Chapter 11 - Corporation tax – taxable total profits

Question 1

Q: What is Corporation Tax, and who is liable to pay it?

Answer 1

A: Corporation Tax is payable by UK resident companies on worldwide income and gains for an accounting period. A company is liable if it is either incorporated in the UK or managed and controlled in the UK.

Question 2

Q: How is Taxable Total Profits (TTP) defined?

Answer 2

A: Taxable Total Profits (TTP) is the total income and gains a company receives, which is subject to Corporation Tax.

Question 3

Q: What defines a company’s accounting period for Corporation Tax?

Answer 3

A: An accounting period (AP) typically corresponds to the company’s financial year but cannot exceed 12 months. It begins when the company starts trading or receives chargeable income, and ends 12 months later or when the company stops trading.

Question 4

Q: What happens if a company’s accounting period exceeds 12 months?

Answer 4

A: The accounting period is split into two: the first 12 months and the remaining period.

Question 5

Q: How is a corporation tax computation made?

Answer 5

A: The corporation tax computation starts with calculating the TTP, including trading income, property income, non-trading loan relationships, chargeable gains, and qualifying charitable donations.

Question 6

Q: How are dividends treated in Corporation Tax computations?

Answer 6

A: Dividends received by a company are generally exempt from tax but do affect tax rate and payment dates. Dividends paid are not deductible from profits.

Question 7

Q: How is trading income calculated for corporation tax?

Answer 7

A: Trading income is similar to that of a sole trader and is adjusted for disallowed expenses, capital allowances, and non-taxable income.

Question 8

Q: What are capital allowances, and how do they affect trading income?

Answer 8

A: Capital allowances are deductions from taxable trading profits, such as allowances for plant and machinery. They reduce taxable profits by allowing companies to claim tax relief on capital expenditures.

Question 9

Q: What is the full expensing regime for capital allowances?

Answer 9

A: Full expensing allows 100% tax relief on new and unused plant and machinery (excluding cars) purchased by companies between 1 April 2023 and 31 March 2026.

Question 10

Q: What is the tax treatment of disposals of assets benefiting from full expensing?

Answer 10

A: If assets purchased under full expensing are disposed of, a balancing charge arises equal to the disposal value.

Question 11

Q: How is rental income from UK properties taxed?

Answer 11

A: Rental income is taxed on the accruals basis, meaning it is taxed when earned, not when received.

Question 12

Q: What is the tax treatment of interest income from loan relationships?

Answer 12

A: Interest income is taxed on the accruals basis, and its classification as either trading or non-trading income determines the tax implications.

Question 13

Q: How are chargeable gains calculated for a company?

Answer 13

A: Chargeable gains are taxed on the profit made from disposing of chargeable assets, with the calculation similar to that for individuals, but companies do not benefit from the Annual Exempt Amount (AEA).

Question 14

Q: How are Qualifying Charitable Donations (QCDs) treated for corporation tax purposes?

Answer 14

A: QCDs are deducted from taxable profits when calculating TTP. They are only deductible if made on a cash paid basis.

Question 15

Q: What are the key steps in calculating Corporation Tax liability?

Answer 15

A: 1. Calculate TTP.
2. Calculate augmented profits.
3. Determine the applicable tax rate.
4. Apply the tax rate to TTP.

Question 16

Q: What are augmented profits in relation to Corporation Tax?

Answer 16

A: Augmented profits include TTP plus any exempt distributions from 51% subsidiaries. They affect tax rate determination.

Question 17

Q: What is the tax rate for companies with augmented profits greater than £250,000?

Answer 17

A: Companies with augmented profits greater than £250,000 are taxed at the main rate of 25%.

Question 18

Q: What tax rate applies to companies with augmented profits less than or equal to £50,000?

Answer 18

A: Companies with augmented profits of £50,000 or less are taxed at the small profits rate of 19%.

Question 19

Q: How is marginal relief applied to companies with augmented profits between £50,000 and £250,000?

Answer 19

A: Marginal relief applies to companies with profits between £50,000 and £250,000, calculated using a specific formula based on profits and the applicable fraction (3/200).

Question 20

Q: How does the tax rate change for short accounting periods?

Answer 20

A: For short accounting periods (less than 12 months), the £50,000 and £250,000 limits for tax rates are proportionally reduced.

Question 21

Q: What does it mean for companies to be “associated” for tax purposes?

Answer 21

A: Companies are considered associated if one controls the other or both are controlled by a third company. Control means owning more than 50% of the share capital or voting power.

