Coperation Tax

Question 1

How does corporation tax differ from income tax and CGT, and what laws govern it?

Answer 1

• Corporation tax replaces income tax and capital gains tax (CGT) for companies.
• Applies to income profits and capital gains, calculated similarly to individual taxes but tailored for companies.
• Key statutes:
• Corporation Tax Act 2009: Governs income profits.
• Corporation Tax Act 2010: Governs rules and structures.

Question 2

What are the corporation tax rates for Financial Year 2023, and how are they calculated for marginal profits?

Answer 2

1. Small profits rate (19%): Profits ≤ £50,000.
   
   2. Main rate (25%): Profits > £250,000.
   3. Marginal rate: Profits between £50,001–£250,000, calculated as follows:
      * Apply 25% rate to all profits.
      * Subtract the reduction using a statutory fraction.
      * Simplified method: 19% rate for the first £50,000 and 26.5% rate for the remainder.

Question 3

What are the four key steps in calculating corporation tax for a company?

Answer 3

1. Calculate Income Profits
   • Definition: Income profits include all income earned by the company, such as trading profits, property income, and certain income associated with loans.
   • Key Components:
   • Trading Profit: Derived from the company’s main business activities and calculated after deducting allowable expenses.
   • Example: Salaries, rent, and utility costs.
   • Property Income: Income from letting properties owned by the company.
   • Loan Relationship Income: Income or gains from loans or financial instruments.
   • Exclusions: Payments such as dividends paid to shareholders or share buybacks are not deductible.
2. Calculate Chargeable Gains
   • Definition: Chargeable gains are calculated based on the disposal of chargeable assets (similar to CGT for individuals).
   • Steps:
   • Stage 1: Identify Chargeable Disposals: Look for sales, gifts, or transfers of chargeable assets like land, buildings, and shares in other companies.
   • Stage 2: Calculate the Gain or Loss:
   • Proceeds of disposal
   • Less: Costs of disposal
   • Less: Allowable expenditure (initial and subsequent expenses).
   • Stage 3: Apply Reliefs: For example, rollover relief on replacement of business assets.
   • Stage 4: Deduct Indexation Allowance (if applicable):
   • Compensates for inflationary increases in asset value, applied to costs incurred before 31 December 2017.
3. Aggregate Total Profits
   • Definition: Add together income profits and chargeable gains to calculate total profits.
   • Steps:
   • Combine trading profits, property income, loan income, and chargeable gains.
   • Deduct reliefs such as:
   • Trading Loss Relief: Offset current or previous trading losses against total profits.
   • Charitable Donations: Deduct qualifying donations made by the company.
   • Result: The remaining figure is the taxable total profit.
4. Apply Tax Rates
   • Definition: The corporation tax rate(s) applied depend on the company’s taxable profits and thresholds.
   • Current Rates (from 1 April 2023):
   • Small Profits Rate (19%): For companies with taxable profits up to £50,000.
   • Main Rate (25%): For companies with taxable profits exceeding £250,000.
   • Marginal Rate: For profits between £50,001 and £250,000, a tapered rate applies.
   • Calculated using the formula: Apply 25% rate to total profits, then deduct a fraction determined by HMRC.
   • Example: A company with £150,000 taxable profits:
   • First £50,000 taxed at 19%.
   • Remaining £100,000 taxed at 26.5% under the marginal rate formula.

Question 4

What constitutes a chargeable disposal for corporation tax, and how is it classified?

Answer 4

• Chargeable disposals include sales, gifts, or transfers of chargeable assets.
• Chargeable assets include land, buildings, shares, and goodwill, provided they are not part of regular income.
• Special rules apply to sales at undervalue or to connected persons, where market value is used instead of sale price.

Question 5

What is the indexation allowance, and how is it applied in corporation tax calculations

Answer 5

• Adjusts gains to exclude inflationary increases on assets owned from 31 March 1982 to 31 December 2017.
  
  • Frozen after 31 December 2017; no allowance for expenditures incurred after this date.
  • Cannot create or increase a loss.
  • Applied to initial and subsequent expenditure, excluding disposal costs.

