Corporate Taxation Flashcards
What is VAT charged on?
Any supply of goods or services made in UK where it is a taxable supply made by a taxable person in the course of furtherance of any business carried on by that person
Taxable person = registered for VAT purposes
In course of business = any economic activity carried on on a regular basis (exc employees’ services to an employer)
When is a person required to be registered?
2 situations
- At end of month the value of his/her taxable supplies in the period of one year or less has exceeded the VAT registration threshold; or
- At any time if there are reasonable grounds for believing that the value of his/her taxable supplies in a period of 30 days then beginning will exceed the VAT threshold
What is the VAT registration threshold?
£85,000
vAT (80)
When must a person notify and when will a person be registered?
- Notify within 30 days of end of month, will be registered from beginning of 2nd month after taxable supplies went over threshold
- Notify within the 30 days, will be registered from the beginning of the 30 days
Why would and wouldn’t a person voluntarily register?
Pro: input tax can be recovered (can reduce costs)
Con: business has to charge VAT on supplies of goods/services (less attractive than unregistered competitors)
What is the difference between output tax and input tax?
Output tax = VAT chargeable by business when making supply of goods or services (output)
Input tax = VAT paid by a person on goods and services supplied to them (bought in)
How does offsetting work?
VAT registered business offsets input tax it has suffered (on things purchased) against output tax it has charged customers (sold) and only accounts to HMRC for the difference
Difference = output tax less income tax
What can a business do when there is no output tax charged in any VAT accounting period? What is the condition on this?
Can reclaim any input tax incurred where it is intended that output tax will be charged in the future
What is the rate of VAT and how do we know it is included?
Standard rate is 20% - a price is deemed to include VAT unless states otherwise
I.e. stated consideration paid for supply includes VAT
Can be expressed as ‘exclusive of VAT’ so VAT charged in addition to stated price
What are the 4 types of supply?
- Standard rated (20%)
- Reduced rate (5%) - limited types of supply e.g. domestic heating, mobility aids, car seats
- Zero rated - for public policy reasons e.g. new houses, public transport
- Exempt - provision of insurance, finance, education/health
Can zero rated and exempt supplies reclaim input tax?
Zero rated can recover VAT suffered on inputs (favourable), exempt cannot (cost to business!)
How is VAT accounted for to HMRC?
Businesses with turnover above VAT reg threshold are required to keep VAT records and make VAT return online
1. VAT Invoice
2. VAT Return
3. Special schemes
In what transactions will an VAT invoice be given and when?
Taxable business making a taxable supply to another taxable business must supply customer/client with VAT invoice within 30 days of the supply and keep a copy
HMRC carries out regular inspections to ensure invoices kept
How often is a VAT return made?
Taxable business must submit VAT Return online to HMRC every 3 months (due date usually within 1 month and seven days after end of VAT period)
Because there are 3 letters in VAT
What should a VAT Return show and what should a business do when making it?
- Shows the total output tax charged on making taxable supplies during VAT period less the total input tax attributable to the making of taxable supplies
- Business pays to HMRC the excess of output tax charged over the input tax suffered
What do businesses that normally pay more than £2.3m a year to HMRC in VAT do?
Make monthly payments on account and then pay balance when submitting the quarterly VAT return
What are special schemes?
Designed to simplify accounting for VAT or to reduce VAT liability
What special schemes are available?
- Retail schemes (used by retailers who find it difficult to issue VAT invoices for large number of supplies made to public)
- Cash Accounting
- Annual Accounting
- Flat rate scheme
Who is Cash Accounting available to and when is it allowed?
Businesses with annual turnover of less than £1,350,000 - allowed if they comply with certain conditions (e.g. output tax accounted for when invoice paid rather than issued)
Who is Annual Accounting available to and what is it?
Businesses with annual turnover not exceeding £1,350,000 - may be allowed to make an annual VAT return
VAT paid instalments during year - balance paid when VAT Return submitted
What is a flat rate scheme?
Where a business may elect for VAT to be charged on a flat rate on turnover rather than every single transaction
Usually no relief for input VAT
When is a flat rate scheme available?
Where business has a taxable annual turnover not exceeding £150,000 (excluding VAT) and a total annual turnover not exceeding £230,000 (inc VAT and value of exempt/non-taxable income)
What is the flat rate?
Depend on type of business - e.g. hairdressers, estate agents - ‘limited cost traders’ must account for VAT at rate of 16.5%
What corporation tax paid on?
