E - Corporation tax Liabilities

Question 1

What is corporation tax and who has to pay it?

Answer 1

Tax on profits of UK resident companies on world wide income and capital gains for the accounting period.

Question 2

How do we know if a company is UK resident for tax purposes?

Answer 2

1. Incorporated in the UK, this will override item 2

2. centrally managed and controlled in the UK.

Question 3

How do we identify the accounting period for corporation tax?

Answer 3

Accounting period is usually the companies financial period (not exceeding 12 months)
Start of Ap - start of trade, receipt of income chargeable to CT or after the end of the previous ap
end of ap - 12 months from start, or cease of trade .

Question 4

How are total taxable profits for corporation tax calculated?

Answer 4

Start with tax adjusted trading profits
Interest income
Property income
chargeable gains
Miscellaneous income
Gives total profits
less: qualifying charitable donations. 
NB watch out for key differences from sole traders when calculating tax adjusted profits.

Question 5

What are the key differences from sole traders when calculating company tax adjusted trading profits?

Answer 5

Private use - no private use restrictions
capital allowances - full capital allowances an all assets calculated for each ap.
dividends paid - appropriation of profit, not an allowable deduction
interest payable/receivable - for trading income deduct there, non trading deduct from interest income.

Question 6

What are the loan relationship rules for interest income,e?

Answer 6

All interest is taxed on an accruals basis

Must be determined if interest is trading or non trading.

Question 7

How is interest income identified as trading income dealt with?

Answer 7

it would be viewed asa income if the business trade is lending money.
An expense where it relates to loans for P&M, overdraft or write off of trade receivables.
This will be included as part of the trading profits

Question 8

How is interest income identified as non trading income dealt with?

Answer 8

Income - any other interest income received
expense - loans for buy to let properties or to invest in an other company.
Tax treatment is:
deduct/add back to calculation of trading profits
include receipts as interest income instead.
note incidental loan costs will be treated the same way as the loan.
impaired debt write offs are also dealt with under the loan relationship rules.

Question 9

How is property income calculated for corporation tax purposes?

Answer 9

Profits from letting are taxed on an accruals basis
Rent accrued,
less allowable deductions
plus lease premium
gives Total taxable property income
NOTE interest on a loan to buy a rental property - is not an allowable property income expense.

Question 10

What about other types of income?

Answer 10

Miscallaneous income - usually patent royalties

dividends received - exempt income

Question 11

What about companies with long periods of account?

Answer 11

Must be split in to 12 months then remainder, profits are split:
trading profit - adjust for accounting period then time apportion
capital allowances - separate calculation for each period
interest/property income - accrual basis
chargeable gains - date of disposal
qualifying charitable donations - date paid
NOTE: there will be two payment dates but only one file for the return

Question 12

How do trading losses for companies arise?

Answer 12

when total taxable profit after capital allowances is negative.
the TTP in the tax computation becomes 0
loss is then off set

Question 13

how can a companies trading losses be off set?

Answer 13

1. can carry forward against future trading profits before QCD, this method allows for a partial claim.
2. off set against all current total profits, then carried back 12 months, does not allow for partial claims.

Question 14

What if the period prior to the loss was less than 12 months?

Answer 14

Still carry back for the full 12 months, LIFO, time apportion.
Note if the loss making period is less than 12 months full relief is still given in the loss making period.

Question 15

What if the losses occur in the last 12 months of trading?

Answer 15

then terminal loss relief can be claimed.
the carry back period is extended to 36 months.
Losses are off set on a LIFO basis.
NOTE claims to off set losses must be made within 2 years of the end of the loss making period.

Question 16

what factors influence the choice of loss relief?

Answer 16

timing 0 CY/CB saves tax now, CF saves tax later

Amount - avoid wasting QCD

Question 17

How are company property losses dealt with?

Answer 17

Net property losses are off set against TTP before QCD in current period.
Automatic relief
no partial claims can be made
excess is carried forward
NOTE
must be claimed within 2 years of the end of the ap
Once carried forward partial claims are allowed
carry back claims are not allowed.

Question 18

how are company capital losses dealt with?

Answer 18

set against chargeable gains in the current period
excess is carried forward against 1st available chargeable gain.
automatic relief - net figure appears in CT computation.

