Corporation taxes Flashcards
Main difference between corporate and individual tax return
no separate heads of income
same tax rate for all incomes
no bands, same % for whole taxable income
qualifying charitable donations for corporation
will be deducted from total income
no grossing up
then we will arrive at taxable income
what is augmented profit
taxable income + dividend received from non group companies
this amount will determine tax rate
structure of corporate tax return
trading
property
capital
NTLR
Misc income (includes patenting income)
overseas=
total income
less qualifying donation
taxable income
add: dividend received from non group companies
augmented profit
dividend income
exempt for companies, dont add in total income
companies pay tax for accounting year or tax year
accounting year
tax rate for corporate income
income earned before 1 april 2023- 19%
income earned after 1 april 2023:
lower limit= 19% (small rate)
upper limit= 25% (main rate) and marginal relief is available
additional= 25%
what is lower, upper, additional limit
lower limit=
augmented profit between 1-50,000
upper limit=
50,001-250,000
additional=
above 250,000
what is marginal relief and how is it calculated
marginal relief will be deducted from tax liability
Formula given in exam
upper limit and lower limit will be apportioned in which cases?
when period of accounts is different from 12 months
or
if there are a number of companies in group (50% relation)
if in exam question there is no dividend from non group companies (no augmented profit)
then use these tax bands:
below lower limit of 50,000= 19%
50,000-250,000= 26.5%
>250,000= 25%
these are BANDS not limits
can ONLY be used when no augmented profit
types of losses
trading losses
capital losses
property losses
non trading loan relationship losses
what is trading loss
trading loss except year of ceasation
loss in normal business or trading activity
how can trading loss be relieved and cf till when?
Trading loss will hit total income
in either of the following ways:
1) carry forward directly
2) current year then c/f
3) current year, carry back last 12 months, and then c/f
Cf indefinitely
is it allowed to claim loss partially
in current year and carry back, partial claim not allowed (usually this will waste qualifying donation)
in carried forward, partial claim IS allowed
when do we need to notify tax dept about loss claim
-carry forward loss claim: submit within 2 years in which loss will be relieved
-current year and carry back loss: file within 2 years in which loss INCURRED
how to quantify benefit in loss question
USE TAX BANDS SYSTEM
taxable income lies in whichever band, that rate will be used to quantify loss
CHECK WHICH PORTION U R HITTING
WE ARE USUALLY HITTING UPER KA PORTION AKA MARGINAL RATE PORTION
after 1 april 2023 rates increased so hit that first
what is terminal trading loss
trading loss in last 12 months of business. it is the loss in year of ceasation.
how is terminal trading loss relieved? Partial claim allowed?
It will hit total income
In the following way:
-current year
-then last 36 months on LIFO basis
no partial claim allowed
if last accounting period is less than 12 months what to do for terminal loss?
terminal loss needs to be composed, as Terminal loss is of 12 months
we will borrow loss from previous accounting period
if loss exists then we will borrow, otherwise we wont borrow.
loss memo:
1st write previous yr loss, transfer it to terminal loss
2nd write composed loss (terminal loss+ borrowed loss)
1st deal with normal loss it arised before
then deal with terminal loss.
how to deal with terminal loss in loss memo
Q21- PAGE 8 + cresco question
what is capital loss, relief, partial gain, carry forward till when?
-can only hit capital gains
-current year then future gains
-carryback not allowed
-no partial claims allowed (gaya tou gaya)
what is property loss
Relief:
Property loss will hit total income
-current year then future
-no carry back
-no partial claim in current year
-partial claim is permitted in c/f (business needs ongoing support)
what is loan relation and its two types?
loan relation: any transaction related to loan
eg. interest exp, interest income, legal fees
if loan relation is on trading loan, then it will be adjusted in trading pNL. (loan taken for assets or working capital for business)
if loan is taken for non trading purpose (loan for investment in shares, loan to purchase property for rentals) , its shown separately on corp tax return under head of non trading loan relation]
NTLR value can be positive (in case if interest income) and negative (int expense)
how can non trading loan relation deficit (loss) be relieved?
