Corporation Tax - Taxable total profits

Question 1

When is a company resident in the UK?

Answer 1

• If it is incorporated in the UK OR
• It is ‘centrally managed and controlled’ in the UK (where the directors make their day-to-day decisions)

A company can be incorporated abroad but centrally managed and controlled in the UK and therefore it would be resident in the UK - and vice versa

Question 2

What is TTP?

Answer 2

The total income and gains of a company is known as taxable total profits

Question 3

What is the accounting period for a company?

Answer 3

An accounting period (AP) for corporation tax purposes is usually the company’s period of account (the period covered by the financial statements) but it cannot exceed 12 months

Question 4

When does an accounting period start?

Answer 4

• When the company starts to trade (or to receive income chargeable to corporation tax/any taxable source of income), or
• When the previous accounting period ends

Question 5

When does an accounting period end?

Answer 5

• 12 months after the beginning of the accounting period, or if sooner,
• at the end of the company’s period of account
• when the company ceases to trade

Question 6

What do you do if the period of account is longer than 12 months?

Answer 6

Split it into two accounting periods:

• the first 12 months
• the remainder of the accounting period

Question 7

What is the corporation tax computation?

Answer 7

Add:
Trading Income
Property Income
Non-trading loan relationships (NTLR)
Chargeable gains
Miscellaneous income

Less: Qualifying charitable donations (QCDs)

= TTP (Taxable Trading Profits)

Question 8

What is ‘miscellaneous income’?

Answer 8

Simply any income not taxable under any other heading

Question 9

How do you treat dividends?

Answer 9

There is no dividend income included in the calculation. All dividends received are exempt, but they may have an impact on the payment dates for corporation tax

Question 10

Are dividends paid allowable deductions?

Answer 10

No

Question 11

How do you treat small donations to charities within the corporation tax computation?

Answer 11

Small donations to local charities are permitted to be deducted within trading profits

Question 12

What are the differences in the calculation of trading income for a company?

Answer 12

• No adjustment for private expenses met by the company

- No adjustment for appropriation of profits (e.g. salary paid to a director)

Question 13

How do you calculate trading income for a company?

Answer 13

Tax adjusted trading profits - Capital allowances = Trading income

Question 14

How are capital allowances for companies given?

Answer 14

Capital allowances for companies are given for an accounting period so if the period of account exceeds 12 months, two capital allowance computations will be needed to cover:

• the first 12 months
• the remainder of the accounting period

Question 15

Are capital allowances available on all assets?

Answer 15

Yes, full capital allowances are available on all assets even if they are privately used by a director or employee of the company (but a taxable benefit in kind may arise on the director or employee)

Question 16

What qualifies for FYA within a company?

Answer 16

• All the same as those qualifying for sole traders and partnerships (tax tables)
• In addition, expenditure by a company on new (not second-hand) plant and machinery for use in a designated enterprise zone qualifies for 100% FYA

Question 17

How is rental income from UK properties taxed?

Answer 17

On an accruals basis. This means only rent relating to the accounting period is included as taxable income, and the date the rent was actually received is ignored

Question 18

Is interest payable on a loan to acquire or improve property an allowable expense?

Answer 18

No, instead, relief is given under the ‘loan relationship’ rules

Question 19

What do the loan relationship rules determine?

Answer 19

Whether interest payable/receivable is classified as trading or non-trading

Question 20

How do you treat interest if it is classified as trading?

Answer 20

If interest is classified as trading, it is allowable or taxable as part of trading income

Question 21

How do you treat interest if it classified as non-trading?

Answer 21

If interest is classified as non-trading, it is allowable or taxable as part of NTLR

Question 22

When is income receivable classed as trading and when is it classed as non-trading?

Answer 22

Trading: Only if trade is lending money, e.g. banks

Non-trading:

• Any other interest receivable e.g. by trading companies on deposits or from investments in bonds or government stocks
• Interest receivable on repayments of corporation tax (repayment interest)

Question 23

When is interest payable classed as trading and when is it classed as non-trading?

Answer 23

Trading:

• Overdraft interest
• Interest payable on loans to purchase plant and machinery
• Interest payable on loans/debentures to fund daily operations

Non-trading:

• Interest payable on loan(s) to buy a let property
• Interest payable on loan(s) to buy other companies/investments
• Interest payable on overdue corporation tax

Question 24

How do you calculate TTP for companies when items are not accounted for?

Answer 24

1. Find the adjusted trading profits by taking the profits per account and deducting trading interest payable
2. Find the income amount by taking bank interest receivable and deducting non-trading interest payable
3. Add these two figures together

Question 25

How do you calculate TTP for companies when items are accounted for?

Answer 25

1. Find the adjusted trading profit by adding non-trading interest payable to the profit per accounts and deducting non-trading interest receivable
2. Find the interest income by deducting non-trading interest payable from non-trading interest receivable (bank interest)
3. Add these two figures together

Question 26

Which items are exempt from corporation tax on chargeable gains?

Answer 26

The same as those for a sole trader or partnership as well as gilt-edge securities, plus goodwill created on or after 1 April 2002

Question 27

What is the indexation allowance? (IA)

Answer 27

The indexation allowance (IA) on disposal gives relief for inflation between the month of acquisition and the month of disposal

IA cannot create or increase a loss and any unused indexation allowance is lost.

Question 28

How do you calculate chargeable gains for a company?

Answer 28

Disposal Proceeds
Less: Incidental Disposal Costs
Total = Net disposal proceeds
Less: Allowable expenditure
Total = Unindexed gain
Less: Indexation allowance
Total = Chargeable gain

Question 29

When do companies NOT benefit from IA?

Answer 29

Companies do not benefit from IA beyond 31 December 2017:

• If an asset acquired before 1 January 2018 is disposed of on/after that date, IA will only be given up to December 2017
• If an asset is both acquired and disposed of on/after January 2018, no IA will be available

Question 30

What is RPI?

Answer 30

Retail price index is used to calculate the inflation from purchase to disposal, giving the indexation factor

Question 31

How do you calculate the indexation allowance from RPI?

Answer 31

(RIP for month of disposal (Dec 2017 if earlier) - RPI in month of expenditure) / RPI in month of expenditure

Question 32

What must the indexation factor be rounded to?

Answer 32

Three decimal places

Question 33

How do you calculate IA if enhancement expenditure was incurred?

Answer 33

• Calculate a separate indexation factor for each element of allowable cost
• Multiply each allowable cost (including incidental costs of purchase) by the relevant indexation factor

Question 34

What is a QCD?

Answer 34

Companies receive relief for charitable donations by deducting the amount paid when calculating taxable total profits. This is called a qualifying charitable donation (QCD)

Companies make charitable donations gross, therefore no grossing up is required

QCDs are relieved on a cash paid basis not an accruals basis