Corporation Tax - Taxable total profits Flashcards
When is a company resident in the UK?
- 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
What is TTP?
The total income and gains of a company is known as taxable total profits
What is the accounting period for a company?
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
When does an accounting period start?
- 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
When does an accounting period end?
- 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
What do you do if the period of account is longer than 12 months?
Split it into two accounting periods:
- the first 12 months
- the remainder of the accounting period
What is the corporation tax computation?
Add: Trading Income Property Income Non-trading loan relationships (NTLR) Chargeable gains Miscellaneous income
Less: Qualifying charitable donations (QCDs)
= TTP (Taxable Trading Profits)
What is ‘miscellaneous income’?
Simply any income not taxable under any other heading
How do you treat dividends?
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
Are dividends paid allowable deductions?
No
How do you treat small donations to charities within the corporation tax computation?
Small donations to local charities are permitted to be deducted within trading profits
What are the differences in the calculation of trading income for a company?
- No adjustment for private expenses met by the company
- No adjustment for appropriation of profits (e.g. salary paid to a director)
How do you calculate trading income for a company?
Tax adjusted trading profits - Capital allowances = Trading income
How are capital allowances for companies given?
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
Are capital allowances available on all assets?
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)
What qualifies for FYA within a company?
- 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
How is rental income from UK properties taxed?
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
Is interest payable on a loan to acquire or improve property an allowable expense?
No, instead, relief is given under the ‘loan relationship’ rules
What do the loan relationship rules determine?
Whether interest payable/receivable is classified as trading or non-trading
How do you treat interest if it is classified as trading?
If interest is classified as trading, it is allowable or taxable as part of trading income
How do you treat interest if it classified as non-trading?
If interest is classified as non-trading, it is allowable or taxable as part of NTLR
When is income receivable classed as trading and when is it classed as non-trading?
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)
When is interest payable classed as trading and when is it classed as non-trading?
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
How do you calculate TTP for companies when items are not accounted for?
- Find the adjusted trading profits by taking the profits per account and deducting trading interest payable
- Find the income amount by taking bank interest receivable and deducting non-trading interest payable
- Add these two figures together
How do you calculate TTP for companies when items are accounted for?
- Find the adjusted trading profit by adding non-trading interest payable to the profit per accounts and deducting non-trading interest receivable
- Find the interest income by deducting non-trading interest payable from non-trading interest receivable (bank interest)
- Add these two figures together
Which items are exempt from corporation tax on chargeable gains?
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
What is the indexation allowance? (IA)
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.
How do you calculate chargeable gains for a company?
Disposal Proceeds Less: Incidental Disposal Costs Total = Net disposal proceeds Less: Allowable expenditure Total = Unindexed gain Less: Indexation allowance Total = Chargeable gain
When do companies NOT benefit from IA?
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
What is RPI?
Retail price index is used to calculate the inflation from purchase to disposal, giving the indexation factor
How do you calculate the indexation allowance from RPI?
(RIP for month of disposal (Dec 2017 if earlier) - RPI in month of expenditure) / RPI in month of expenditure
What must the indexation factor be rounded to?
Three decimal places
How do you calculate IA if enhancement expenditure was incurred?
- 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
What is a QCD?
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