options:
1- offset against current yr total income
2- offset against last 12 months NTLR only
3- offset against future total incomes
Partial claim is allowed in all options
carry forward indefinitely
approach when there are alot of losses in question
put date wise in loss memo (earliest one first)
check if any yr exceeds lower limit or not
use max loss
save the QCDs
deal date wise
when to notify tax department about loss relief
for ALL types of losses, current year and carry back claims need to be submitted within 2 years of loss occurring
for carry forward reliefs, claim needs to be submitted within 2 years of the year in which loss is reliefed
what are the restrictions on loss relief
-different trades in one company restriction
-change in ownership and major change in business restriction
-deduction allowance limit
if a company has different trades then
trading loss of one trade cannot be offset against another trade income within the same company (does not apply on group relief)
if total income includes other trade income, we will remove them from total income then claim loss
if there is change in ownership of the company or change in activity
if there is change in ownership (>50% shares sold) AND within 3 years before OR 5 years after (8 yr period) there is major change in business activity (change in primary business, target customer, revival of trade),
loss will be restricted on change in ownership date. loss will not be able to carry back or get carried forward beyond that date.
deduction allowance limit
5 Smart Cats Tread Carefully Post-April Together.
5-million: carry forward loss claim of trading loss and capital loss is restricted to 5 million per year
Smart:Single limit for the 75% group.
Cats: Combined limit for trading and capital losses
Tread- trading losses created after 6 april 2017 are included in this limit
Carefully:capital losses after 6 april 2020 come in this limit
Post April: Post 6 april 2017 and 6 april 2020 respectively
Together: Thresholds:
limit will increase if losses are above 5m. It will increase by 50% of excess.
what is the difference between individual and companies CGT?
-no annual exemption for companies
-companies get indexation allowance
-no BADR for companies
-Companies get substantial shareholding exemption
what is indexation allowance concept
indexation allowance is adjustment of inflation from gain
DP less cost = chargeable gain
chargeable gain less indexation allowance = taxable gain
how is indexation allowance calculated
cost x index factor
index factor = will be calculated using retail price index (RPI)
index factor=
RPI on disposal date - RPI on purchase date / RPI on purchase date
(new - old /old)
indexation allowance concept applies on which dates
it is frozen till 31 december 2017.
all gains uptil this date are allowed, after that frozen.
annual exemption is available once on all disposals during the year, however index allowance is…
separately available on each disposal
what is Substantial shareholding exemption (SSE) relief and its conditions
SSE -10-12-6
S = Selling Company must be a trading company.
S = Shares sold must be of another trading company.
E = Exempt from CGT (No gain/no loss transaction).
10 = At least 10% shareholding required.
12 = Ownership for 12 consecutive months.
6 = The 12 months must fall within the last 6 years.
(toot toot kar not allowed)
whenever a company sells shares of another company
ALWAYS THINK OF SSE
if 12 months ownership condition is not satisfied, will SSE be available?
yes if it was owned by the group for 12 months. (intra-group transfers don’t penalize the SSE benefit.)
what is the structure of a capital gains group
it is formed when a single parent company has:
-75% direct ownership AND
-50% indirect ownership (effective ownership) in ALL companies
Privileges for capital gains group
NO RISK TRANSFERS
-No Gain/No Loss Transfers of assets
-Rollover Relief Within Group
-Transfer of Capital Gains and Losses
can a company be in more than 1 capital gain group at a time?
no, only 1 at a time. preferably with parent co.
can overseas company be part of a CGG?
yes, but it will not get any privileges. it will just be there as a link
privileges of capital gain group:
#1 transfer of assets
-assets will be transferred at no gain/no loss
-they will be transferred at COST PLUS INDEX ALLOWANCE (this amount will be cost for the buyer company)
In what case would this benefit of no gain no loss asset transfer get withdrawn?
if receiving company gets sold within 6 yr of transfer, and it still owned that intra group asset at date of disposal
then
-no gain no loss relief
will get withdrawn
and DEGROUPING charge will arise
(gain will be calculated)
Market value at transfer date less original cost = gain.
gain less index allowance= taxable gain
this taxable gain is called degrouping charge
and it will be added to taxable gain on sale of shares of company.
If eligible for SSE then total gain including degrouping charge will be exempt.
will degrouping charge arise if shares of a company are sold but control is not sold?
No.
capital gains group, privilege #2: rollover relief
rollover relief can be claimed on each other disposals.
-if one company sells a qualifying asset
-another one invests in a qualifying asset,
rollover relief can be claimed (holdover also)
(1-3 rule applies
this does not refer to instra group transfer as those are not chargeable
capital gains group, privilege #3:
transfer of capital gains and losses
Current Gains Transfer, No Back Loss, Partial Offsets
-Current year transfer of capital gains and losses
-No back losses (b/f balance can not be transferred)
-partial claim is allowed
-capital loss will hit capital gain only
-capital gain can hit total income
rule for pre entry capital losses
pre entry capital losses (ones that arised before joining group) can not be surrenderred to a group company
these losses must be set off against the company’s own capital gains which may be:
1) gain arised before joining group
2) gain after joining group but asset was owned before joining group
3) asset may be purchased after joining group but from third party for valid business use.
if pre entry loss isnt utilisied in 5 years, may surrender to group company.
what is the 75% group
formed when companies have a common parent which owns atleast
-75% direct ownership
-75% indirect ownership
can a company be in a capital gains group and 75% group at the same time?
yes
can a company be in more than one 75% group at a time
yes
overseas company can be in a 75% group?
yes but as a link only. no privileges
what are the privileges of the 75% group?
