Corporation Tax Flashcards
what is corporation tax payable on?
a company’s income profits and capital gains
what is the position in relation to partnerships and corporation tax?
If a company is a partner, they will pay corporation tax, not income tax
give an overview of a corporation tax calculation
o Step 1: calculate income profits
o Step 2: calculate chargeable gains
o Step 3: calculate total profits & apply reliefs
o Step 4: calculate the tax at the applicable rate
re: step 1 - calculating income profits
what does this stage involve?
calculating trading profits (see other flashcards)
when does the tax year run?
The tax year runs from 6 Apr - 5 Apr
NB: this may be different to a company’s financial year as they can change this
re: step 1 - calculating income profits
in addition to usual income considered when calculating trading profits, what other type of income is considered?
o property income
o income associated with loans
o goodwill
o intellectual property (i.e. trademarks, patents)
re: step 1 - calculating income profits
what is not deducible expenditure?
o dividends paid to SHs
o payments made to SHs for bought back shares
re: stage 2 - calculate chargeable gains
what does this stage involve?
This is largely the same process as calculating CGT, with some minor differences
1. Identify disposal of a chargeable asset
2. Calculate the gain (or loss)
3. Apply relief(s)
4. Aggregate remaining gains and losses
re: stage 2 - calculate chargeable gains
when identifying the disposal of a chargeable asset, what is it important to remember?
- It must not form part of the company’s income stream, otherwise this will be income profits and not chargeable gains
- Goodwill and IP are not a chargeable asset in CT
re: stage 2 - calculate chargeable gains
what is it important to remember if a loss arises in relation to corporation tax?
If there is a loss, then this must be deducted from the chargeable gains and not the income profits
re: stage 2 - calculate chargeable gains
how is the indexation allowance different to CGT?
indexation allowance only applies when calculating gain on an asset between 31 March 1982 and 31 December 2017
If the asset was disposed of after 31 Dec 2017, then RPI as of this date is used
re: stage 2 - calculate chargeable gains
how is the relief stage different to CGT?
There is no annual exemption
There are less reliefs available compared to CGT:
o The main relief is rollover relief of qualifying business asset
o Goodwill and intellectual property are QBAs for GCT, but wouldn’t be for CT
re: stage 3 - calculate total profits & apply reliefs
what reliefs are available?
- in-year and carry-back relief
- carry forward relief
- terminal carry-back relief
- qualifying donations made to charity
re: stage 3 - calculate total profits & apply reliefs
what steps must be taken as part of this stage?
- Income profits and chargeable capital gains are added together
- If this amounts to a loss, then reliefs can be applied
re: stage 3 - calculate total profits & apply reliefs
when are reliefs applied?
if, after profits are aggregated, there has been a loss
re: stage 3 - calculate total profits & apply reliefs
how can the company apply the reliefs?
The company can choose to use any of the reliefs it is eligible for and can use more than one if one relief does not absorb all of the losses
Companies will typically pick the relief(s) that is best for cash flow, i.e.:
o In-year / carry-back and terminal carry-back relief may lead to a tax refund
o Carry-forward reduces the amount of future corporation tax to pay
re: stage 3 - calculate total profits & apply reliefs
explain in-year / carry-across relief
the loss can be set off against the total profits received in the same accounting period the loss was incurred
re: stage 3 - calculate total profits & apply reliefs
explain carry-back relief
the loss can be set off against the total profits received in the 12 months preceding the accounting period of loss
NB: it refers to a ’12 month period’ rather than the ‘previous accounting period’ because a company may have changed their accounting period
re: stage 3 - calculate total profits & apply reliefs
if using in-year & carry-back relief, when must in-year relief be used?
In-year relief must be used before carry-back relief
re: stage 3 - calculate total profits & apply reliefs
what condition must be satisfied for carry-back relief to be used?
- The company can only use carry-back relief if they are carrying on the same trade
re: stage 3 - calculate total profits & apply reliefs (in-year and carry-back relief)
when must the claim be made?
- The claim must be made within 2 years from the end of the accounting period in which the loss was incurred
re: stage 3 - calculate total profits & apply reliefs
when is carry forward relief used?
