CORPORATION TAX Flashcards
DEFINITION
1.nCompanies are charged to corporation tax on income and chargeable gains (‘taxable profits’).
2. Broadly, companies will have trading profts, non-trading profts, property income, and capital gains.
3. They are able to deduct payments to national charities as ‘qualifying charitable deductions’.
COLLECTION OF TAX
- A company must pay any corporation tax due** 9 months and1 day after the end of its financial accounting period**.
- Corporation tax returns for the same period must be submitted 12 months after the end of a company’s financial accounting period. 3. Any corporation tax which is underpaid or overdue is subject to interest and penalties.
Corporation Tax Rates
- the corporation tax rate is 19% for profits below £50,000 (the ‘small proft rate’) and **25% for profts above £250,000** (the ‘main tax rate’).
- Be-tween the two financial thresholds marginal relief is available to reduce the main tax rate so that effectively, as profits 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, calculating 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 computations are prepared: one for the first 12 months and anotherfor the remaining months. These will have two separate paydates, discussed above, but only one submission date, which will be 12 months from the end of the long accounting period
Calculation ofTrade Proft
Trade income less cost of sales and capital allowances.
Allowable Deductions
- Salary (and bonuses) paid to directors and employees are
an** allowable deduction** against a company’s taxable trading profits - Dividends paid by a company are simply a distribution of all or part of a company’s profits to the shareholders. Dividends are not a deductible expense for the company.
- Nonetheless, as discussed in the income tax chapter, individual shareholders 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 charitable donations) in the current accounting period (if there are any other profits);
- 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 profits (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:
1. Five or fewer participators (shareholders); or
2. Any number of directors who are also shareholders.
Most companies in the UK are close companies, usually because 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 official rate, a taxable benefit arises.
- If the loan exceeds £10,000 and the participator 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 offcial 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.
