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

What is the overview of corporation tax reporting?

Answer 10

See page 198

Question 11

What are some of the key differences when performing adjustments to profit calculations for companies when compared to sole traders or partnerships?

Answer 11

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.
6. 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.
7. Capital allowance computations for companies never include private use adjustments.
8. 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.

Question 12

Define property income

Answer 12

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

Question 13

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 13

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 14

Are dividends received exempt from the calculation of income tax?

Answer 14

Yes.

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

They are therefore ignored in computing taxable total profits.

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

Question 15

What is the treatment for interest payable and receivable?

Answer 15

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

Question 16

How to compute chargeable gains?

Answer 16

See page 200

Question 17

What is indexation allowance?

Answer 17

‘indexation allowance’ is also available in arriving at the chargeable gain.

Indexation allowance is designed to ensure that the inflationary element of gains is not subject to tax.

Question 18

When is each item of acquisition cost indexed?

Answer 18

Each item of acquisition cost is indexed from the date when the expenditure was incurred to the date of the disposal. Costs incurred in the same month can be added together.

Question 19

How is the indexation factor calculated?

Answer 19

The indexation factor is calculated as follows:
RD– RI / RI

where RD is the Retail Prices Index (RPI) for the month of disposal and RI is the RPI for the month
in which the expenditure was incurred.

In this examination relevant RPIs will be provided.

Question 20

What happens if RD < RI?

Answer 20

If RD is less than RI (ie, the RPI falls) then the indexation factor is nil.

Question 21

To how many decimal places is the indexation factor rounded to?

Answer 21

The indexation factor is rounded to three decimal places.

Question 22

When was indexation allowance frozen?

Answer 22

Indexation allowance has been frozen at December 2017.

Assets acquired before 1 January 2018 but disposed of on or after 1 January 2018 will use the RPI for December 2017 as the RPI of the month of disposal.

For disposals of assets acquired on or after 1 January 2018 there will be no indexation allowance deducted from the gain.

Question 23

Can the indexation allowance create or increase a loss?

Answer 23

The indexation allowance cannot create or increase a loss.

Question 24

Are companies entitled to an annual exempt amount?

Answer 24

Companies are not entitled to an annual exempt amount.

Question 25

What are the exempt assets for companies?

Answer 25

Exempt assets for companies are as for individuals (see earlier in this Manual), with the addition of goodwill created or acquired on or after 1 April 2002 and the exclusion of gilt-edged securities.

Question 26

What is the treatment for miscellaneous income?

Answer 26

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

Question 27

What are qualifying charity donations?

Answer 27

The method of tax relief for a company differs from that used for individuals.

A company makes qualifying donations gross. The amount paid in the accounting period is deducted from the company’s total income and gains. This is called a qualifying donation.

Question 28

How to calculate a company’s total taxable profits?

Answer 28

A company’s total income and gains less qualifying donations is its taxable total profits.

Question 29

What are loan relationships?

Answer 29

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

This includes both trading and non-trading loan relationships.

Interest payments are taxed or relieved on an accruals basis.

Question 30

What is corporation tax?

Answer 30

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

Question 31

What is the rate of corporation tax for FY19?

Answer 31

Rates of corporation tax are fixed for Financial Years (FYs). FY 2019 runs from 1 April 2019 to 31 March 2020. The rate for FY 2019 is 19%.

Question 32

What are augmented profits?

Answer 32

Augmented profits: 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 33

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

Answer 33

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

Question 34

How is the limit off £1,500,000 scaled down?

Answer 34

The limit of £1,500,000 (FY 2019) applies for a 12-month accounting period, for a company with no related 51% group companies. T

he limit is scaled down for shorter accounting periods so the limit for, say, a nine month period is £1,125,000 (£1,500,000 x 9/12).

The limit is also scaled down if the company has related 51% group companies at the end of the previous accounting period.

Question 35

What are related 51% group companies?

Answer 35

Companies A and B are related 51% group companies if A is a 51% subsidiary of B, or B is a 51% subsidiary of A, or both A and B are 51% subsidiaries of the same company.

B is a 51% subsidiary of A if more than 50% of B’s ordinary share capital is owned directly or indirectly by A.

Therefore, sub-subsidiaries, where one company owns shares in another, which in turn owns shares in another, may also be included as related 51% group companies if the indirect holding exceeds 50%.

Non-UK resident companies may be included.

Companies count as related 51% group companies even if they have left the group part way through the accounting period.

However, a related 51% group company is ignored if it does not carry on a trade, or is passive (dormant).

Question 36

How is the limit of £1,500,000 adjusted when there are 51% group companies?

Answer 36

The number of related 51% group companies is important as the limit for determining a company’s corporation tax payment date(s) is divided by the number of related 51% group companies, including the company itself.

However, the number that is relevant is the number of
related 51% group companies at the end of the previous accounting period.

Question 37

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

Answer 37

The due date for corporation tax payable by companies is nine months and one day after the end of the accounting period. T

his is the case unless the company is a large or very large company in the accounting period.

Question 38

Define a large company.

Answer 38

A large company is one with augmented profits greater than the £1,500,000 limit 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.

Question 39

What are the due dates for corporation tax payable by large companies?

Answer 39

A large company must pay corporation tax 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.

Question 40

What are the due dates for corporation tax payable by very large companies?

Answer 40

Companies which have augmented profits exceeding £20 million in accounting periods starting on or after 1 April 2019 must continue to pay their corporation tax liabilities in quarterly instalments.

However, they must pay their liabilities four months earlier than large companies.

Instalments are therefore due on the 14th day of months 3, 6, 9 and 12 of the accounting period.

Question 41

What is the flat rate disallowance of relevant payments for leased cars with CO2 emissions above 110g/km?

Answer 41

There is a flat rate disallowance of 15% of relevant payments for leased cars with CO2 emissions above 110g/km.