Question 6

What is rollover relief, and how does it affect corporation tax on asset disposals?

Answer 6

• Rollover relief allows companies to defer tax on gains when proceeds are reinvested in qualifying assets (e.g., land, buildings).
  
  • Conditions:
  • Replacement asset must be acquired 1 year before or 3 years after disposal.
  • Gain is deducted from the replacement asset’s cost, reducing future allowances.
  • Partial reinvestment restricts the relief.

Question 7

What reliefs are available for trading losses in corporation tax?

Answer 7

1. Carry-Forward Relief: Losses offset future profits; must meet trade continuity conditions.
   
   2. Carry-Across/Carry-Back Relief: Losses offset total profits in the same or previous accounting periods.
   3. Terminal Carry-Back Relief: Final-year losses offset profits from the three preceding years.
   4. Claim deadlines: Reliefs must usually be claimed within 2 years of the relevant period’s end.

Question 8

How are dividends treated in corporation tax calculations?

Answer 8

• Most dividends received by companies are exempt from corporation tax to prevent double taxation.
  
  • Exceptions apply where the exemption rules do not cover specific cases, such as distributions not classified as dividends.

Question 9

What is group relief in corporation tax, and how does it work?

Answer 9

• Allows a group company to transfer losses to another company within the group.
  
  • Conditions:
  • One company must own ≥75% of the other, or both must be ≥75% subsidiaries of a parent.
  • Restrictions:
  • Cannot transfer capital losses; only income losses.
  • Losses must overlap with the transferee’s accounting period.

Question 10

What are the payment deadlines for large and very large companies?

Answer 10

• Large companies (profits ≥ £1.5M): Pay in four instalments:
  
  1. 6 months and 13 days after the start of the accounting period.
  2. Every 3 months thereafter.
• Very large companies (profits > £20M): Payments start 2 months and 13 days after the period begins, with three subsequent 3-month intervals.

Question 11

What are the corporation tax implications of loans from close companies to participators?

Answer 11

• Close companies must pay HMRC 33.75% of the loan amount, refundable if repaid.
  
  • Exemptions:
  • Loans ≤£15,000 where the participator owns <5% of shares and works full-time.
  • Loans made in the normal course of business, e.g., bank loans.

Question 12

How are share buybacks treated for corporation tax purposes?

Answer 12

• If CGT rules are satisfied (e.g., purpose is trade-related), profit is taxed as chargeable gains.
  
  • Otherwise, profit is taxed as income, potentially subject to higher rates.
  • HMRC clearance can confirm applicable tax treatment.

Question 13

What are the notification and filing requirements for companies under corporation tax?

Answer 13

1. Notification: Inform HMRC of the start of the first accounting period within 3 months.
   
   2. Tax Return: File self-assessment within 12 months of the period’s end.
   3. Tax Payment: Due 9 months and 1 day from the period’s end for most companies.

Question 14

How is corporation tax applied to goodwill and intangible fixed assets?

Answer 14

• Treated as income receipts for tax purposes.
  
  • Expenditure on these assets is deductible when calculating income profits.
  • Gains can be rolled over into replacement intangible assets to defer tax.

Question 15

What are the three main types of trading loss reliefs, their conditions, and applicable accounting periods?

Answer 15

1. Carry-across/Carry-back Relief
   
   • When Loss Occurred: Losses can occur at any time.
   • Losses Set Against: The company’s total profits.
   • Relevant Accounting Periods: The accounting period of the loss and the accounting period(s) in the previous 12 months.
     2. Terminal Carry-back Relief
   • When Loss Occurred: Losses incurred in the final 12 months of trading.
   • Losses Set Against: The company’s total profits.
   • Relevant Accounting Periods: The accounting period of the loss and the accounting period(s) in the three years prior to the final 12 months of trading, starting with the most recent periods.
     3. Carry-forward Relief
   • When Loss Occurred: Losses can occur at any time.
   • Losses Set Against: The company’s total profits and subsequent profits of the same trade if specific conditions are met.
   • Relevant Accounting Periods: Subsequent accounting periods until the loss is fully absorbed.