Corporation Tax Flashcards
Who is subject to corporation tax
- Companies
- Unincorporated associations
- Excludes partnerships
Tax accounting period of a company
Starts
-on commencement to trade
-following end of previous accounting period
Ends
-12 months after commencement
-on accounting date of a company (period of accounts)
Therefore no accounting period can be longer than 12 months
Allocating profits to accounting periods
- Adjusted trading profits = time apportioned (accruals basis)
- Capital allowance = on basis of actual expenditure in each accounting period
- Property income = time apportioned (accruals basis)
- Non trading loan relationships = accruals basis
- Chargeable gains = period in which gain released
- Charitable gifts = period in which paid
- No personal allowance
Capital allowances for companies
1 April 23 to 31 march 24
-if accounting period of a company straddles 31 march it means that the taxable profits for that tax accounting period will be taxed in two FY
R&D tax relief - small and medium companies (IMPORTANT)
- R&D credits only available to companies
- Project must aim to extend overall knowledge (creating new products or processes)
- Qualifying expenditure (non capital expenditure)
- Small/medium companies = 186% of allowable expenditure deductible in the tax computation (86% extra allowed)
- If loss they can claim payment of 14.5% of the surroundable loss (the amount of trading loss. 186% of r&D expenditure)
- For capital items there is 100% capital allowance for purchase of new buildings or machinery used for R&D
R&D large companies (IMPORTANT)
- The company does not get an enhanced tax deduction for R&D
- Above the line credit (ATL). The ATL 20% tax credit is included as income when computing chargeable profits
- Credit is deducted from the company’s CT liability, any remaining credit may be paid to company by HMRC
Loan relationships
-> exists when a company is either a creditor or debtor for a debt which is regarded as a loan under general law
-> interest receive is gross
Trading loan relationship
-interest payable on loan received for trading purposes (allowable deduction from trading profits)
-interest receivable on loan paid for trading
-taxable income for trading profits
Non trading loan relationship
-income and gains arising from non trading relationships
-aggregate together
-treats on accruals basis
-credit (taxable in accounting period)
-debit
-> set against other income of same period
-> surrender to group relief
-> carried back against non trading credits of previous 12 months
-> carried forward against future non trading profits
Income from property
-accruals basis
-interest on a loan to buy property is disallowed
-no restriction on amount of interest that can be deducted
-rent a room relief doesn’t apply to companies
Short periods of accounts
Accounting period < 12 months
-profits are time apportioned
-capital allowances are restricted to length of accounting period
Long periods of account
Accounting period > 12 months
-result of the AP must be split into two or more periods of account for tax purposes
-capital allowances are calculated separately directly each AP, and deducted form the CT computations for that that AP. CA is calculated based on the actual capital transactions im each AP
Rates of corporation tax
FY22 = 19%
FY23 = main rate 25% and small pool 19%
Which rate to use
The rate of CT depends on augmented profit of a company
1. If augmented profit are greater or equal to £250,000 (upper limit) then the main rate of CT (25%) is applied to the taxable profits
2. If augmented profit are £50,000 or less then the small profit rate of CT (19%) is applied to the taxable profits
3. If augmented profits fall between £50,000 and £250,000 then taxable profit are taxed at the main rate less marginal relief
These upper and lower limits are reduced if
- The accounting period of the company is less than 12 months. If this is the case, the upper and lower limits are scaled down proportionately
- The company has associated companies. If there are other companies in the group then the upper and lower limits scaled down proportionately
Marginal relief
MR = F x (U-A) x N/A
F= marginal relief fraction
U= upper limit
A= augmented profits
N= non augmented profits (taxable total profits)
Close companies
-> a company that is controlled and manipulated by a small number of people for tax avoidance purposes
A company is close if it is a UK resident company under the control of
-five or fewer participators and their associates (shareholders, loan creditors, family, business partners)
-any number of participators who are also directors (manager who owns more than 20% of the shares)
Consequences of close company status
- Benefits provided to participators are treated as distributions
-cost of benefits disallowed in company
-distribution calculated using BIK rules
-person receiving BIK taxed as if received dividends - Loans made to participators are assessed to tax
-company pay tax at 33.75% of the amount of the loan by 9 months and one day after accounting period.
