Chapter 2: Corporation tax for a single company Flashcards
1.1 Corporation tax
UK payable by UK resident companies, assessed on their taxable total profits for the accounting period. TTP brings in all income and gains from the company’s sources. If the AP is longer than 12 months, then this is split into two APs, made up of the first 12 months and the balance.
1.2 First year allowances for companies
From 1 April 2021 to 31 March 2023 companies can claim first year allowances on new assets at a rate of:
- 130% for main pool plant and machinery
- 50% for special rate pool assets
Not available on cars, if the accounting period straddles 1 April 2023 and the asset was purchased before the date. The first-year allowance of 50% is allowable in full on the asset if it is allocated to the special rate pool, but time-apportioned rate is calculated for main pool assets.
On purchase, any assets subject to the super deduction should be kept out of the main pool. On disposal a balancing charge will arise, this is calculated as:
- Sales proceeds x 1.3 if the AP ends before 1 April 2023
- Sales proceeds if the AP periods starts on or after 1 April 2023
A hybrid charge is calculated if the period straddles 1 April 2023.
For 50% FYAs, 50% expenditure is kept out special rate pool. On disposal a balancing charge arises on the proportion of FYAs claimed, this is 50% x sales proceeds received on disposal. The remaining proceeds are deducted from the special rate pool.
1.3 Dividends received.
Most dividends from UK and overseas companies are exempt from UK corporation tax. Dividends received by small companies are exempt if they are received from a UK company or a company resident in a county which the UK has a double tax treaty and the dividend is not paid as part of a scheme that has the obtaining of a UK tax advantage as one of its main purposes.
Dividends received by companies that are not small are exempt if they fall under any of the following:
- Received from a company that is controlled by the recipient.
- Relate to non-redeemable ordinary shares.
- Received from a portfolio holding of the share class concerned.
- Relate to a transaction not designed to reduce UK tax, or
- Relate to shares accounted for as liabilities.
A small company is one with fewer than 50 employees, and either has annual turnover of less than 10m euros or balance sheet total of less than 10m euros.
1.4 Calculation of corporation tax
For FY2023 large companies (augmented profits greater than £250,000) pay corporation tax at 25%, but small companies (augmented profits not exceeding £50,000) continue at 19%, marginal relief applies for companies between these rates. The limits are apportioned for short accounting periods.
Companies are associated if at any point in the last 12 months, one company is under control (>50%) of another, or they are both under the control of the same person or group of persons. Dormant and passive holding companies are not included when identifying associated companies.
Augmented profits is calculated as TTP plus exempt dividends.
Marginal relief is calculated as (U-A) x (N/A) x SF, where.
- U is the upper limit for corporation tax (£250,000)
- A is augmented profits.
- N is the taxable total profits
- SF is the standard fraction for marginal relief, this is 3/200 for FY23.
CT is calculated at 25%, then the marginal relief is deducted from the tax payable.
1.5 Payment of corporation tax
Small companies pay CT nine months and one day after the end of the accounting period. Large companies pay through quarterly instalments. A large company is one with augmented profits greater than £1,500,000 and this is divided by the number of 51% related companies in a group. A very large company has augmented profits greater than £20m.
2.1 Research and expenditure
Relief depends on the size of the company. SME get an extra 130% deduction against trading income whereas large companies can claim a tax credit of 13% of qualifying expenditure. Conditions include:
- Guidelines produced by the department for Business, Energy and Industrial Strategy define R&D for tax purposes.
- Revenue expenditure, not capital expenditure qualifies for the extra deduction/ tax credit.
- There are special rules for externally provided workers and subcontracted expenditure.
- Capital expenditure qualifies for 100% FYA deduction. Alternatively, if the expenditure was on plant and machinery purchased between 1 April 2021 and 31 March 2023 the 130% super deduction can be claimed on main pool expenditure.
2.2 R&D tax credit for SMEs
If the company entitled to the extra deduction for R&D during the year has a trading loss, the company can convert some of this loss into a tax credit. The conditions are:
- The company is an SME, and
- The company was entitled to the extra R&D deduction in the year, and
- After the extra deduction, there was a trading loss.
Steps:
- Calculate the surrenderable loss as the lower of trading loss after CY claim, other loss relief and group/consortium relief or 230% x R&D expenses.
- Calculate the tax credit which is 14.5% of surrenderable loss.
