Answer 20

The gain that arises when a company disposes of a capital asset

Question 21

Outline the pro-forma for calcualting chargeable gains for asset disposal for companies

Answer 21

Question 22

How do chargeable gains of companies differ for that of individuals?

Answer 22

Companies are not entitled to an annual exempt amount.

All exempt assets are the same for companies as for individuals except for goodwill - goodwill is chargeable for individuals but exempt for companies

Question 23

What is the treatment for miscellaneous income for companies?

Answer 23

Miscellaneous income received by a company is taxable as income not otherwise charged. Such income is received gross.

Question 24

What are qualifying charity donations?

Answer 24

A company makes qualifying donations gross. The amount paid in the accounting period (not aaccrued) is deducted from the company’s total income and gains. This is called a qualifying donation.

This is reduces a companies taxable profit

Question 25

What are loan relationships?

Answer 25

A company has a loan relationship if it loans money as a creditor or is loaned money as a debtor.

The tax treatment will depend upon whether or not the loan was entered into for trading purposes

Interest payments are taxed or relieved on an accruals basis.

Question 26

Outline the treatment for gross interest payable and receivable for trading loan relationships when calculating a companies taxable profits. Give the main examples of each type of trading interest for companies

Answer 26

• Gross interest payable is an allowable trading expense so can be set against trading income - not adjusted for in trading profit
• Gross interest receivable is an allowable trading receipt so can be treated as trading income - not adjusted for in trading profit

Question 27

Outline the treatment for gross interest payable and receivable for non-trading loan relationships when calculating a companies taxable profits. Give the main examples of each type of non-trading interest for companies

Answer 27

• Gross interest payable is not an allowable trading expense so must be adjusted for in trading profit - added back. It is instead treated as a non-trading loan relationship ‘debit’
• Gross interest receivable is not an allowable trading receipt so must be adjusted for in trading profit - deducted. It is instead treated as a non-trading loan relationship ‘credit’.

The credits (income) and debits (expenses) on loan relationships are combined - debits deducted from credits

Question 28

Outline the method for calculating a companies taxable profits

Answer 28

1) Write out the pro-forma pictured
2) Take the companies trading profit from accounts and make appropriate adjustments including, adding back any disallowable expenses, deducting property income, deducting miscellaneous income, adding back non-trade interest paid, deducting non-trade interest received, adding back qualifying donations, deducting capital allowances (if not already done), deduct profit/add back losses on disposal of assets
3) Add back the property income, making sure to include any rent that needs to be accrued for but not yet received and ignoring any rent that will not be recieved due to bad debt.
4) Compute the non-trading loan relationships by deducting debits from credits and then add onto trading and property income
5) Add on miscellaeous income
6) Compute any chargeable gains from the disposal of assets and add on
7) Deduct an qualifying donations that have been paid in the accounting period
8) Add up and deduct where applicable as per the pro-forma to give the companies taxable total profits

Question 29

What is corporation tax?

Answer 29

Corporation tax is the tax charged on the taxable total profits of a company.

Question 30

What are a companies augmented profits?

Answer 30

A companies augmented profits is its taxable total profits plus exempt ABGH distributions.

When calculating augmented profits in the examination, you should include as ‘exempt ABGH distributions’ any dividends received from UK and overseas companies, other than those received from companies which are 51% subsidiaries of the receiving company.

Question 31

How is the rate of corporation tax a company pays determined?

Answer 31

By comparing the companies augmented profits to the augmented profits limits (in tax table)

Question 32

Outline the limits for corporation tax and explain how a companies augmented profits will detrmine at which rate they will pay corporation tax

Answer 32

• If a companies augmented profits are below the augmented profits limit for standard small profits rate (£50,000) then the companies total taxable profits will all be taxed at 19%
• If a companies augmented profits are above the augmented profits limit for marginal relief (£250,000) then the companies total taxable profits will all be taxed at 25%
• If a companies augmented profits falls between the limits (£50,000-£250,000) then the companies total taxable profits will all be taxed at 25% but receive marginal relief (see other card for this calculation)

(see tax tables)

Question 33

Outline how to calculate a companies corporation tax liability if they qualify for marginal relief

Answer 33

1) Apply a rate of 25% to the total taxable profits of the company
2) Deduct from this marginal relief, which is calcualted using the equation pictured where AP is augmented profit and TTP is taxable total profits
3) This will give the companies corporation tax liability

Question 34

When will these augmented profit limits need adjusting and how?

Answer 34

There are two scenarios where you will need to adjust the augmented profit limits:
* If the accounting period is less than 12 months long, the limits must be scaled down - £50,000 x n/12 & £250,000 x n/12, where n is the number of months in the accounting periods
* If the company has associated companies, the limits are shared equally between all the associates in a group - £50,000/no. of associates & £250,000/no. of associates

Question 35

When are companies considered ‘associated companies’ of one another?

Answer 35

Companies A and B are associated companies if:
* One company is under the control of the other;
* or Both are under common control of a third party (individual, partnership, or other company).

Where control means over 50% of the issued share capital or voting power or distributable reserves or assets. Include non-UK resident companies any companies bought and sold during the accounting period.

Ignore dormant companies for these purposes (one which is not carrying on a trade or business).

Question 36

With what limit is a company’s augmented profits compared with to determine payment dates?

Answer 36

A company’s augmented profits are then compared with the limit of £1,500,000 to determine the payment date(s)

Question 37

What is the due date for corporation tax payable by companies?

Answer 37

The due date of a companies corporation tax will differ depending on its size
* For non-large companies it is nine months and one day after the end of the chargeable accounting period.
* For large companies they must pay in four equal instalments based on the company’s estimated liability for the accounting period. The instalments are due on the 14th day of the 7th, 10th, 13th and 16th months after the start of a 12-month accounting period - at each installment they will reestimate their liability and pay appropriately where the last payment will be a balancing payment to ensure their full liability is paid
* For very large companies they must also pay in four equal instalments based on the company’s estimated liability for the accounting period (but 4 month earlier than for large companies). The instalments are due on the 14th day of the 3rd, 6th, 9th and 12th months after the start of a 12-month accounting period - at each installment they will reestimate their liability and pay appropriately where the last payment will be a balancing payment to ensure their full liability is paid

Question 38

Define a large company.

Answer 38

A large company is one with augmented profits greater than £1,500,000 but not exceeding £20 million.

However, a company is not treated as large if:

• it has a tax liability of less than £10,000; or
• it was not a large company in the preceding 12 months and it has augmented profits of £10 million or less in this accounting period.

These limits (including the £10 million limit) are, once again, scaled down for short accounting periods or where there are one or more associated companies. This time, we use the number of associated companies at the end of the last accounting period.

Question 39

Define a very large company.

Answer 39

A very large company is one with augmented profits greater than £20 million.

This limit is, once again, scaled down for short accounting periods or where there are one or more associated companies. This time, we use the number of associated companies at the end of the last accounting period.