Corporation Tax Flashcards
Scissor Ltd is a UK-resident trading company which is a large company for the purposes of research
and development. For many years the company had two wholly owned subsidiaries: Crop Ltd, a UK-
resident trading company, and Divisi SpA, a company resident in Elixia. All three companies prepare
accounts to 31 March each year.
The draft tax-adjusted trading profit includes a profit on disposal of the shares in Crop Ltd of £241,000. Scissor Ltd purchased the shares on 1 June 2004 for £442,000 and sold them on 20 May 2021 for £683,000.
At the time of the share disposal, Crop Ltd owned a property worth £300,000 that was transferred to it on 18 November 2016 by Scissor Ltd. The property was originally purchased by Scissor Ltd on 29 April 2003 for £80,000 and was worth £240,000 on 18 November 2016.
Explain the gains implications of the disposal of the shares in Crop Ltd. Calculate the total proceeds on disposal to be used in the gain calculation
The substantial shareholding exemption applies so the gain on the disposal of Crop Ltd is exempt as Scissor Ltd has owned at least 10% of the shares in Crop Ltd for at least 12 months out of the last 6 years, and Crop Ltd is a trading company.
In addition, Crop Ltd and Scissor Ltd were in a gains group when a property was transferred from Scissor Ltd to Crop Ltd under nil gain/ nil loss in November 2016.
When Crop Ltd left the group within six years of the transfer whilst still owning the asset a degrouping charge of £122,800 (W) arose.
The degrouping charge is added to the proceeds on disposal of the shares to give total sale proceeds of £805,800 (£683,000 + £122,800).
As the gain on the shares is exempt, the degrouping charge is also exempt £ Sale proceeds (MV at time of transfer) 240,000 Less cost (80,000)
160,000
Less indexation allowance (Apr 2003 – Nov 2016)
(265.5 – 181.2)/181.2 = 0.465 × £80,000 (37,200)
—————-
Degrouping gain 122,800
Tog Ltd prepared accounts for the 15 months to 31 March 2022. Tog Ltd does not pay corporation tax by instalments
For the 15 months ended 31 March 2022, state and explain the corporation tax filing and payment deadlines applicable to Tog Ltd.
A company cannot have an accounting period exceeding 12 months. Therefore, for tax purposes Tog Ltd has two APs:
The year ended 31 December 2021•
The three months ended 31 March 2022•
A company which does not pay corporation tax by instalments must pay its corporation tax within nine months and one day after the end of the accounting period.
Tog Ltd’s CT liability is payable nine months and one day after the end of each accounting period:
1 October 2022•
1 January 2023•
A return is due for each AP but both returns must be filed within 12 months of the period of account end – ie, by 31 March 2023, or three months after the notice to deliver a return is issued, if later
On 10 January 2022 Mathison Ltd sold the entire holding of shares in Galvez Ltd for £400,000.
Mathison Ltd purchased the shares for £150,000 in August 2008.
The sale of the shares does not qualify for the substantial shareholding exemption.
At the date of the share sale, Galvez Ltd owned an investment property that it purchased from Mathison Ltd in April 2016 for £200,000, when the market value of the property was £340,000.
Mathison Ltd purchased the property for £60,000 in June 1990
Calculate the degrouping charge arising as a result of transactions relating to Galvez Ltd
Degrouping charge:
Sale proceeds (MV at transfer) 340,000 Less cost (60,000) Less indexation allowance (261.4-126.7)/126.7 = 1.063 x 60,000 (63,780) ------- 216,220
On 10 January 2022 Mathison Ltd sold the entire holding of shares in Galvez Ltd for £400,000.
Mathison Ltd purchased the shares for £150,000 in August 2008.
The sale of the shares does not qualify for the substantial shareholding exemption.
At the date of the share sale, Galvez Ltd owned an investment property that it purchased from Mathison Ltd in April 2016 for £200,000, when the market value of the property was £340,000.
Mathison Ltd purchased the property for £60,000 in June 1990
Calculate the chargeable gains that will be added to corporation tax in the later computation
Sale proceeds 400,000
Add degrouping charge (a) 216,220
616,220
Less cost (150,000)
466,220
Less indexation allowance (no rounding)
£150,000 × (278.1 – 217.2)/217.2 (42,058)
424,162
Lockhart Ltd prepared accounts for the seven months ended 31 October 2022, having previously prepared annual accounts to 31 March. For many years, the company has had a wholly owned subsidiary, Beren Ltd, and a 5% shareholding in another company, Sonny Ltd.
