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Business Law and Practice > Corporation Tax > Flashcards

Corporation Tax Flashcards

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1
Q

What is corporation tax payable on?

A
  • all income profits and
  • chargeable gains
  • of a body corporate
  • that arise in its accounting period
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2
Q

What is the sum of company’s income profits and chargeable gains known as?

A

Taxable total profits chargeable to corporation tax (TTP)

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3
Q

What is the financial year for companies?

A

1 April to 31 March

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4
Q

What are the rates of corporation tax as of 1st April 2023?

A
  • companies with TTP over £250,000 - 25%
  • companies with TTP less than £50,000 - 19%
  • companies with TTP over £50,000 but less than £250,000 - claim marginal relief ie tapered tax rates
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5
Q

How is the chargeable gain to be calculated?

A

Sale proceeds less:

  • allowable expenditure
  • indexation allowance
  • capital/trading losses
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6
Q

How are income profits to be calculated?

A

Income receipts less:

  • deductible expenditure
  • capital allowances
  • trading losses
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7
Q

How can capital be distinguished from income?

A

Income receipts and expenditure arise through everyday trading whereas capital receipts and expenditure arise from one-off transactions

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8
Q

What are chargeable income receipts?

A

These are receipts of an income nature which arise from the company’s business or trading activity

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9
Q

What expenditure by the company is deductible for income purposes?

A
  • expenditure which is wholly and exclusively incurred for the purpose of the trade
  • expenditure that is not prevented from being deducted by statute ie money spent by a company entertaining its clients and doubtful debts
  • be income in nature - element of recurrence eg rent, utility costs, interest paid, wages and repairs
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10
Q

What are capital allowances?

A

Form of tax relief whereby deductions for certain qualifying items are paid for calculating income profits

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11
Q

What expenditure would qualify for capital allowances?

A

Plant and machinery

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12
Q

How does capital allowances work for plant and machinery?

A

Companies can deduct 18% of the value of plant and machinery from their income receipts each year on a reducing balance basis

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13
Q

What is the super annual investment allowance?

A

Annual investment allowance whereby company can deduct 100% of expenditure on P and M up to a specified amount - currently £1 million each year

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14
Q

What allowable expenditure is deductible for assessing the chargeable disposal by companies?

A
  • initial expenditure
  • subsequent expenditure (defending title costs and enhancement)
  • cost of disposal
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15
Q

In relation to companies and capital gains, what do they not benefit from that individuals do?

A
  • annual exemption
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16
Q

In relation to companies and capital gains, what do they benefit from that individuals do not?

A

(1) indexation allowance

(2) substantial shareholding exemption whereby gain may be totally exempt in disposing of shares in a private company provided:

  • disposing company must have held at least 10% of the ordinary share capital of the company whose shares are being disposed of
  • must have held those shares for at least 12 consecutive months in the last 6 years
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17
Q

Can companies claim business asset disposal relief or investor’s relief?

A

No

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18
Q

What is rollover relief?

A

Tax deferral mechanism which can be used by individuals or companies to defer tax that would otherwise be due in respect of a gain arising when an asset is disposed of

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19
Q

When will rollover relief potentially be available?

A
  • where a company disposes of a qualifying business asset and it (or another company in its group) buys another qualifying asset
  • where a sole trader or partnership disposes of a qualifying business asset and buys another qualifying asset
  • where an individual other than a sole trader, owns a business asset, sells that asset and buys another qualifying asset and both assets are used by either:

(i) a company which is the individual’s personal company

(ii) a partnership of which the individual is a partner

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20
Q

What is the general effect of rollover relief?

A

Tax is postponed until the replacement asset is sold and no new qualifying replacement asset is purchased

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21
Q

What assets are qualifying assets for rollover relief?

A
  • land and buildings
  • goodwill
  • fixed plant and machinery
  • ships and hovercraft
  • aircraft
  • Lloyd’s syndicate capacity
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22
Q

Must the replacement asset be of the same type that was sold?

A

No - must just be another qualifying asset

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23
Q

When must the replacement asset be bought by?

A

Must be bought 12 months before or three years after the sale of the old asset

24
Q

What happens where not all of the sale proceeds of the original assets are used to acquire the new asset?

A

The amount by which the sale proceeds of the original asset exceeds the cost of the replacement asset is deducted from the chargeable gain before rollover relief and only the remaining amount of gain can be rolled over

Ie - gain rolled over is reduced by £1 for every £1 of sale proceeds not invested

25
Q

What happens when the cost of the replacement asset is deducted from the sale proceeds of the original asset, the resulting figure is greater than the amount of gain?

A

No rollover relief claim can be made

26
Q

What is the general rules in relation to dividends and corporation tax?

A
  • they are exempt from corporation tax
  • cannot be deducted for tax purposes by company paying it
27
Q

What is meant by straddling financial years?

A

Company’s TTP from accounting period will have to be apportioned between financial years and relevant amounts for each will be taxed at rates of those respective financial years

28
Q

When will a trading loss occur?

A

Where tax deductible expenditure exceeds income receipts for a specific period

29
Q

Can be done with trading losses?

A

They can be offset against taxable profits

30
Q

How can trading losses be offset against current year profits?

A

Trading losses can be offset against all other profits in the same accounting year.

