Corporate Taxation

Question 1

What is VAT charged on?

Answer 1

1. Supply of goods and services
2. In the UK
3. By a taxable person (registered for VAT)
4. In the course of business

Question 2

When is a person required to be registered for VAT?

Answer 2

1. At the end of any month if the value of their taxable supplies in period of one year or less has exceed VAT registration threshold
   - notify HMRC within 30 days of end of that month –> will be registered from beginning of second month after going over threshold
2. At any time if there are reasonable grounds for believing that the value of their taxable supplies in period of 30 days then beginning will exceed VAT
   - notify HMRC within 30 days
3. Register voluntarily

Question 3

What is the current threshold for VAT registration?

Answer 3

£90,000

Question 4

What is the de-registration threshold?

Answer 4

£88,000

A person can de-register where the value of their future annual taxable supplies will not exceed VAT deregistration threshold

Question 5

What is input and output tax?

Answer 5

Output: VAT chargeable by business
Input: VAT paid by a person on goods or services supplied to the person

• VAT registered business offsets input tax it has suffered against output tax it has charged

Question 6

What is the standard rate VAT?

Answer 6

20%

Question 7

What is reduced rated supply?

Answer 7

5%
- domestic hearing and power
- installation of mobility aids
- smoking cessation products

Question 8

What is zero rated supply?

Answer 8

• 0%
• certain food, sewerage and water, books/newspapers, new houses, public transport

Question 9

What is an exempt supply?

Answer 9

• provision of insurance, finance, health services and sale of land/buildings
• does not charge VAT and cannot recover VAT suffered

Question 10

How do business pay and account VAT to HMRC?

Answer 10

VAT invoice
- supply customer/client with VAT invoice within 30 days of supply

VAT return
- submit online to HMRC every 3 months
- usually due within 1 month and 7 days after end of VAT period

Question 11

When can businesses use cash accounting/annual accounting schemes?

Answer 11

If their annual turnover is less than £1,350,000 (excluding VAT and exempt supplies)

Question 12

What is a flat rate scheme?

Answer 12

• VAT charged at flat rate on turnover rather than every single transaction
• Must have taxable annual turnover not exceeding £150,000 and a total annual turnover not exceeding £230,000

Question 13

What is an annual accounting scheme?

Answer 13

Business makes an annual VAT Return. The VAT paid by instalments during the year with the balance being paid when VAT Return is submitted

Question 14

What are the corporation tax rates for 24/45?

Answer 14

• TTP greater than £250,000: 25%
• TTP £50,000 or less: 19%
• TTP £50,000 - £250,000 - marginal relief tapering effect

Question 15

What are taxable total profits chargeable to corporation tax?

Answer 15

Sum of chargeable gains and income profits

TTP = chargeable gains + income profits

Question 16

What are chargeable income receipts?

Answer 16

Income profits = income receipts (less deductible expenditure - capital allowances - trading losses)

Chargeable income receipts are receipts of an income nature which arise from the business or trading activity
- dividends are post tax = not deductible

Question 17

What are common income receipts?

Answer 17

Chargeable income receipts:
- rental income
- trading income
- interest

Question 18

What are the conditions for tax deductible expenditure?

Answer 18

1. Wholly/exclusively incurred for purposes of trade
2. Not prohibited by statute
3. Income nature

Question 19

What are examples of tax deductible expenditure (for purposes of calculating income profits)

Answer 19

Includes:
- wages and salaries
- heating costs
- trade expenses
- advertising costs
- interests of loan

Does not include:
- non-routine improvement of asset
- one-off purchase
- net interim dividend

Question 20

What is the corporate interest restriction?

Answer 20

Where a company has more than £2million net interest expense in UK any year, the amount of interest a company may deduct is restricted to maximum amount equal to 30% its income receipts

Question 21

What are capital allowances for plant & machinery?

Answer 21

• Deductions against income receipts which allow businesses to spread the cost of assets over a period of time
• Companies can deduct 18% of value of plant and machinery from income receipts each year on reducing balance basis
• Tax written down value - carried forward to following chargeable period and is the figure on which allowances for following year (18%) are calculated

Question 22

What is the annual investment allowance?

Answer 22

• Can deduct 100% of expenditure on new, used or refurbished P&M - up to £1million each year
• Normal capital allowance of 18% is applied to expenditure above that amount

Question 23

What is the full expensing allowance?

Answer 23

• From 1st April 2023 - 31 March 2026 - companies can deduct 100% of cost of new and unused P&M
• Amount deductible is uncapped
• First-year allowance so a claim must be made in period in which expenditure is incurred
• Companies only

Question 24

What is a chargeable gain for corporation tax purposes?

Answer 24

Sale proceeds LESS allowable expenditure, indexation allowance, capital/trading losses

Question 25

What is the substantial shareholding exemption?

Answer 25

- Can exempt the whole of a chargeable gain that arises when a company disposes of shares in a trading group - 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 last 6 years

Question 26

What is indexation allowance?

Answer 26

- Tax allowance for indexation available to companies in calculating their chargeable gains - Takes into account inflation based on RPI so a company is not taxed on chargeable gains arising solely because of inflation - Cannot be claimed for any period commencing on or after 1 Jan 2018

Question 27

To claim rollover relief, when must a company replace the business asset?