Lockhart Ltd had the following sources of income for the seven months ended 31 October 2022:
Tax adjusted trading profit 775,000
Dividend received from Sonny Ltd 12,000
In the year ended 31 March 2022 Lockhart Ltd had a taxable total profit of £1.1 million.
Requirements
Explain, with supporting calculations, why Lockhart Ltd is required to pay corporation tax
(a) in instalments for the seven months ended 31 October 2022.
(3 marks)
(b) State the due dates for payment of the instalments and the amount payable at each date. (3 marks)
Lockhart Ltd is required to pay corporation tax in instalments for the seven months ended 31 October 2022 as:
it has augmented profits exceeding £437,500 (£1.5 million × 1/2 × 7/12), ie, it had
(1) one other related 51% group company at the end of the previous accounting period and the period is seven months long.
(2) it was a large company in the previous accounting period (ie, augmented profits exceeded £750,000 (£1.5 million × 1/2).
(3) the tax liability is not less than £5,833 (£10,000 × 7/12)
TTP 775,000
Exempt ABGH distribution 12,000
——
Augmented profit 787,000
b) Instalments
Payments are due by:
14 October (3/7 x £147,250) 63,107
14 January 2023 63,107
14 February 2023 21,036
When is something classified as a long-life asset?
- It has an expected life of at least 25 years
- Expenditure in the year of acquisition exceeds £100,000 (apportion this for shorter accounting periods)
Bhambra Ltd, a UK-resident company, had the following results for the year ended 31 March 2022 before loss relief:
Trading income 6,900,000
Chargeable gains 2,100,000
Taxable total profits 9,000,000
Bhambra Ltd has a trading loss brought forward of £7,560,000 from the year ended 31 March 2021.
The maximum possible trading loss will be relieved by Bhambra Ltd in the year ended 31 March 2022.
Requirement
State the date by which Bhambra Ltd’s claim for loss relief in the year ended 31 March 2022 must be made and calculate the amount of the trading loss to be carried forward at 31 March 2022
The claim for relief of the trading losses brought forward must be made by 31 March 2024.
Trading loss brought forward at 1 April 2021 7,560,000
Less:
deductions allowance (5,000,000)
additional loss relief (£9,000,000 – £5,000,000) × 50% (2,000,000)
Trading loss carried forward at 31 March 2022 560,000
Examiner’s comments
By far the most common answer was that no claim is required, ie the relief is automatic, and the
losses carried forward were setting losses just against the trading income. ie like sole trader losses.
Some answers recognised that the losses could now be offset against all profits and gains but did not
apply the restriction for losses exceeding £5 million.
Ursid Ltd is the only subsidiary of Wolf Ltd. For its year ended 30 April 2021, Ursid Ltd had taxable total profits of £5 million. Ursid Ltd then changed its year end and for the eight months ended 31 December 2021 it had taxable total profits of £32 million.
Ursid Ltd did not purchase any plant and machinery during 2020 or 2021
For Ursid Ltd’s eight-month accounting period ended 31 December 2021:
- explain why Ursid Ltd is very large for corporation tax payment purposes;
- and state the amount and due date for each corporation tax instalment.
Note: Ignore VAT and stamp taxes
CT due = £32 million @ 19% = £6,080,000
Ursid Ltd is a very large company because:
TTP is more than the £20m limit adjusted for a short accounting period and divided by the number of 51% related group companies ie £20m × 8/12 / 2 = £6.67m
It is irrelevant that Ursid Ltd was not a very large company in the previous accounting period
It has a corporation tax liability for the current year in excess of £10,000
14 July 2021 (month 3) = 3 × (6,080,000 / 8) 2,280,000
14 Oct 2021 (month 6) = 3 × (6,080,000 / 8) 2,280,000
14 December 2021 = (final instalment) = balance 1,520,000
6,080,000
Futo Ltd owns 100% of Entill Ltd. Both companies are UK-resident trading companies and together they form a loss relief group and a chargeable gains group
Year ended 31 December 2021
Futo Ltd and Entill Ltd had the following results for the year ended 31 December 2021:
Futo Ltd
Trading Profit 1,000,000
Trading loss b/f (28,750,000)
Chargeable gains 750,000
Entill Ltd
Trading Profit 22,00,000
Trading loss b/f -
Chargeable gains 1,650,000
The trading loss brought forward is from the year ended 31 December 2020. The deductions
allowance will be allocated first to Futo Ltd and then to Entill Ltd.