All income profits and chargeable gains of a body corporate that arise in its accounting period
Financial year = 1 Apr - 31 Mar
But can choose accounting period
Recall - difference between income and capital receipts/expenditure
- Income receipts/expenditure = everyday trading
- Capital receipts/expenditure = one-off transactions
What are the taxable total profits (TTP)?
The sum of a company’s profits and gains = TTP
Amount of TTP determines the amount of corporation tax payable
What is the corporation tax rate for:
- Flat rate
- Profits over £250k
- Profits not exceeding £50k
- Profits between £50k-£250k
- Flat rate = 19%
- Profits over £250k = 25%
- Profits not exceeding £50k = small profits rate 19%
- Profits between 50k-250k = main rate 25% reduced by marginal relief
What is the calculation of TTP?
Picture
NB one thing can affect both sides e.g. capital allowances can be used to reduce income profits and rollover relief to less chargeable gains
How is chargeable gains calculated?
For purposes of corporation tax
Sale proceeds less:
- Allowable expenditure
- Indexation Allowance
- Capital/Trading Losses
= chargeable gain
How are income profits calculated?
For purposes of corporation tax
(Chargeable) Income receipts less:
- Deductible expenditure
- Capital allowances
- Trading losses
= income profits
Essentially: aggregate all chargeable income receipts and deduct all tax-deductible expenditure
What are chargeable income receipts?
Receipts of an income nature arising from business/trading activity (not-exempt)
What is tax deductible expenditure?
Expenditure by a company that can be deducted from income receipts and thus reduce tax bill
What must expenditure be to be deductible for income purposes? Are dividends included?
Wholly and excusively _____ , not prohibited by _____ , be of an ____ nature
- Wholly and exclusively incurred for the purposes of trade
- Not be prohibited by statute (entertainment expediture)
- Be of an income nature (rent, interest paid, wages, repairs)
Does not include dividends - these are paid after profits taxed
Can capital expenditure affect income profits?
I.e. can capital expenditure be deducted from income receipts?
Generally no, can only be deducted from capital receipts. But capital allowances are the exception.
Capital allowances treated as deduction for income purposes in calculating income profits
How do capital allowances work?
Given as a deduction against income receipts to allow businesses to spread cost of certain assets over a period of time
What are capital allowances available on?
Qualifying items of expenditure - P&M (plant and machinery)
Are capital allowances only available to companies?
No - also available to individuals and partnerships
What types of capital allowances are available?
- Annual Investment Allowance (AIA)
- Normal (P&M) (18% value > 18% TWDV)
- Super-deduction (130%)
- Full expensing (100% companies only)
How does the Annual Investment Allowance work?
Company can deduct 100% expenditure on P&M up to £1m
How does normal (P&M) capital allowance work?
Companies can deduct 18% of value of P&M from income receipts each year on reducing balance basis
- First year: Value of P&M reduced by 18% (so original value of asset less any capital allowances claimed = tax written down value (TWDV) of P&M)
- Following year: can claim 18% of TWDV of P&M after it was reduced by previous year’s capital allowances claim
E.g. P&M £100,000
First year: CA is £18,000 (18% of £100,000). TWDV is £82,000 (£100,000 - £18,000)
Following year: CA is £14,760 (18% of £82,000). TWDV is £67,240.
And so on…
Can the normal capital allowance of 18% be used with the Annual Investment Allowance?
Yes!
E.g. £1,400,000 on P&M and claims full capital allowance as income deduction
1. First year: AIA (£1,000,000) + P&M 18% (£400,000 @ 18% = £72,000) = £1,072,000 (total year 1 allowance). The TWDV is £328,000 (£1,400,000 - £1,072,000).
2. Following year: 18% of TWDV (18% of £328,000) = £59,040 (total year 2 allowance). The TWDV is £268,960 (£328,000 - £59,040).
What was the super-deduction?
Temporary capital allowance in response to COVID - allowed companies to claim 130% first-year relief on expenditure incurred from 1 April 2021-31 March 2023
* Did not apply to second-hand, used or leased assets
* No expenditure limit
No longer available
What is full expensing capital allowance?
Companies can deduct 100% of cost of new and unused P&M
* 1 April 2023-31 March 2026
* Amount deductible is uncapped
* Is a first-year allowance; claim must be made in period in which expenditure on P&M incurred
Are the rules on chargeable disposals by companies the same as they are for individuals?
Yes - initial expenditure, subsequent expenditure and costs of disposal can be deducted
What is the annual exemption for CGT for companies?
None!
What is the Substantial Shareholding Exemption (SHE)?
A relief that can exempt from corporation tax the whole of a chargeable gain that arises when a company disposes of shares in a trading company (or holding company of a trading group) provided conditions are met
What are the conditions for SHE?