Answer 27

Must be purchased within 12 months before or 3 years after sale of old asset

Question 28

What is straddling?

Answer 28

Where a company's accounting year does not coincide with a financial year, TTP of the accounting period must be apportioned between FYs and the relevant proportions of TTP must be taxed at applicable rates for FYs

Question 29

How can trading losses be deducted against profits?

Answer 29

Trading losses occurs where tax deductible expenditure exceeds income receipts Trading losses can be set off against other taxable profits (income/chargeable gains): 1. Current year profits - claim must be made within 2 years after end of accounting period in which loss arose 2. Previous year profits - can carry back losses 3. Future trading profits - unused trading losses are automatically carried forward 4. Group relief

Question 30

How can trading losses be deducted against previous year profits?

Answer 30

Can carry back any losses which cannot be used against current profits against taxable profits of previous accounting period - Must have been carrying on the same trade - Claim must be made within 2 years - If company ceases trading, any trading loss in final 12 months can be carried back and set against any profits made in three years prior to start of final 12 months

Question 31

What is the deductions allowance for setting losses against future trading profits?

Answer 31

Future trading profits - any unused trading profits are automatically carried forward and set against all taxable total profits in the future - £5million

Question 32

What is the anti-avoidance rule which prevents a buyer acquiring loss-making companies purely to make use of their losses?

Answer 32

Anti-avoidance rules prevent trading losses being carried forward or back where the company has been sold to a new owner and the nature of the trade of the company has substantially changed within 5 years of sale

Question 33

What loss relief is available in respect of capital losses?

Answer 33

- Can only be offset against capital gains - Can be offset against current year and carried forward - Cannot be carried back to a previous year To crystallise the loss, a claim must be made to HMRC within 4 years from end of accounting period in which the loss arose

Question 34

What is corporation tax procedure for companies with TTP £1,500,000 or less?

Answer 34

- Estimate tax liability and pay HMRC within 9 months and one day of end of accounting period - File tax return within 12 months of end of accounting period

Question 35

What is corporation tax procedure for companies with TTP of more than £1,500,000?

Answer 35

Required to pay their tax bills in four instalments over the course of relevant accounting period and next one

Question 36

What is a close company?

Answer 36

Company under control of: - Either 5 or fewer participants or - Any number of participators who are also directors Participator = person having a share or interest in capital (shareholders) Control = ability to exercise control of company's affairs - more than 50% of income of the company or assets on winding up - control is held by shareholders/participators TOGETHER

Question 37

What is the taxation effect of a loan to a participator?

Answer 37

- Company must pay corporation tax on amount of the loan, calculated at the rate of income tax payable on dividends by higher rate taxpayers - Company may claim a refund of tax paid if loan is repaid, satisfied, written off or waived

Question 38

What is taxation effect for recipient participator if loan is written off or waived?

Answer 38

The participator is deemed for income tax purposes, to receive a dividend equal to amount of loan written off/waived

Question 39

What can capital losses not be set off against?

Answer 39

Cannot be set off against trading profits in current accounting period and cannot be set off against chargeable gains in previous accounting period - It can only be set off against off against chargeable gains in the same or subsequent accounting periods

Question 40

What is the position for a private company considering declaring a dividend?

Answer 40

Dividends may be declared by the board of directors if the company has made a profit one it has paid its corporation tax liability to HMRC - A company must first satisfy its obligations to HMRC before it can issue dividends

Question 41

What is the qualifying period for Business Property Relief?

Answer 41

Transferor must have owned the business assets for at least 2 years immediately prior to transfer - available for lifetime transfers and death estate Business property includes: - a business or interest in business (sole trader or partnership) - shares in unquoted company - 100% relief - shares in quoted company - 50% relief - land or buildings, machinery or plant used for business purposes

Question 42

What are VAT requirements for sole traders?

Answer 42

A person must register for VAT if at any month end taxable supplies made by them exceed £90,000, irrespective of the number of business - Therefore, if a sole trader has two businesses, which whilst separately do not make taxable supplies above £90,000 threshold, but do collectively (e.g., one is £65,000 and one is £50,000) - The sole trader must register for VAT and will have a single VAT registration Threshold assessed on total end taxable supplies

Question 43

How many VAT registrations can one person have?

Answer 43

Only ONE VAT registration, irrespective of the number of businesses - sole trader must register for VAT if they meet £90,000 threshold (for total, irrespective of number of businesses) and will have a single VAT registration

Question 44

When will a business with estimated VAT taxable turnover of more than £1.35million be expected to pay VAT?

Answer 44

Within a month of each three-month period for which it submits a VAT return A business with an estimated VAT taxable turnover of more than £1,350,000 must make (unless it agrees monthly or annual returns with HMRC) a VAT return every three months. - VAT must be paid within a month from the end of the three-month period to which it relates.

Question 45

How do you calculate the VAT element of a fee paid?

Answer 45

A VAT-inclusive figure combines the price for the supply and the VAT payable on that price. To calculate the VAT element of a figure, the VAT fraction can be used. The current VAT fraction, based on the standard rate of 20%, is 1/6. Therefore, 1/6 × £8,130 = £1,355.

Question 46

What is the VAT fraction for a VAT inclusive price for standard rated supplies?

Answer 46

1/6 on the VAT-exclusive price