Year ending 31 December 2022
- On 1 January 2022 Futo Ltd sold a building which had been used in its trade for £600 million.
- The building was purchased on 1 January 1986 for £62 million.
- On 1 March 2022 Entill Ltd purchased a satellite for £275 million for use in its trade.
Briefly explain, with supporting calculations, the maximum group relief claim that can be made within the Futo group for the year ended 31 December 2021
Futo Ltd
Futo can only surrender the brought forward loss it cannot use itself – ie, £27 million
Entill Ltd
The deductions allowance available to Entill is £5m – £1.75m = £3.25m
Entill can therefore claim the lower of:
- Futo’s remaining loss of £27 million; and
- The amount Entill can claim is restricted by the deductions allowance: £3.25m + [50%• × (£23.65m – £3.25m)] = £13.45 million
Futo Ltd owns 100% of Entill Ltd. Both companies are UK-resident trading companies and together they form a group relief group and a chargeable gains group
Year ended 31 December 2021
Futo Ltd and Entill Ltd had the following results for the year ended 31 December 2021:
Futo Ltd
Trading Profit 1,000,000
Trading loss b/f (28,750,000)
Chargeable gains 750,000
Entill Ltd
Trading Profit 22,00,000
Trading loss b/f -
Chargeable gains 1,650,000
The trading loss brought forward is from the year ended 31 December 2020. The deductions
allowance will be allocated first to Futo Ltd and then to Entill Ltd.
Year ending 31 December 2022
- On 1 January 2022 Futo Ltd sold a building which had been used in its trade for £600 million.
- The building was purchased on 1 January 1986 for £62 million.
- On 1 March 2022 Entill Ltd purchased a satellite for £275 million for use in its trade.
Calculate Futo Ltd’s net chargeable gains for the year ending 31 December 2022. Show the amount of any relief
Futo Ltd net chargeable gains
- As members of a gains group, they form a single entity for rollover relief purposes.
- Purchase of a satellite in the 12 months before or 36 months after disposal qualifies for relief.
- Rollover relief is restricted by proceeds not reinvested such that the chargeable gain is the lower of the proceeds not reinvested and the chargeable gain on disposal:
£
14 July 2021 (month 3) = 3 × (6,080,000 / 8) 2,280,000
14 Oct 2021 (month 6) = 3 × (6,080,000 / 8) 2,280,000
14 December 2021 = (final instalment) = balance 1,520,000
6,080,000
£ Proceeds 600,000,000 Less Cost (62,000,000) Less IA to December 2017: £62m × 1.889 (278.1 – 96.25)/96.25 (117,118,000)
Chargeable gain 420,882,000
Less rollover relief β (95,882,000)
Chargeable gain (proceeds not reinvested = £600m – £275m) 325,000,000
Ovett Ltd is a UK resident, wholly owned trading subsidiary of Coe Ltd, which also owns 75% of15.1
Cram Ltd.
Ovett Ltd’s adjusted trading profit before deduction of capital allowances for the year ended
31 March 2022 is £1,179,674.
However, due to an error with the computer accounting system,
the four items below were ignored in the preparation of the financial statements.
Therefore, any tax-allowable element of the following four items will need to be deducted, along with capital allowances, in arriving at the final tax-adjusted trading profit.
Operating lease costs of £8,100 for a car used by the sales director. The car has a list price of £23,000 and CO 2 emissions of 45g/km. The car is used 75% of the time for business purposes.
The lease was taken out on 1 May 2021.
20 free samples given to Ovett Ltd’s biggest customer. The samples have a retail value of £12 each and cost £6 per item to manufacture.
A trade-related patent royalty of £20,000. The royalty was paid to another UK company without any deduction of tax.
Ovett Ltd’s capital allowances for the year ended 31 March 2022 comprise an annual
investment allowance of £790,000 and writing-down allowances of £318,150 in respect of plant and machinery. All capital purchases were made in November 2021.
On 1 May 2021, Ovett Ltd sold a warehouse for £551,688 which it had purchased on 1 May
1999 for a total cost of £307,000. Since purchase, the property had been rented out to an unconnected company for an annual rent of £78,000, payable quarterly in advance.