CAnnot be off set against other income.

Question 19

What about losses for individuals?

Answer 19

these are dealt with in a similar way to companies.

there is an optional extension of relief - against chargeable gains.

Question 20

what is the default relief position for individuals trading losses?

Answer 20

Loss is carried forward:
off set against 1st available future trading profits of the same trade
off set must be the maximum amount possible.
claim must be made within 4 years of the end of the tax year.

Question 21

What about loss relief against total income?

Answer 21

an individual may elect to off set losses against total profit:
can off set against current and prior year in any order
relief is all or nothing, no partial claims
relief must be claimed within 12 months from 31st jan following the end of the tax year.

Question 22

Is relief against other income restricted?

Answer 22

Yes - but remember this only applies to other income there is no restriction on off set against trading income,e.
Max off set is the greater of:
£50,000 or
25% of adjusted total income ( total income - gross pension contributions)

Question 23

Can individuals losses be off set against chargeable gains?

Answer 23

yes - but only after the loss has been off set against total income.
this can only be done for CY and/or PY and only once losses have been off set against total income for the year.
the max amount that can be off set is the lesser of:
1. remaining loss
2. remaining chargeable gains after all capital losses have been offset.
this must be claimed within 12 months of 31st jan following the end of the tax year.

Question 24

special circumstances - what reliefs are available at the start of trade?

Answer 24

Normal opening year basis applies
Losses can only be relieved once
against total income for losses arising in the first 4 years of trading:
loss is carried back 3 years on a FIFO basis
one claim applies to all three years and may result in an income tax refund.
no partial claims allowed.

Question 25

what terminal loss relief is available to individuals?

Answer 25

for losses made in final 12 months of trading:
off set against total income of current year and/or prior year.
terminal loss relief - against trading profit in the last tax year then can be carried back 3 tax years on a LIFO basis.
NOTE this must be claimed within 4 years of the end of the final year of trade.

Question 26

How is terminal loss relief calculated?

Answer 26

for the period 6th April to date of cessation:
actual trading profit (0 id not negative)
plus unrelieved overlap profits.
12 months before cessation to 5th april:
Actual trading loss

Question 27

how are losses dealt with in partnerships?

Answer 27

the loss is allocated to the partners on the same basis as any profits
each partner then decides how to deal with their share of the loss.
same process as for individuals.

Question 28

what is a group relief group?

Answer 28

where a company holds a 75% or greater interest in another company.

1. company must hold 75% or greater of ordinary shares
2. company had right to 75% or greater of distributable profits
3. has right to 75% or greater of assets when business is wound up.

Question 29

How do we identify if sub subsidiary interest is sufficient to be part of a relief group?

Answer 29

multiply subsidiary percentage by parent company percentage.

Question 30

so what can companies in a relief group do?

Answer 30

transfer losses from surrendering company to claimant company.
claimant company must claim the group relief on it’s CT return with in 2 years of it’s end of ap.
payments made for group relief are not taxable/tax deductible.

Question 31

what type of losses can a company surrender?

Answer 31

trading losses of the current accounting period
b/f trading losses - if these cannot be utilised by the company it self.
unrelieved QCD
unrelieved property losses.
NOTE capital losses cannot be surrendered.

Question 32

how much group relief can the claimant company take?

Answer 32

up to a maximum of the lower of:
available loss of surrendering company
available profits of the claiming company

Question 33

how is the max available profits of the claiming company calculated?

Answer 33

total profits
less
losses bought forward
current year losses
QCD relief
gives max available profits

Question 34

what is meant by “corresponding AP”

Answer 34

losses surrendered must be off set against TTP of the claimant company in a corresponding AP.
where companies have differing year ends profits and losses must be time apportioned.

Question 35

what is group relief planning?

Answer 35

how to use losses to gain the best relief
group relief is more flexible as partial claims can be made.
so to avoid wasting QCD the group relief amount can be fixed to retain enough profit to allow for the claim.

Question 36

what is a capital gains group

Answer 36

A parent company and it’s 75% subsidiaries, parent company must have 50% effective interest in it’s subsidiaries.
NOTE subsidiaries cannot be parent companies of another capital gains group.

Question 37

so what can a capital gains group do?