The company will carry forward its loss and set it against profits in the next accounting period. They can be carried forward until the losses are fully relieved.
re: stage 3 - calculate total profits & apply reliefs
what conditions must be satisfied to use carry-forward relief?
The company must meet certain conditions in order to claim this relief (i.e. continuing to trade)
However, if the company doesn’t meet these conditions they can still claim to relief against profits of the same trade
re: stage 3 - calculate total profits & apply reliefs (carry-forward reliefs)
what is the cap on relief?
The amount that can be relieved is no more than £5m, plus 50% of remaining total profits after the deduction of the allowance
re: stage 3 - calculate total profits & apply reliefs (carry-forward reliefs)
what is the time limit to make this claim?
The claim must be made within 2 years from the end of the accounting period in which the loss was incurred
re: stage 3 - calculate total profits & apply reliefs
when is terminal carry-back relief relevant?
Relevant where a company ceases to trade and has made a loss within the last 12 months
re: stage 3 - calculate total profits & apply reliefs
how is terminal carry-back relief applied? Give an example
Loss is first off-set against any profits made in the last 12 months
If there are still losses remaining, these can be set off against profits from the preceding years, starting with the most recent period and working backwards
example:
31 Dec 2023 – accounting period ends & company ceases trading
the company made a loss for the period of 12 months prior to cessation of trade (i.e. 1 Jan 2023 – 31 Dec 2023)
o First, losses are set off against any profits made between 1 Jan 2023 – 31 Dec 2021
o Remaining losses can be set off against accounting periods up to 1 Jan 2020 (this is because they can only be off for up to 3 years prior to period of loss)
re: stage 3 - calculate total profits & apply reliefs (terminal carry-back relief)
what is the time frame to make a claim?
The claim must be made within 2 years from the end of the accounting period in which the loss was incurred
re: stage 4 - calculate tax
what are the current rates of tax?
Companies with profits of up to £50,000 - small profits rate of 19%
Companies with taxable profits between £50,000 to £250,000 - marginal rate:
The first £50,000 is taxed at 19%
The remaining is taxed at 26.5%
Companies with profits of more than £250,000 - main rate of 25%
re: stage 3 - calculate total profits & apply reliefs
what are qualifying donations to charity? How are they applied?
Money, investments, trading stock, medical supplies, gift of plant or machinery and land are qualifying donations
If applicable, the value of the donation can be deducted from the total trading profits
re: stage 4 - calculate tax
what happens if the company’s financial year and tax year are different?
If a company’s financial year is different to the tax year, then the two tax rates will be applied to the respective parts of the year
re: close companies
what are the close company rules and why are they in place?
A company controlled by a small group of persons may try to arrange its affairs in order to avoid paying tax. i.e. the company could give a loan to a SH which would represent the extraction of profits, but the SH wouldn’t pay any income tax on this
The close company rules are designed to prevent this type of tax avoidance and ensure SHs of all companies are treated the same way for tax purposes
re: close companies
when will a company be ‘close’?
a company will be ‘close’ in either of the following two circumstances:
- If it is under the control of either:
o 5 or less participators; or
o Any number of participators if they are also directors - 5 or fewer participators are entitled to more than half of the company’s assets on winding up
re: close companies
what is a participator?
anyone with a share or interest in the company’s capital or income, i.e.: SHs and loan creditors
re: close companies
when will a participator have control of the company?
Participators will have control of the company if they possess or are entitled to acquire:
o The greater part of voting power; or
o The greater part of the share capital; or
o They can control the company’s affairs
re: close companies
what is the one of the key measures under the close company rules to prevent tax avoidance?
loans to participators - a close company will incur a tax charge if it makes a loan to a participator or their associate (i.e. a close relative or business partner)
re: close companies
what is the consequence of a loan to a participator?
The tax rate is the higher rate on dividends (currently 33.75%) is payable
re: close companies
how does the loan to a participator rule work?
This is akin to a deposit, once the loan is repaid or written off the company can recover the tax paid (by way of tax relief)
re: close companies
where there has been a loan to a participator, when will not tax be payable?
