Corporation Tax

Question 1

Q; What are the 4 steps to calculate corporation tax?

Answer 1

Step 1: Calculate income/trading profits

Calculating trading profit/loss
▪ Chargeable receipts - deductible expenditure- capital allowances (including AIA) = Trading Profit/Loss

▪ Chargeable assets include land, buildings and shares in other companies.
○ However, they must NOT form part of the company’s income stream otherwise they will be classed as income profits rather than chargeable gains.
○ Plant and machinery are unlikely to increase in value and so a chargeable capital gain is unlikely to arise.

▪ property income and certain income associated with loans are also chargeable to corporation tax.

Step 2: Calculate chargeable gains

Stage 1: Identify a chargeable disposal

Stage 2: Calculate the gain (or loss)- Expanded below (undervalue + indexation allowance)

Gain (before indexation)
▪ Proceeds of disposal - Costs of disposal - Initial expenditure - Subsequent expenditure = Gain (before indexation or loss)

Gain after indexation
▪ Proceeds of disposal - Costs of disposal - Initial expenditure - Subsequent expenditure - Indexation allowance = Gain (after indexation)

Stage 3: Apply reliefs

▪ E.g., Rollover relief on the replacement of qualifying business assets
○ The main qualifying assets are land and buildings, although other more unusual assets such as ships also qualify.

○ Time limits: The company must acquire (or have acquired) the replacement asset within one year before or within three years after it disposes of the original asset.

▪ How the relief is applied; Acquisition cost of replacement asset - Gain

○ The gain is notionally deducted from the acquisition cost of the replacement asset. This gives a lower acquisition cost to use in the corporation tax calculation when the replacement asset is sold.

▪ Note company shares are NOT qualifying assets
○ This only relates to BADR of a reduced CGT rate of 10% in CGT calculations.

▪ The rollover relief does NOT apply to goodwill and other intellectual property.

Stage 4: Aggregate remaining gains or losses.

Step 3: Calculate total profits and apply any available reliefs against total profits to get TAXABLE PROFITS

1. Income Profits + Capital Gains = Total Profits
2. Total Profits - Reliefs against total profits (to reduce income/profits) = Taxable Profits

Reliefs deducted from total profits include:
▪ Carry across/carry back relief
▪ Terminal carry-back relief
▪ Carry forward relief
▪ Qualifying donations to charity

Step 4: Calculate tax at the appropriate rates

▪ At Step 4, the appropriate tax rate is applied to taxable profit, to calculate tax payable.

Question 2

Q: Corporation Tax Rates Depending on Business Size

Answer 2

• Small Profits Rate (Profits up to £50,000): 19% corporation tax
• Main Rate (Profits over £250,000): 25% corporation tax
• Marginal Rate (Profits between £50,001 and £250,000): 26.5% on profits exceeding £50,000, calculated using a tapering method.

Question 3

Q: What is Carry-Across/Carry-Back Relief and How Does it Work?

Answer 3

• Definition:
  ○ Allows a company to offset trading losses against its total profits in the same accounting period (carry-across) or against total profits from the accounting period in the preceding 12 months (carry-back).
  • How it works:
    
    1. Losses are first offset against profits in the same period.
    2. Remaining losses are carried back to offset profits from the prior year.
    3. Claims must be made within two years of the end of the loss-making period.
  • Benefit:
    Often results in a corporation tax rebate, helping improve cash flow.

Question 4

Q: What is Terminal Carry-Back Relief and How Does it Work?

Answer 4

• Definition:
  ○ Applies when a company ceases trading. Losses from the final 12 months of trading can offset total profits from the three years prior to the final year/termination of the company.
  • How it works:
    
    1. Losses are first applied to the final year’s profits.
    2. Remaining losses are applied to the profits of the three preceding years, starting with the most recent year.
    3. Claims must be made within two years of the end of the loss-making period.
  • Example:
    A company ceasing trading in 2024 can offset losses from that year against profits from 2024, 2023, 2022, and 2021.

Question 5

Q: What is Carry-Forward Relief and How Does it Work?

Answer 5

• Definition:
  ○ Allows losses to be carried forward to offset profits in future accounting periods, provided the company continues trading.
  • How it works:
    
    1. Losses offset future profits of the same trade.
    2. For losses exceeding £5 million, only 50% of remaining profits AFTER deducting £5 million can be offset in carry forward relief.

3. Claims must be made within two years of the period when profits are reduced.

Question 6

Q: What are the time limits for acquiring a replacement qualifying business asset under rollover relief?

Answer 6

The replacement asset must be acquired:
* One year before the disposal of the original asset, or

* Three years after the disposal of the original asset.

This ensures eligibility for rollover relief to defer corporation tax on gains.

Question 7

Q: What is a Close Company?

Answer 7

• Definition:

○ A close company is a company controlled by:

1. Five or fewer participators- i.e. people with shares or rights to acquire shares in the company, OR
2. Participators who are directors or shadow directors.