-tax repaid to company when participator repays loan or it is written off
-if written off the participator is deemed to have receivable taxable dividend of an amount equal to the amount written off
-doesn’t include certain loans
-> those provided in normal course of business
-> not exceeding £15,000 to a participator who is a full time director or employee as long as they hold less than 5% of shares
Payment of corporation tax
- Self assessment system in place
- submit return within 12 months of end of accounting period or 3 months after notice to file received from HMRC
- Company must calculate its own tax, HMRC will NOT do this
- Maintain records for 6 years
Companies
Small / medium = 9 months and one day after end of accounting period
Large companies = quarterly instalments (max 4) starting 6 months 14 days after the start of the year
-large company profits > £1,500,000
-tax charged for the year must be estimated by company at each quarterly payment date
-if underpaid gets charged interest however if overpay can recover
-interest is relievable and taxable
Penalties re corporation tax
Late submission of return
-£100 up to 3 months (£500 if 3rd consecutive late return)
-£200 up to 6 months (£1,000 if 3rd consecutive late return)
-tax related penalty if more than 6 months late
-> 10% of tax unpaid if 6 to 12 months
-> 20% of tax unpaid if more than 12 months late
Failure to notify
-within 12 months of accounting period
-> 30% to 100% of tax unpaid, depending whether deliberate and or concealed
Inaccurate return
-30% to 100% of additional tax payable depending on culpability
Failure to keep records
-£3,000 per years records
Trading loss relief against total profits
-elect to relieve against total profits in the year of the loss
-against accounting periods falling wholly or partly in the 12 months prior to the loss making period (s37)
-> before deducting charitable gifts
-> given in later periods before earlier ones
-> profits may need to be time apportioned
Carry forward trading loss relief
Loss incurred on or after 1 April 2017
-the loss that is carried forward can be set against total profits of later periods
-the company can decide how much of the loss is utilised in each period so as to maximise the benefit of the losses
-future profits must arise from the same trade that incurred the loss
-losses are delivered before charitable gift deductions
-limited to £5million + 50% of the company’s profit in excess of £5m
Unrelieved qualifying charitable donations (IMPORTANT)
Gift aid donations by companies are paid gross, unlike donations made by individuals who make donations net of basic rate income tax.
Are deducted from company’s taxable total profits, so they reduce the company’s corporation tax liability.
1. Donations made by company under gift aid scheme
2. Gifts of listed shares or securities to a charity
3. Gifts of land and buildings to a charity
If a company has insufficient taxable total profits to cover its donations, then some or all of the donations will be unrelieved (not allowed as an expense). This may arise if
-> company has low total taxable profits in a year it has made gift aid donations
-> company utilises trading losses brought forward to reduce or eliminate trading profits in the year
In these circumstances
-> the tax savings in the unrelieved gift aid donations is lost because relief for the donation can only be in the period it’s made
-> relief for the donation cannot be carried forward or carried back
Other company losses
Property losses
-set against other income and gains for the accounting period in which made. Any balance is then:
1. Carried forward against future total profits, as long as the property business continues in these future periods
2. Relieved by group relief in group companies
Net dentist on non trading loan relationships
-set against other income of same period
-surrendered to group relief
-carried back against NTLR credits of previous 12 months
-carried forward against future non trading profits
Groups of companies
Levels of groups
- 51% group
- 75% group
- consortia
Percentage based on
- control
- ownership of shares
- rights to profits in a distribution
- rights to assets on a winding up
Related 51% group companies
-> A is a 51% subsidiary of B
-> B is a 51% subsidiary of A
Why is it important
-affects upper and lower bands for payment of CT
-affects whether a company has to pay corporation tax by instalments
75% groups
If all the following apply B is 75% subsidiary of company A:
1. Company A owns (directly or indirectly) at least 75% of the ordinary share capital of company B
2. Company A is entitled to at least 75% of the profits available to the ordinary shareholders of company B
3. Company A would be entitled to at least 75% of available to the ordinary shareholders of company B were to be wound up
Advantages of 75% group
- Group relief - the transfer of certain losses between members of the 75% group
- Ability to transfer capital gains chargeable gains assets between members of the group without incurring a tax charge
Group relief
-right to transfer (surrender) trading losses and other items between members of the group
-only current year losses can be surrendered and cannot be carried forward or nack by the claimant
-very flexible arrangement, losses can be surrounded in any amount
-if accounting periods not coterminous will result in time apportionment of the losses in overlap period
-must claim within two years of end of claimants accounting period
-s37
-s130