- The tax credit is capped at: £20,000 plus three times the total PAYE and NIC liability for the period. A company is exempt from the cap if its employees are involved in creating, preparing to create or managing intellectual property, and no more than 15% of its qualifying R&D spend is incurred on subcontracting R&D to connected parties.
2.3 Above the line R&D credits for large companies
The company is entitled to a credit for any accounting periods in which it has qualifying expenditure. RDEC is given at a rate of 13% the qualifying R&D spend. The credit is above the line, meaning the amount of credit the company receives is treated as taxable income in the TTP computation. In a period where the RDEC is available: R&D expenditure can be deducted from taxable profits, but the RDEC must be added as taxable income.
The impact of the above is that relief is claimed for 87% of R&D expenditure against taxable profits. Relief for the other 13% of the qualifying spend is claimed against the corporation tax liability. The company uses the RDEC to pay the current year corporation tax liability.
If RDEC exceeds the CT liability, the company can claim a repayment from HMRC. Any repayment is subject to two caps, and is the lowest of:
- The remaining RDEC
- The full current year RDEC less notional CT liability on that credit (81% x current year credit)
- The amount of PAYE and NICs paid by the company in respect of its workers engaged in R&D
Any remaining RDEC which cannot be repaid can either be carried forward by the company to offset against its own future corporation tax liabilities or surrendered to other group members.
3.1 Intangibles
If a company acquires IFA (not goodwill) post April 2002, then a deduction for amortisation/impairments is allowed, or if an election is made 4% straight line WDA. On disposal a profit or loss is made.
Goodwill the treatment is different:
- 1 April 2002 to 31 March 2019: treated as a trading asset. Amortisation allowable on goodwill before 3 December 2014. No deduction available for goodwill created on incorporation on or after 3 December 2014 or purchased from 8 July 2015 (companies claim deduction for goodwill arising before this date)
- On or after 1 April 2019: purchased goodwill from unrelated party is deductible. This is a fixed rate of 6.5% of qualifying costs but capped at six times the value of qualifying IP assets purchased with the goodwill, this includes patents, copyrights and registered designs.
3.2 Profit on IFA disposals
- Accounting treatment: proceeds less carrying amount.
- TWDV: proceeds less TWDV.
If the asset sold is goodwill on which no deductions were available, the profit is sales less cost. If this gives rise to a loss, this is a non-trade debit rather than a trading loss.
3.3 Intangibles and rollover relief
Applies if a company makes a profit on the sale of an IFA and reinvests the proceeds in another IFA. If a new tangible is acquired within 12 months before or up to 36 months after disposal of the original IFA, then part of the profit can be deferred. The full profit is not available because a deduction is already received for any amortisation/writing down allowance of the asset.
Maximum deferral is the lower of proceeds or the amount reinvested less cost of original intangible asset. This amount is deducted from the cost of the new intangible.
Profits on the disposals of intangible fixed assets can be rolled into the direct purchase of a new IFA, and/or the purchase of shares in a company which holds an IFA.
The cost of the replacement IFA is the lower of the cost of the shares in the company being acquired and the TWDV of the intangibles held on date of acquisition. The rollover relief is claimed against the TWDV of the IFA in that company, not against the shares in the company.
4.1 Companies with investment business
This is any company whose business consists wholly or partly of making investments. CT charged in the normal way, if the company has a trade, then trading profits are calculated in the same way. Overhead expenses incurred in managing investments are deductible as management expenses. Management expenses are deducted on the face of the CT company if they are general management expenses. Excess expenses are carried forward an offset against future income and gains, or group relieved.
5.1 SSE
If a company disposes of shares in another company, the gain or loss is exempt if the SSE conditions are met. A substantial shareholding is when the investing company owns at least 10% of the ordinary share capital. This is automatic in the following conditions:
- The selling company has held at least 10% of the shares in the company being disposed of for a continuous 12-month period during the last 6 years, and
- The investee company is a trading company (or holding company of a trading group)
5.2 SSE or paper-for-paper treatment
SSE rules take precedence if a disposal has taken place, meaning that no gain arises, and the replacement shares have an allowable cost of market value. If the acquiring company and selling company within a takeover are in a gains group, the no gain no loss treatment means effectively no disposal takes place. As the SSE means a disposal is exempt, in this situation the SSE rules would not apply. Instead, the share-for-share approach would be followed.
5.3 SSE for groups
When members of a group hold shares in the same company (more than 50% holding), the holdings of group members may be added together to determine if the 10% requirement has been met.