It is a standard loan (i.e. bank to SH); or
The loan (and all other loans to the same person) is:
No more than £15,000; and
The borrower is a full time employee; and
They do not own more than 5% ordinary shares
NB: if the company writes off the debt, the borrower will need to pay tax on it
what additional reliefs are available to groups of companies?
- group relief
- chargeable gains group
How are groups of companies taxed?
Companies in a group will be taxed separately as each has SLP, but there are additional mechanisms in place in relation to groups of companies
what is group relief applicable to?
If companies are in the ‘same group’, they can transfer losses and management expenses to reduce taxable profit
The loss / expense must have occurred in the same accounting period of the receiving company
this is applicable to income loss only
for the purposes of group relief, when will companies be in the same group? Give an example
Companies will be in the same group if one company directly or indirectly owns 75% or more of the subsidiary company’s ordinary shares
Example
A owns 80% of B
B owns 80% of Company C
o A and B are in the same group, as A directly owns more than 75% of B
o B and C are in the same group, as B directly owns more than 75% of C
o A and C are not in the same group, because A only has a 64% indirect shareholding in C (80% x 80% = 64%)
what is chargeable gains group?
Companies in the ‘same group’ can arrange for the company that will benefit most in terms of tax to dispose of an asset which gives rise to a chargeable gain
for the purposes of chargeable gains group, when will companies be in the same group? Give an example
Companies will be in the same group if:
o Each company owns 75% of its subsidiary; and
o All of the subsidiaries in the group are effectively 51% subsidiaries of the principal company (there can only be one principal company)
A owns 80% of B
B owns 80% of Company C
C owns 75% of D
o A, B and C are in the same group because:
A directly owns at least 75% of B
B directly owns at least 75% of C
A indirectly owns at least 51% of C (80% x 80% = 64%)
o D is not part of the group, because A does not own at least 51% of D
(80% x 80% x 75% = 48%)
in relation to chargeable gains group, what is the position in relation to reliefs?
If the company that disposes of the asset elects rollover relief on replacement of a business asset, they can either roll the gain into a QBA that they acquire or another company in the same group
Explain and indirect shareholding and how you would calculate this
An indirect shareholding is when a person or entity holds a share or right through another entity, rather than directly
To calculate indirect ownership, you can multiply the ownership shares along the chain i.e. if A owns 60% of B, and B owns 60% of C, then A indirectly owns 36% of C (0.6 x 0.6 = 0.36)
what does HMRC do each year in relation to corporation tax notices?
A company must write to HMRC within 3 months of starting its first accounting period, after that HMRC will issue a notice each year requiring the company to deliver a self-assessment corporation tax return
when must the company file its tax return?
The tax return must be sent to HMRC within 12 months of the end of the relevant accounting period
in most instances, when it corporation tax payable? What practical implication does this have?
within 9 months and one day of the relevant accounting period
This means companies are required to pay tax before it is required to file a return
Companies will make a payment on their anticipated CT liability and make a balancing payment (or receive a rebate) once the final figure is determined
how do large companies pay tax and what is a large company?
Large companies (i.e. those with annual taxable profits of £1.5 million or more) usually have to pay tax in 4 instalments on the following dates:
o 6 months and 13 days after the start of the accounting period;
o 3 months from the first instalment due date
o 3 months from the second instalment due date; and
o 3 months and 14 days after the end of the accounting period
when would a large company pay tax if its accounting period was from 1 January 2026 – 31 December 2026?
Example - accounting period from 1 January 2026 – 31 December 2026
o 1st instalment - 14 July 2026
o 2nd instalment - 14 October 2026
o 3rd instalment - 14 January 2027
o 4th instalment - 14 April 2027
how do very large companies pay tax and what is a very large company?
Very large companies (i.e. with annual taxable profits over £20million) have to pay tax in 4 instalments:
o 2 months and 13 days after the start of the accounting period
o 3 months from the first instalment due date
o 3 months from the second instalment due date
o 3 months from the third instalment due date
