Corp Tax - Chapter 29

Question 1

Where remuneration is paid in cash form

Answer 1

employee is liable to income tax and Class 1 NICs. The employer company will also
be liable for secondary Class 1 NICs on the remuneration paid

Question 2

Are dividends classified as earnings for NI?

Answer 2

No

Question 3

Dividend downsides

Answer 3

Dividends are not deductible for the company for corporation tax purposes
(often outweighed by the NICs saving in the first place).

• Dividends are not earnings for pension purposes thereby potentially reducing
  the individual’s capacity to make pension contributions (although the employee could still make gross pension contributions of £3,600 per annum in
  any event).

Question 4

Dividends in Specie

Answer 4

The word ‘distribution’ has a very wide meaning and includes the transfer of an
asset from a company to its shareholders. Such distributions are commonly called ‘dividends in specie’.

A distribution in specie also constitutes a disposal by the company for capital gains
purposes. The disposal will not take place at ‘arm’s length’, so proceeds are
deemed to be the market value of the asset being distributed.

Remember here that as it is the company making the gain, indexation allowance
is available (to December 2017) but the annual exempt amount is not.

Making a dividend in specie often therefore leads to a double charge to tax – ie
income tax in the hands of the shareholder receiving the dividend in specie and
corporation tax on the chargeable gain arising within the company. This is subject
to the capital gains exemptions for assets such as wasting chattels and cars.

There is no relief for this double charge as it arises in the hands of two separate
chargeable persons.

Question 5

Rent income downsides

Answer 5

Tax @ 20%/40%/45%

CGT on sale

Question 6

Interest benefits and rules

Answer 6

The interest payments are normally deductible for the company under the loan
relationships rules.

Where a UK company pays interest to an individual, it must withhold 20% income
tax at source.

Question 7

There are two ways in which cash can be taken out of a company and thereafter
be treated as capital proceeds for CGT:

Answer 7

1. Where the company buys back the shares from the shareholder (a ‘company
   purchase of own shares’).
2. A distribution to a shareholder on the winding up/liquidation of the company.

Question 8

Formal Liquidation

Answer 8

a special resolution of the company (being one requiring the approval of 75% of the shareholders)

The fees charged by an insolvency practitioner for a liquidation will vary from case
to case, but will typically be between £2,000 and £7,000 (plus VAT) on average.
This will obviously be higher in more complex cases.

Question 9

BADR Criteria

Answer 9

24m ending

Individuals personal trading company

Indiv had been officer or e’ee of the company

Shares disposed of within 3 years

A personal company is one where the shareholder owns at least 5% of:

• ordinary share capital
• voting rights.
• distributable profits
• assets available
• proceeds of a disposal

Question 10

‘Informal’ Liquidations

Answer 10

Avoids costs, DS01

Must not have traded for previous 3m