Claim must be made within two years after the end of the accounting period in which the trading loss arose

31
Q

How can trading losses be offset against previous year profits?

A

If trading losses cannot be used in whole or in part against current profits, a company can carry back any remaining trading losses against taxable profits from the previous accounting period

The company must have been carrying on the same trade in both years to be able to carry back the loss

Claim must be made within 2 years of end of accounting period which loss arose

If company has ceased trading, any loss in last 12 months can be offset against any profits made in the three years prior to the start of the final 12 months

32
Q

How can losses be offset against future trading profits?

A

If the loss cannot be used against any current profits that year, or any previous profits from other years then they can still be carried forward and set against all the company’s taxable total profits in the future.

33
Q

Are there any limits in carrying losses forward to offset against future profits?

A
  • company must continue to trade in loss-making trade in period which losses are used but use of losses not restricted to profits of same trade
  • maximum of £5 million set-off available in each accounting year (deductions allowance)
  • where in an accounting period, the company has unrelieved taxable profits in excess of the available deductions allowance for that period, carried forward losses may be used to relieve a maximum of 50% of the unrelieved profits (applies to group of company as a whole not each individual company within group)
34
Q

How does loss relief work where there is a group of companies?

A

One company with a trading loss can surrender that loss to another profitable company in the group so that the surrendered loss can reduce or eliminate that company’s profits

35
Q

What is the main anti-avoidance rule in relation to group losses?

A

Trading losses cannot be carried forward or back where company has been sold to a new owner and nature of trade of company has substantially changed five years after sale

36
Q

What can capital losses be set-off against?

A

Capital gains in current and future years but not previous years

37
Q

What are the limits on using capital losses to offset gains?

A

Limit of the deduction allowance of £5 million (provided not used up by other trading losses)

After deduction allowance, any further losses can only reduce a maximum of 50% of unrelieved gains

Capital losses can be carried forward indefinitely, but to crystallise the loss, claim must be made to HMRC within 4 years from end of accounting period that caused loss

38
Q

How must companies with TTP of £1,500,000 or less do their self-assessment?

A
  • estimate their tax liability
  • pay HMRC tax due within 9 months and one day of end of accounting period
  • company must file tax return within 12 months of the end of the accounting period to which it relates together with its accounts
  • unless HMRC examine or make enquiries, tax return will be regarded as finalised 12 months after filing date
39
Q

How must companies with TTP of more than £1,500,000 do their self-assessment?

A

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

40
Q

What are the rules around the deductibility of interest?

A
  • interest paid on business loans is generally deductible
  • if more than £2 million in net interest expense in a year, company may only deduct maximum of 30% of income receipts
41
Q

When must a company withheld tax from certain interest payments?

A
  • a company may have to withhold tax from payment on interest in an international context
  • company which pays interest to another UK corporation tax paying company or UK bank is allowed to make payments without deducting tax from the payments
42
Q

What is a close company?

A

Company under control of:

  • five or fewer participants
  • any number of participators who are also directors
43
Q

What is a participator?

A

Person who has a share or interest in capital or income of the company eg shareholders or creditors

44
Q

What is control?

A

Control means ability to exercise control over the company’s affairs, normally by voting rights or the possession of or entitlement to:

  • issued share capital allowing the greater part (ie more than 50%) of income of the company to be distributed
  • the greater part of assets of the company on winding up
45
Q

When will a company not be a close company?

A
  • its shares are quoted on a recognised stock exchange
  • it is controlled by one or more non-close companies, and it could only be a close company by treating a non-close company as one of the five or fewer participators having control
46
Q

What needs to be considered in assessing a person’s control?

A

The rights and entitlements of that person’s ‘nominee’, ‘associates’ and companies controlled by the individual

47
Q

Who are associates?

A

Associate means any close relative ie spouse, parent (or remoter forebear) child (or remoter issue), brother or sister

48
Q

Who are nominees?

A

Nominees means a person owning property on behalf of another

49
Q

What loans to participators are not caught by the specific tax rules?

A
  • loans in the form of credit in respect of goods or services normally supplied by the company in the course of business where credit does not exceed six months or company’s normal limit
  • loan made in the ordinary course of company’s business which includes money lending
  • a loan to a borrower which, together with other outstanding loans made to borrower does not exceed £15,000 in aggregate and borrower works full-time for the company and does not have a material interest in the close company
50
Q

What is a material interest in a company?

A

Indirect control of more than 5% of the ordinary share capital of the company or an entitlement on winding up to more than 5% of the assets available

51
Q

What is the tax effect for the company on making a loan to participator?

A

The company must pay corporation tax to HMRC on the amount of 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

52
Q

What is the tax effect for the recipient participator on a company making a loan to that participator?

A

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

If loan is paid back in full, then no tax effect

53
Q

What is a distribution to a close company?

A

Broad term including living accommodation and other benefits in kind provided to participators (but not where such benefits are provided by reason of employment)

54
Q

What IHT implications to distributions have in close companies?

A

Transfer of value by a close company results in value of gift being apportioned between its shareholders

55
Q

When may transaction in securities rules apply to close companies?

A

Transaction involving close company where the transaction gives any person a tax advantage by changing a receipt which would have been treated as income for tax purposes into a capital receipt

Business Law and Practice (22 decks)

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