Question 22

Q: How does being an associated company affect the corporation tax limits?

Answer 22

A: The £50,000 and £250,000 limits for determining tax rates are divided by the number of associated companies.

Question 23

Q: How are dividends from associated companies treated for tax purposes?

Answer 23

A: Dividends from associated companies are excluded from the augmented profits calculation, which affects the corporation tax rate.

Question 24

A: What is the formula for calculating marginal relief?

Answer 24

A: The formula for marginal relief is:

(𝑈−𝐴) × (𝑁/𝐴) x 𝑆𝐹

where U is the upper limit, A is augmented profits, N is taxable total profits, and SF is the standard fraction (3/200 for FY23).

Question 25

Q: What are the key differences between trading income and non-trading income for Corporation Tax purposes?

Answer 25

A: Trading income is income from regular business activities, whereas non-trading income includes passive income like interest, rental income, and income from non-core investments.

Question 26

Q: What is the meaning of “income arising from chargeable gains” in relation to Corporation Tax?

Answer 26

A: Income arising from chargeable gains refers to the profit made from the sale of an asset, such as land or property, which is subject to Corporation Tax.

Question 27

Q: What are the special tax rates or treatments for ring-fenced profits?

Answer 27

A: Ring-fenced profits, such as profits from oil and gas activities, may be subject to higher tax rates and specific treatment under the supplementary charge.

Question 28

Q: What is the tax treatment of research and development (R&D) expenditure for a company?

Answer 28

A: Companies can claim a tax credit or enhanced deductions for qualifying R&D expenditure, effectively reducing their taxable profits.

Question 29

Q: How are losses treated under Corporation Tax?

Answer 29

A: Losses can be carried forward to offset future profits, or carried back (subject to specific rules), or set off against other sources of income, reducing the company’s tax liability.

Question 30

Q: What are the rules regarding tax for multinational companies under Transfer Pricing?

Answer 30

A: Transfer pricing rules ensure that cross-border transactions between related companies are priced according to market rates, to prevent tax avoidance by shifting profits to lower-tax jurisdictions.

Question 31

Q: How are foreign dividends taxed in the UK for a corporation?

Answer 31

A: Foreign dividends received by a UK company may be exempt from Corporation Tax if certain conditions are met, such as being from a qualifying group or country with a suitable tax treaty.

Question 32

Q: What is the impact of Controlled Foreign Company (CFC) rules on UK tax?

Answer 32

A: CFC rules may bring income from foreign subsidiaries back into the UK tax net if certain criteria are met, ensuring the UK company doesn’t artificially shift profits to low-tax jurisdictions.

Question 33

Q: How does a company determine its residency for Corporation Tax purposes?

Answer 33

A: A company is considered a UK resident if it is incorporated in the UK or its central management and control is exercised in the UK.

Question 34

Q: What are the tax implications of a company’s change of accounting period?

Answer 34

A: Changing the accounting period may require the company to file a “short accounting period” return and may affect its Corporation Tax calculation, particularly for tax rate application.

Question 35

Q: What is the tax treatment of intangibles, such as patents or trademarks, for Corporation Tax purposes?

Answer 35

A: Expenditures on intangible assets may be eligible for amortization or capital allowances, and the sale of such assets may result in chargeable gains or income.

Question 36

Q: What are the penalties for non-compliance with Corporation Tax obligations?

Answer 36

A: Penalties can arise from late payment of Corporation Tax, failure to submit tax returns, or underpayment due to errors or deliberate evasion. Penalties vary depending on the severity of the issue.

Question 37

Q: How are UK property companies taxed differently from other companies?

Answer 37

A: UK property companies may face special rules, including paying tax on property income and capital gains, as well as being subject to different rates for certain transactions like sales of land.

Question 38

Q: What does it mean for a company to have “non-resident” status?

Answer 38

A: A non-resident company does not have to pay UK Corporation Tax on worldwide income but may be liable to tax on income generated within the UK, such as rental income or income from a UK branch.

Question 39

Q: What is a “group relief” in Corporation Tax?

Answer 39

A: Group relief allows companies within the same group to transfer tax losses to offset against the profits of another company in the same group, reducing the overall tax liability.

Question 40

Q: How does Corporation Tax apply to charities and not-for-profits?

Answer 40

A: Charities and not-for-profits are generally exempt from Corporation Tax, but only if they meet the requirements set out by HMRC, such as using profits for charitable purposes.