- Disposing company must have held at least 10% of ordinary share capital of company whose shares are being disposed of for at least 12 consecutive months in the last 6 years
- Not available for individual sellers (meant to use BDR or IR)
What is Rollover Relief?
(Tax deferral mechanism)
- Any gain arising from disposal of qualifying asset can be rolled into the cost of qualifying replacement asset;
- The acquisition cost of the replacement asset is reduced by the amount of gain being rolled over
- Tax is postponed until replacement asset sold and no new qualifying asset purchased
Replacement asset does not have to be the same type
Can be used by a company, sole trader/partnership, or an individual other than a sole trader (provided that assets are used by the individual’s company or partnership) i.e. must be in business context
Is Rollover Relief indefinite? And when must replacement asset be purchased?
- Is indefinite provided sufficient qualifying asset bought within time limits
- Replacement asset must be purchased within 12 months before or 3 years after sale of old asset
Rollover Relief example
What happens when not all proceeds of the original asset are used for the new asset? I.e. replacement asset is cheaper than the sale proceeds
Amount by which the sale proceeds of asset exceeded cost of replacement asset is deducted from chargeable gain; only remaining amount can be rolled over
If the cost of the replacement asset is deducted from the sale proceeds of the original asset and this figure is greater than the chargeable gain, what happens? I.e. the replacement is much cheaper than the sale proceeds
No Rollover Relief claim can be made
Is dividend income included in the company’s TTP for tax purposes?
Exemptions so broad that general effect is that all dividends are exempt unless certain anti-avoidance provisions apply
So dividend income not included in company’s TPP for tax purposes
Is dividend tax deductible for company paying it?
No; company pays dividends out of profits that have already been taxed
I.e. dividend payments not deductible from income receipts
What is straddling and what happens when it occurs?
Straddling = company’s accounting year does not coincide with financial year
- TTP of accounting period must be apportioned between financial years
- Relevant proportions of TTPs must be taxed at applicable rates for Financial Years
What is a trading loss?
Loss relief (trading)
Occurs where tax deductible expenditure exceeds income receipts for a specific period - trading losses can be set off against other taxable profits
What are the 4 way trading losses can be set off against other taxable profits?
- Current year profits
- Previous year profits
- Future trading profits
- Group relief
How can trading losses be set off against current year profits?
Can be set off against all other profits (income profits and chargeable gains) of the same accounting year as long as claim made within 2 years after end of accounting period in which loss arose
If trading losses cannot be used against current profits (in whole or part), when can a company carry back any remaining losses against taxable profits (income and chargeable gains) of a previous accounting period?
I.e. Previous year profits loss relief
When company is carrying on same trade
For setting off trading losses against either current year profits or previous year profits, when must a claim be made?
Within 2 years after end of accounting period in which that loss arose
I.e. must be made before 2 years after that accounting period
If a company ceases trading, can trading losses still be used against taxable profits of previous periods?
(Previous year profits loss relief)
Yes - any trading loss in final 12 months can be carried back and set against any profits made in 3 years prior to start of final 12 months
When can trading losses be used against future trading profits?
If there are still trading losses unused - will be automatically carried forward and set against all company’s taxable profits in the future
When using trading losses on future trading profits, are the losses restricted to profits of the same trade?
No, but company must continue to trade the loss-making trade in the period in which the losses are used
The Deductions Allowance (DA) means that a company can set off carried forward losses against taxable profits of up to how much in each accounting period? This is providing what?
A company can set off carried forward losses against taxable profits of up to £5m in each accounting period provided DA not already used for purposes of setting off carried forward capital losses against capital gains in the same period
I.e. £5m is a CAP for each period
DA applies for carried forward trading and capital losses! Tactical decisions necessary
What if a company has unrelieved taxable profits in excess of available DA for an accounting period?
Carried forward losses can be used to relieve a maximum of 50% of unrelieved profits (loss restriction)
Can the DA apply to group rather than an individual company (where individual company in a group of companies)?
Yes
What is group relief?
Where one company with a trading loss can surrender that loss to another profitable company inthe group to reduce/eliminate that company’s profits
How are buyers prevented from acquiring loss-making companies to make use of their losses?
Anti-avoidance rules prevent trading losses being carried forward or back where company has been sold to new owner and nature of trade of company has substantially changed within 3 years of the sale
When is a capital loss made?
When cost of asset is greater than consideration received for it (N/A to gift)
E.g. bought machine for £20,000, now selling it for £15,000. Made a capital loss of £5,000
Can a capital loss be set off against capital (chargeable) gains from previous, curret and future years?
