Corporation Tax

Question 1

what is the assessment of tax for companies?

Answer 1

companies are self-assessed to corporation tax on the basis of a FINANCIAL YEAR

financial year = runs from 1 April to 31 March of the next calendar year

Question 2

what must a company do re its corporation tax and HMRC? (2)

Answer 2

• pay HMRC
• file a tax return

Question 3

when must a company pay corporation tax to HMRC?

Answer 3

• within 9 months and 1 day from the end of its accounting period = if total taxable profits are 1.5m or less
• in 4 instalments over the accounting period = if total taxable profits are more than 1.5m

Question 4

when must a company file a tax return?

Answer 4

within 12 months of the end of its accounting period

Question 5

what is the difference between an accounting period and fiscal year? how does this affect corporation tax?

Answer 5

• accounting period = chosen by the company, default is starting the end of the month in which it was incorporated and lasting for one year
• financial year = 1 april - 31 march
• corporation tax is payable on income profits and chargeable gains made in an accounting period
• if the accounting period and financial year differ, then the company must apportion the corporation tax based on the period which fall before and after the financial year, as different rates may apply each year

Question 6

what is corporation tax payable on?

Answer 6

the total taxable profits in a company’s ACCOUNTING PERIOD

Question 7

what is the total taxable profits made up of? (2)

Answer 7

1. income profits
   plus
2. chargeable gains

IN THE ACCOUNTING PERIOD

Question 8

how are income profits calculated? (4 points)

Answer 8

income receipts minus:

• trading losses
• deductible income expenditure = income expenses incurred wholly and exclusively for trade purposes (not business entertainment expenses and doubtful debts)
• capital allowances = for costs of P&M

Question 9

how are chargeable gains calculated? what reliefs are available for them?

Answer 9

chargeable gain =

• proceeds of sale of fixed assets = P&M, land, buildings
• minus allowable expenditure = initial expenditure, subsequent expenditure, and disposal expenditure
• minus indexation allowance
• but no annual exemption

(trading losses and capital losses can be applied; rollover relief may be available; substantial shareholding exemption may be available

Question 10

what are income receipts?

Answer 10

money received on a regular basis

examples:
- trading profits
- interest paid by bank for savings held in account
- rent received
- salary or benefits in kind received

Question 11

what is income expenditure?

Answer 11

• money spent as part of day to day trading
• can be deducted from income receipts to calculate income profits (but must be wholly andexclusively for trading purposes and cannot be for business entertainment or doubtful debts)
• examples = rent and bills, staff wages, general repairs, interest paid out on business loans / overdrafts, advertising costs

Question 12

what are capital receipts?

Answer 12

• Receipt of money from a one-off transaction that is not a part of such regular activity
• Example: proceeds of selling building or P&M
• may produce chargeable gains which are included in corporation tax

Question 13

what is a capital expenditure?

Answer 13

• Money spent for a one-off purchase of a capital asset as part of the infrastructure of the business or as an enduring benefit for the business
• Examples: equipment items, P&M, land, non-routine expenditure on enhancing a capital asset
• cannot be set off against income receipts to reduce income profits (except for P&M allowable expenditure)

Question 14

what are capital allowances?

Answer 14

capital allowances are deducted from income receipts to reduce the total income profits (thus the total corporation tax)

Question 15

what are the 3 types of capital allowances to reduce income profits?

Answer 15

Apply on plant and machinery:

1. deduct 100% of cost of new and unused P&M (uncapped amount)

if PM is second hand / used:

2. annual investment allowance = deduct 100% of expenditure on P&M up to £1m from income receipts

then for the balance of the value above £1m:

3. deduct 18% of the balance each year on a reducing balance basis = the tax written down value of the P&M reduces by 18% each year

Question 16

what are trading losses and how can they operate to reduce corporation tax payable? (4)

Answer 16

trading loss = where tax deductible income expenditure exceeds income receipt in a certain period

can reduce corporation tax by:

1. trading loss in current accounting year can set off income profits and chargeable gains of the same year
2. trading loss in current accounting year can be carried back to set off income profits and chargeable gains of the previous accounting period only (but company must have been carrying out the same trade in both years)
3. trading loss in current accounting year are carried forward and set off income profits and chargeable gains of future years (up to max of £5m in each accounting period including carried forward capital losses)
4. group relief = a company with trading loss can surrender it to another profitable company in its group

Question 17

what are capital losses and how can they operate to reduce corporation tax payable? (3 points)

Answer 17

capital loss = loss made on selling a capital asset which decreased in value

can reduce corporation tax by:

1. current year capital losses can set off capital gains in the current year
2. current year capital losses CANNOT be carried back to set off capital gains in the previous year
3. current year capital losses can be carried forward to set off capital gains in future years (up to max of £5m in each accounting period including carried forward trading losses)

Question 18

what is the substantial shareholding exemption and what are the requirements (2)?

Answer 18

• SSE relief = when a company disposes of shares it held in a trading company, the whole of the chargeable gain made on the sale is exempt from corporation tax
• requirements:
  (1) company held at least 10% of the ordinary share capital of the company whose shares are being disposed of
  (2) company held them for at least 12 consecutive months in the last 6 years before disposal

Question 19

what is rollover relief?

Answer 19

• tax deferral mechanism to defer tax otherwise payable on gains arising from disposing of a qualifying business asset when the company purchases a replacement qualifying business asset within the requisite time
• effect = the gain from the disposal is carried forward by reducing the base cost of the replacement asset

(base cost of replacement asset = price of replacement asset - gain from selling original asset)

Question 20

what are qualifying assets for rollover relief? (5)

Answer 20

• land and buildings
• goodwill
• plant and machinery
• ships and aircraft
• Lloyd’s syndicate capacity

Question 21

what are the timing requirements for rollover relief to apply?

Answer 21

the replacement asset must be purchased:
- within 12 months before the sale of the old asset
- max 3 years after the sale of the old asset

Question 22

what happens to the rollover relief available if the cost of the replacement asset is less than the proceeds of selling the original asset?

Answer 22

the amount rolled over into the base cost of the replacement asset is reduced by the difference in value between the proceeds of sale of the original asset and the cost of replacement asset

(base cost of replacement asset = price of replacement asset - gain from selling original asset - [proceeds of sale of original asset - price of replacement asset])

Question 23

what happens to the rollover relief available if the chargeable gain is less than the difference in value between the sale proceeds from the original asset and the price of the replacement asset?

Answer 23

no rollover relief can be claimed

where = sale proceeds from the original asset - price of the replacement asset > chargeable gains

Question 24

if a company is a shareholder in another company and receives dividends, how are these dividends treated for corporation tax purposes?

Answer 24

dividends received are exempt from corporation tax = do not count them as income

Question 25

if a company pays out dividends, how does this impact their corporation tax calculation?

Answer 25

it does not impact = a company cannot deduct the dividends it pays from the total taxable profits so as to reduce its corporation tax

Question 26

what are the corporation tax rates?

Answer 26

• If a company’s profits do not exceed £50,000 = 19% of the TTP
• If a company’s profits are more than £250,000 = 25% of the TTP
• If a company’s profits are between £50,000 and £250,000 = marginal relief may apply (has a tapering effect)

Question 27

what is a close company?

Answer 27

• close company = under the control of:
  1) 5 or fewer participators, or
  2) any amount of participators who are all also directors
• participator = shareholders
• control = exercising control over company affairs via voting rights, having shares giving over 50% of dividends, or being entitled to over 50% of capital on winding up
• cannot be controlled by on or more non-close companies

Question 28

what is the tax treatment of close companies?

Answer 28

• when a close company makes a loan or credit advance to a participator, the company must pay corporation tax on the amount of the loan = at the dividend income tax rate for higher rate taxpayers
• when the loan is waived / written off = participator is deemed to have received an equivalent amount of dividend for income tax purposes (so they are taxed)
• exceptions:
  (1) loans for the purpose of business not exceeding 6 months
  (2) total loans of max £15,000 + participator has max 5% control of company + participator works full time in company