Question 8

What is a Participator and What is the Control Test?

Answer 8

• Participator:
  ○ Someone with shares or rights to acquire shares in the company, or who otherwise participates in its profits or assets (e.g., directors, shareholders).
  • Control Test:
    A company is deemed “close” if participators collectively own more than 50% of shares or voting power.

Question 9

Q: Loans to Participators/Associates

Answer 9

• HMRC Refundable Deposit:

○ If a company makes a loan to a participator or an associate, the company must pay 33.75% of the loan amount (given to participators i.e. shareholders or directors) to HMRC as a refundable deposit.

• No Tax on the Loan:
  ○ The loan is exempt if:
  1. It is under £15,000.
  The borrower works full-time for the company and owns less than 5% of the shares.

Question 10

Q: What is Group Relief and What is the Definition of a Group?

Answer 10

• Group Relief:
  ○ Allows companies in a group to transfer income losses or expenses (to other companies in the group) to reduce taxable profits within the group.
  • Definition of a Group:
    One company must own 75% or more of the subsidiary’s ordinary shares directly or indirectly.

Question 11

Q: Relief for Groups on Chargeable Disposals

Answer 11

• Rules:
  ○ Assets transferred between group companies are tax-free (no gain or loss).
  ○ The transferee can use the transferred asset’s losses to offset its gains.
  • Group Definition for Chargeable Gains:
    
    1. The parent must own 75% of each subsidiary directly.
       Subsidiaries must also meet the effective 51% rule (parent entitled to more than 50% of profits/assets).

Question 12

Q: When Must Notice Be Given to HMRC for the First Accounting Period?

Answer 12

Notice must be given within three months of the start of the company’s first accounting period.

Question 13

Q: Payment Deadlines for Corporation Tax

Answer 13

Small Companies (Profits under £1.5M):
* Deadline: Nine months and one day after the end of the accounting period.

Large Companies (Profits £1.5M - £20M):
* Corporation Tax is paid in Instalments (Four payments):

1. 6 months and 13 days after the start of the period.
	
2. 9 months and 13 days  (3 months later) after the start of the period.

3. 12 months and 13 days (3 months later) after the start of the period.

4. 3 months and 14 days  (3 months and 14 days after the accounting period ends). 

Very Large Companies (Profits over £20M):
* Instalments (Four payments):

1. 2 months and 13 days after the start of the period.
	
2. 5 months and 13 days (3 months later) after the start of the period.
	
3. 8 months and 13 days  (3 months later) after the start of the period.
	
4. 11 months and 13 days (3 months later) after the start of the period.

Question 14

Q: What are the rules for the assessment and payment of CGT?

Answer 14

1. Standard Deadline:
   ○ CGT is due on or before 31 January following the end of the tax year, or 30 days from the issuance of an assessment, if later.
2. Residential Property Disposals:
   ○ CGT on gains from residential property sales must be calculated and paid within 60 days of completion.
   3. Payment Methods:
      ○ Tax can be paid through:§ HMRC’s real-time CGT service.
      § HMRC property service.
      § Self-assessment tax return.
   4. Instalment Payments:
      ○ Rarely allowed, CGT can be paid in ten annual instalments if:§ The disposal was a gift.
      § The asset is land, a controlling shareholding, or unquoted shares.
      § Hold-over relief conditions are not met.

The first instalment is due 31 January after the end of the tax year.

Question 15

Example - Trading Profit Calculation
Q: How is trading profit calculated for this scenario?
Scenario:

Chargeable Receipts: £3,540,300.

Expenses: £1,975,000 (stock, salaries, utilities, rent, insurance).

Capital Allowances:
* AIA (new machinery): £75,000.
* WDA (18% of £150,000): £27,000.
* Total: £102,000.

Answer 15

Calculation:

£3,540,300 (chargeable receipts) −£1,975,000 (deductible expenses) −£102,000 (capital allowances) = £1,463,300

A: Trading profit = £1,463,300.

Question 16

Example- Corporation Tax (Using Indexation Values)

Flashcard: Corporation Tax on Chargeable Gains
Q: How is the chargeable gain calculated for the sale of company premises?
Scenario:

• Sale Price: £300,000.
• Incidental Costs of Disposal: £6,000.
• Acquisition Cost: £150,000.
• Incidental Costs of Acquisition: £2,000.
• Indexation Factor (August 2011 to 31 December 2017): 0.3.
• No Reliefs Apply.

Answer 16

Steps to Calculate the Chargeable Gain:

1. Gain Before Indexation:○ £300,000 − £6,000 − £150,000 − £2,000 = £142,000.
2. Indexation Allowance (to adjust initial purchase for inflation):○ Acquisition cost (£150,000) + incidental costs of acquisition (£2,000) = £152,000.§ always add the initial acquisition costs + incidental costs related to the initial purchase○ £152,000 × 0.3 = £45,600.
   3. Chargeable Gain:
   ○ £142,000 − £45,600 = £96,400.

Answer: The total chargeable gain is £96,400.