75 Tigers Need Perfect Quiet Meditation.
75: 75% group
Tigers: Trading losses can be transferred.
Need: NTLR losses
Perfect: Property losses
Quiet: Qualifying Donations (QD) can be transferred.
Meditation: Management expenses are transferable.
Both Current yr and b/f losses may be transferred “75 tigers can borrow”
-Income cannot be transferred.”Tigers share their wounds, not their roars.”
losses of both current year and b/f can be transferred
under what condition can losses be transferred in a 75% group
ESCAPE
E: Excess losses (exceeding own income) can be transferred (except for current year trading/NTLR losses).
S: Sufficient income needed for the receiving company.
(after adjusting own current yr and b/f losses)
C: Claims can be partial.
A: Adjustments must match corresponding periods.
P: pre entry losses must be used by own self. however can be surrendered after 5 years
how should loss planning be done in the group
Check tax rates of companies.
-give losses first to companies paying marginal tax rate (26.5%)
-then give loss to those taxed at main rate (25%)
-then give loss to small rate companies (19%)
capital gain should be transferred to company having capital loss, and then to company paying tax at small rate
what is a consortium and can overseas companies be included in it
COCO
C: Companies – 20 or fewer companies own a company.
O: Ownership – Combined ownership of 75% or more.
C: Company ownership – Each company’s ownership is more than 5% but less than 75%.(kato bacho)
O: Overseas – Consortium members can include overseas companies but with no privileges. The consortium company cannot be an overseas company.
priviliges of a consortium
S: Surrender – Consortium company can surrender its losses to members.
M: Members – Members can surrender losses to the consortium company.
A: Alone – Members cannot surrender losses to other members.
R: Ratio – Members can only access profits or losses based on their shareholding percentage.
T: Timeframe – Only current year losses, and of corresponding periods, can be surrendered.
C: Capital – Capital losses cannot be transferred.
A: Adjusted – Losses can only be transferred if sufficient income exists after adjusting own b/f and current year losses.
P: Partial – Partial claims are allowed.
corporation tax payment dates
N: Nine months after the year-end for regular companies.
A: Augmented profit exceeding the upper limit changes the payment rules.
P: Paid in installments in advance for companies with profits above the upper limit.
UP: Upper limit is £1.5 million.
-
what is the upper limit for installments and when would it be apportioned
1.5 million pounds
it may be reduced due to 2 reasons:
-accounting period less than 12 months
-number of companies in 51% group at PREVIOUS year end
upper limit can be different for different companies within group
what are the installments dates
1) 14th of 7th month during the year
2) 14th of 10th month during the year
3) 14th of 13th month of the year
4) 14th of 16th month of the year (last installment)
how are installments calculated, what if tax is under or overpaid
first 3 installments are based on budgeted tax
last one is based on actual tax
first 3 installments
each installment= budgeted tax/4
budget can be revised on each installment
if tax was underpaid then interest payable at 6.5%/yr
if tax was overpaid then interest receivable at 3%/yr
last installment:
-tax liability for the year as per actual return
-less: tax already paid in installments
= final payment
is it possible that augmented profit exceeds upper limit but company may still not have to pay tax in installments?
yes if expected tax liability is less than 10,000
in this case normal 9 month rule may be followed
this can happen when augmented profit is high due to high dividends and taxable income is low
first time installments relief
for first time installment situation, a company may get a waiver from installments if tax is below limit of10 million
this 10 million limit will get reduced if there are more companies in a 51% group
how are installments paid in case of small accounting period?
installments will be calculated in the following way:
budgeted tax for the period/ number of months in period * 3
tax payment date for each installment will be same as normal. (7th,10th,13th) however, last installment will be paid 4 months after period end.
eg. if 9 months period:
last installment: 9+4= 13th month
other two installments= 7th and 10th month. 3rd and 4th installment will be paid together.
loss planning regarding payment dates
loss should be surrendered to companies whose augmented profit exceeds upper limit
by doing this profit will be reduced below limit and installments can be avoided
