CORPORATION TAX Flashcards
DEFINITION
Companies are
charged to corporation tax on income and chargeable gains
(‘taxable profts’). Broadly, companies will have trading profts, non-trading profts, property income, and capital gains. They
are able to deduct payments to national charities as ‘qualify-
ing charitable deductions’.
COLLECTION OF TAX
A company must pay any corporation tax due nine months
and one day after the end of its fnancial accounting peri-
od. Corporation tax returns for the same period must be
submitted 12 months after the end of a company’s fnancial
accounting period. Any corporation tax which is underpaid
or overdue is subject to interest and penalties.
Corporation Tax Rates
the corporation tax rate is 19% for profts below £50,000 (the ‘small proft rate’) and
25% for profts above £250,000 (the ‘main tax rate’). Be-
tween the two fnancial thresholds marginal relief is available to reduce the main tax rate so that efectively, as profts rise
above £50,000, the tax rate gradually increases to 25%.
Exam Tip
If you are asked to calculate a company’s tax in an SQE
question (which is unlikely), the rate to use will almost
certainly be included in the question. Additionally, cal-
culating the tax on a company entitled to marginal relief
because their profts fall between the small proft rate
and the main tax rate is far too complicated to appear in
an SQE question. Therefore, if you are asked to calcu-
late the tax on a company’s profts, its profts will likely
be less than £50,000 and taxed at the small proft rate
or more than £250,000 and taxed at the main tax rate.
Corporation Tax Computation
(Trade Proft + Other Income + Chargeable Gains - Charitable Donations) x Applicable Corporation Tax Rate %
Note: If a company has a long accounting period, two compu-
tations are prepared: one for the frst 12 months and another
for the remaining months. These will have two separate pay
dates, discussed above, but only one submission date, which will be 12 months from the end of the long accounting period
Calculation ofTrade Proft
Trade in-
come less cost of sales and capital allowances.
Allowable Deductions
1.Salary (and bonuses) paid to directors and employees are
an allowable deduction against a company’s taxable trading
profts
2.Dividends paid by a company are simply a distribution of all
or part of a company’s profts to the shareholders. Dividends are not a deductible expense for the company. Nonetheless, as discussed in the income tax chapter, individual sharehold-ers who receive dividends must pay a dividend tax on the
dividend income they receive. On the other hand, note that
dividends received by a company usually are exempt from
tax and so the company need not add them to its taxable
income.
Calculation of Chargeable Gains
A company’s net gains are all the chargeable gains made in the accounting
period less any current period capital losses and any unused capital losses brought forward. Note well that companies do not receive an annual exemption.
RELIEF
- Replacement of Business Assets (Rollover) Relief
- Trading Loss Relief
Replacement of Business Assets (Rollover) Relief
Replacement of business assets (rollover) relief was dis-
cussed in the Capital Gains Tax chapter. It allows a company to defer a gain—and therefore the corporation tax due—on
the disposal of a qualifying asset, if the gain is reinvested
in another qualifying asset within one year before or three
years after the disposal. This is accomplished by subtracting the gain from the acquisition cost of the new asset.
EXAMPLE
A company builds a new plant for £900,000, It moves into the plant and sells its old plant the following tax year, realising a
£600,000 gain. Applying replacement of business asset re-
lief, the company can defer paying tax on the £600,000 gain
by subtracting it from the acquisition cost of the new plant,
reducing the plant’s acquisition cost £300,000.
Trading Loss Relief
Setting it against total profts** (before qualifying charita-ble donations) **in the current accounting period** (if there are any other profts);
**Carrying it back to set it against total profts (before
qualifying charitable donations)** in the preceding 12 months **(this can be done only after a current period offset); and
***Carrying it forward **to set it against total profts (after
qualifying charitable donations) of a later accounting period.
CLOSE COMPANIES
A close company is a company which is resident in the UK and is controlled by either:
*Five or fewer participators (shareholders); or
*Any number of directors who are also shareholders.
Most companies in the UK are close companies, usually be-
cause they are small and owned by family members.
Control
‘Control’ means ownership of more than 50% of the shares
or voting shares, or over 50% of the share capital of the
company. Shares and rights of associates are included in the calculation. Associates include spouses, parents, siblings,
and children.
Close Company Rules
Close company rules exist to prevent shareholders and
directors of close companies from using those companies as an extension to their own private banking facilities, without
paying any tax. This is especially so in relation to loans to
participators from their own company. An interest-free loan
could be made to the company owner(s). There is normally
no tax on loans, so special rules cover this situation.
Loans to a Participator in a Close Company
a.Deemed Income from Below Market Interest Loans
b.Notional Tax Payment to HMRC
Deemed Income from Below Market Interest Loans
If a close company makes a loan to a participator/sharehold-er who is also an employee/director and either charges no
interest or charges interest below the ofcial rate, a taxable
beneft arises. If the loan exceeds £10,000 and the participa-
tor is an employee or director, this beneft must be reported
to HMRC and taxed as earnings of the participator.
EXAMPLE
Yasir borrows £40,000 from his own company, of which he
is the sole director and shareholder. He pays no interest on the loan in the tax year 2023/24. The ofcial rate of interest is 2.5%. Yasir will be taxed on the beneft of the interest-free loan, which is £40,000 x 2.5% = £1,000.