I.e. previous, current, future…
In the current year but generally not a previous year. Unused can be carried forward and set against any capital gains in future accounting periods
How much of capital losses can be carried forward?
Up to the available Deductions Allowance in relevant accounting period (provided DA not already used for carrying forward trading losses)
Recall 50% of unreleved gains - same applies here
Can capital losses be carried forward indefinitely?
Yes within the company that made them, but claim must be made within 4 years from end of accounting period in which loss arose
What is the procedure for corporation tax self-assessment for companies with TTP £1,500,000 or less?
- Company estimates tax liability and pays HMRC within 9 months and 1 day of end of accounting period
- Must e-file tax return within 12 monthsof accounting period (will show how company has calculated tax liability)
- Unless HMRC examine/enquire into tax return, tax computation usually regarded as finalised 12 months after filing date for tax return
- Interest will accrue on any under or over-payments
What is the procedure for corporation tax self-assessment for companies with TTP more than £1,500,000?
Required to pay tax bills in 4 instalments over course of relevant accounting period and the next one
Can interest on business loans be deductible income expense?
I.e. deductible from income profits
- Generally yes
- Unless company/group has more than £2m of net interest expense in UK any year, in which case a max of 30% of income receipts (corporate interest restriction) can be deducted
What does the obligation to ‘withhold tax’ refer to?
- The obligation of the person making payment (employer for PAYE) to withhold tax payable by person receiving payment and pay over to HMRC (instead of employee paying it)
- A company which pays interest may have obligation to withhold tax from payment esp in international context
Company paying interest to another corporation tax UK paying company allowed to make payments without deducting tax from payments (can make gross payments of interest)
What are close companies?
(Broadly small companies) - companies subject to special treatment (as part of anti-avoidance legislation)
What is a participator?
Re close companies
A person having a share or interest in capital or income of the company
E.g. shareholders and some creditors
What is control?
Re close companies
The ability to exercise control over company’s affairs (normally by [over 50% of] voting rights or possession of/entitlement to issued share capital allowing greater part of income of comapny if distributed or greater part of assets on winding up)
I.e. control in the literal sense, not just influence
When will a company be a close company?
When a company is under the control of:
- Five or fewer participators; or
- Any number of participators who are also directors
Example of close company
What is excluded? I.e. when is a company not a close company?
2 situations
- Shares quoted on recognised stock exchange
- Controlled by one or more non-close companies (so a wholly-owned subsidiary of a non-close company will not be subject to close company tax regime)
What is also considered when assessing a person’s control?
The rights and entitlement’s of that person’s nominees (person owning property on behalf of another), associates (close relative), and companies controlled by the individual
For loans from a close company to a recipient participator, what is the tax effect on the company?
Company must pay corporation tax on the amount of the loan calculated at the higher income taxpayer rate on dividends
- Can claim a refund or the tax paid if the loan is repaid, satisfied, written off or waived
Tax to be paid within 9 months 1 day after accounting period in which loan made
For loans from a close company to a recipient participator, what is the tax effect on the recipient participator?
If loan is written off/waved v paid back in full
- If the loan is written off or waived = participator deemed, for income tax purposes, to receive a dividend equal to amount of loan written off/waived
- If loan paid back in full = no tax effect
What loans are not caught by the close company rules?
- Duration of credit does not exceed 6 months or company’s normal limit (re goods/services normally supplied by company in course of business)
- Loan made in ordinary course of a company’s business which includes money lending
- Loan which does not exceed £15,000 in aggregate (together with outstanding loans to that borrower) and borrower works full time for company and does not have a material interest in it
Material interest =indirect control of more than 5% of ord share capital
What does ‘distribution’ mean in the context of close companies?
Includes living accomodation and other benefits in kind (distributed) to participators
Not inc. benefits provided by reason of employment
What are the IHT implications for close companies?
Re transfer of value by close company
A trasfer of value by a close company results in the value of the gift being apportioned between shareholders
When do the transactions in securities rules apply and what is their effect?
- Apply when: (broadly) transaction gives any person a tax advantage by changing a receipt which would have been treated as income (for tax purposes) into capital receipt
- Effect: counteract tax advantage
E.g. close company, instead of distributing substantial profits as dividend, is wound up and profits passed to shareholders as capital payment on a winding up
What can you do if acting on a transaction which may fall within the transactions in securities rules?
Can apply to HMRC for advance clearance - clearance would state HMRC is satisfied that provisions do not apply to transaction