At 1 April 2021, Ovett Ltd had a capital loss brought forward of £4,304. No group relief is claimed by Ovett Ltd
Calculate the corporation tax due from Ovett Ltd for the year ended 31 March 2022 and state the due date for payment of tax
Tax adjusted trading profit (W1) 43,304 Property income (£78,000 × 1/12) 6,500 Chargeable gains (W2) 31,931 -------------- Taxable total profits 81,735 Corporation tax (£81,735 × 19%) = £15,530
As Ovett Ltds augmented profits are less than £500,000 (£1,500,000/3) corporation tax will be due 9 months and 1 day after the accounting period ie, 1 January 2023
1) Adjusted profit: £1,179,674 Less: Lease costs for car (8,100) Gift of samples (120) Patent royalties (20,000) ------- 1,151,454 Less: CA (790,000 + 318,150) ---------- 43,304
2) Gain on building
Proceeds 551,688 Less cost (307,000) ------- 244,688 Less IA: (278.1 – 165.6)/165.6 = 0.679 × £307,000 = (208,453) ------- Gain = 36,235
Chargeable gain = 31,931
Jackie is the new financial controller of Coe Ltd. She has prepared a draft computation of taxable total profits for Coe Ltd for the year ended 31 March 2022.
Jackie is unsure of the treatment of some items. Her draft computation is as follows:
Notes £ £
Draft adjusted trading profits 400,190
Add:
Interest on a loan to purchase a new lorry 1 930
Interest on a loan to purchase a 2% shareholding in an unconnected company 790
——-
1,720
Less: Bank interest receivable 2 (2,845) Capital allowances: Annual investment allowance on new lorry 1 (20,000) WDA on main pool 3 (3,000) Research and development 4 (40,000)
Tax-adjusted trading profit 336,065
Add: Dividend received from Cram Ltd 10,000
Less: Group relief from Cram Ltd (336,065)
———
Taxable total profits 10,000
Notes
1. The lorry cost £20,000 on 1 November 2021. Jackie made no deduction for the lorry in arriving at the draft adjusted trading profits of £400,190.
- The figure of £400,190 includes the bank interest receivable of £2,845.
- The tax written down value on the main pool at 1 April 2021 was £7,000.
- £40,000 was spent in the year on qualifying research and development. Coe Ltd is classed as a small or medium sized enterprise for research and development purposes. No deduction for this cost has been made in arriving at the figure of £400,190.
- Cram Ltd was purchased by Coe Ltd on 1 January 2016 and made a trading loss of £430,600 for the year ended 31 March 2022. It was agreed that the maximum possible loss
should be surrendered by Cram Ltd to Coe Ltd
Using the information above and in part 1, redraft the corporation tax computation for Coe Ltd for the year ended 31 March 2022, correcting any errors you identify
Adjusted trading profits per the question: £400,190
Add:
- Interest on a loan to purchase P&M = 0
- Interest on a loan to purchase shares 790
Less: Research and development (40,000 x 230%) = 92,000 Bank interest receivable 2,845 ------ (94,845) ---------- 306,135
Less: CA (27,260) W1 ---- TATP: 278,875 ADD: NTLR Bank interest receivable - interest on loans (2,845 - 790) 2,055 ------- Total profits: 280,930 Less group relief W2: (280,930) -------- Taxable total profits = 0
Intra-group dividend of £10,000 is not taxable
W1 Additions: FYA Lorry (20,000 x 130%) 26,000 FYA 130% (26,000) TWDV B/F MP 7,000 WDA @18% = (1,260) --------- TWDV C/F = 5,740
27,260
W2: Group relief
Group relief is the lower of:
Cram Ltd’s loss: £430,600
Coe Ltd’s profit: £280,930
Clock Ltd was incorporated on 1 January 2019, deposited £500,000 in an interest-bearing bank account on 1 February 2019 and commenced trading on 1 April 2019.
Clock Ltd prepared its first set of accounts for the 15 months ended 31 March 2020 and its second set of accounts for the nine months ended 31 December 2020.
In May 2020, Clock Ltd received notices from HMRC requiring it to file corporation tax returns
for the periods ending in the 15 months to 31 March 2020. It is now June 2022 and the company has not yet filed any corporation tax returns or made any payments of corporation
tax
a) In relation to corporation tax, state the dates of Clock Ltd’s accounting periods falling between 1 January 2019 and 31 December 2020
Clock Ltd’s first three accounting periods are as follows:
(a)
- 1 February 2019 to 31 March 2019 – date first acquires a source of chargeable income to date commences to trade
- 1 April 2019 – 31 March 2020 – trade commences to end of first period of account
- 1 April 2020 – 31 December 2020 – same as dates of period of account
Clock Ltd was incorporated on 1 January 2019, deposited £500,000 in an interest-bearing bank account on 1 February 2019 and commenced trading on 1 April 2019.
Clock Ltd prepared its first set of accounts for the 15 months ended 31 March 2020 and its second set of accounts for the nine months ended 31 December 2020.
In May 2020, Clock Ltd received notices from HMRC requiring it to file corporation tax returns
for the periods ending in the 15 months to 31 March 2020. It is now June 2022 and the company has not yet filed any corporation tax returns or made any payments of corporation
tax
In relation to the 15-month period of account ended 31 March 2020, state the dates by which Clock Ltd should have filed its corporation tax returns and explain what penalties are due in relation to their late filing
b)
The corporation tax returns are due on the later of:
- 12 months after the end of the period of account, as the period of account is less than 18 months long; and
- 3 months from the date the notice to file a return is issued by HMRC
Clock Ltd should have filed its first and second return on 31 March 202
Both returns are more than 3 months late so each has an initial fixed penalty of £200
In addition, as both returns will be filed more than 24 months after the end of the return period, a penalty is due in each case of 20% of the tax unpaid at 18 months from the end of the return period ie, 20% of the tax liability as no tax has yet been paid
USE HARDMAN’S
Clock Ltd is a trading company. Clock Ltd’s draft tax-adjusted trading profits after deducting capital allowances for the year ended 31 December 2021 are £1,475,823. In arriving at this figure Clock Ltd has adjusted the accounting profit in accordance with tax rules by removing all non-trade items and adding back all disallowable expenditure.
However, further adjustments may be required in relation to the following two items:
Research and Development Expenditure:
Staff directly engaged in R&D expenditure: 99,500
Consumables 19,450
——–
118,950
The £118,950 above has been deducted in arriving at the draft tax-adjusted trading profit of £1,475,823. Clock Ltd also spent £66,053 on the construction of a new laboratory (excluding land). Clock Ltd qualifies as a SME for R&D purposes.
Staff costs:
On 1 December 2021, Clock Ltd finally paid its senior management bonus relating to the nine months ended 31 December 2020. The total bonus paid was £213,000 (including employer NIC of £25,829).
For accounting purposes, the bonus was treated as an accrued expense in the accounts for the nine months ended 31 December 2020.
No adjustments have been made to the draft tax-adjusted trading profit of £1,475,823 in relation to these staff costs.
In addition, the following items were not considered when calculating the accounting profit figure as the bookkeeper was unsure of the correct treatment and no adjustments have yet
been made to the draft tax-adjusted trading profit.
1) QCD:
Clock Ltd made its first charitable donation in August 2021 for £42,000. As at 31 December 2021 it had promised to make a further payment of £8,000.
2) Clock Ltd disposed of its entire 12% shareholding in Cuckoo Ltd in November 2021 for £142,000. Clock Ltd had purchased the shares in January 2020 for £100,000. Cuckoo Ltd is a trading company.
Clock Ltd sold a building in November 2021 for £238,000. Clock Ltd purchased the building in April 2014 at a total cost of £156,000. Clock Ltd had a capital loss brought forward at 1 January 2021 of £5,772.
3) Net Interest Payable:
Bank overdraft interest payable (20,350)
Interest payable on loan to acquire a 5% holding in Watch Ltd (3,500)
Interest received on loans to employees 4,350
Bank deposit interest received 17,500
——-
(2,000)
Calculate Clock Ltd’s taxable total profits for the year ended 31 December 2021
Ignore VAT
Trading profits (W1) 1,021,785
Non-trading loan relationships
Interest receivable (£4,350 + £17,500) 21,850
Interest paid on non-trading transaction (3,500)
———–
18,350
Gains
Cuckoo Ltd shares – exempt as SSE – 0
Building (W3) 62,500
TTP 1,060,635
Workings: 1) Tax adjusted trading profit Trading profit 1,475,823 R&D expenditure (W2) (220,688) Interest on overdraft (20,350) Staff costs (213,000) ----------- Trading profit 1,021,785
Staff costs disallowed in period ended 31 December 2020 as not paid within nine months of end of accounting period. Therefore, they are allowable costs in the
accounting period in which they are finally paid.
2) R&D Permitted additional deduction = £118,950 × 130% 154,635 Cost of laboratory = FYA @ 100% 66,053 --------- 220,688
3) Gain on disposal of building Proceeds 238,000 Less: cost (156,000) Indexation = (278.1 – 255.7)/255.7 = 0.088 × £156,000 (13,728) ------- 68,272 Less capital loss b/f (5,772) --- Gain 62,500