Answer 37

transfer assets on a tax neutral basis (NGNL)
actual proceeds are ignored
deemed proceeds = cost + indexation up to date of transfer.
if an asset is later sold deemed cost is indexed from state if transfer to 2017 to give cost at disposal.

Question 38

what else can a capital gains group do?

Answer 38

reallocate gains and losses.
all or part of a current year gain or loss can be reallocated within the group.
this must be done within 2 years of the end of the accounting period.
NOTE B/f capital losses cannot be transferred.

Question 39

how are gains groups affected by rollover relief?

Answer 39

for disposal and reinvestment in an asset a gains group is treated as a single trade.

Question 40

What is the super deduction, when can it be claimed and how is it applied?

Answer 40

The Super Deduction is available on new Plant & Machinery acquired between 1st April 21 and 31 March 23.
It is applied at a rate of 130% of the cost of the acquired asset, within the Capital allowance pro forma both the acquisition and allowance are shown at the 130% value.
Note - this cannot be claimed on second hand assets acquired/ Connected party transactions/ Cars or assets acquired in the final accounting period of trading.

Question 41

What allowances can be claimed for special rate pool assets?

Answer 41

FYA at 50% can be claimed for Special rate pool assets, this should be applied after any annual investment allowance has been used up. The balance after both allowances have been applied will then be carried forward in the Special rate pool at 6%.

Question 42

What is Structures and Buildings allowance, and how is it applied?

Answer 42

SBA is a capital allowance on Commercial structures & Buildings only.
To Qualify:
* The Building/Structure must be constructed/Renovated on or after 29/10/18
* Must be used for Trade or Non residential property letting
* Must not be included in the Main Capital allowances computation.
* Each Building/Structure must have it’s own pool.
* Cannot include costs of Land, SDLT, Legal fees or Repairs & Maintainance.
* Is a straight line allowance of 3% per 12 month accounting period (Time apportion)

On Disposal
* SBA claimed up to the sale date is added to the sale proceeds, no balancing adjustment is made to the allowances.
* Buyer will take on remaining useful life and SBAs based on the original cost of the buidling/Structure.

Question 43

How are the different elements of the Corporation Tax COmputation apportioned over long periods of account?

Answer 43

• Trading profits before Capital Allowances - Adjust the profits for the whole (Long) period of account and then time apportion.
• Capital Allowances - Separate calcualtion for each accounting period. AIA and WDA’s will need to be time apportioned in the short AP.
• Property & Interest Income - Allocate on an accruals basis unless there is specific information to indicate otherwise.
• Chargeable gains - In the accounting period the disposal ocurred.
• QCD’s - Date the donation was paid.

2 Ct computations are prepared:
* 2 payment dues dates, 9m + 1d from the end of each AP.
* 1 Filing Due date, 12m from end of long AP.

Question 44

What other considerations should be taken in to account when calculating cahrgeable gains for companies?

Answer 44

• Proceeds - If the item is a gift this will be market value, don’t forget to include any SBA’s claimed.
• Allowable costs will include not just the original purchase cost but also incidental costs of sale and any capitalised enhancement expenditure.
• Indexation - which can be applied to a gain but not a loss, will need to be calculated separately for initial cost and enhancement expenditure.

Formula for Indexation = (RPI for month of Disposal - RPI for month of expenditure)/ RPI month of expenditure.
Round to 3 DP.
Apply this value to the relevent cost

Question 45

How does Rollover relief apply to Tangible and Intangible assets?

Answer 45

The relief is claimable for gains on qualifying assets where net proceeds are reinvested in qualifying assets.
Qualifying Business assets - Land & Buidlings Used for Trade, Fixed Plant & Machinery. Gain deferred is Indexed Gain on disposal.
Special Intangible Rollover Relief - applies to Goodwill and other intangibles, Deferred amount is lower of Proceeds/ amount reinvested less cost of original intangible.

Time Frame - New asset must be acquired between 12 Months prior and 36 months after the disposal.

Question 46

What reliefs or allowances apply to the Disposal of Shares?

Answer 46

There are not reliefs or allowances that apply however the Substatial Share holding exemption my be used.
SSE - Gains are exempt but losses are also disallowed where;
* A holding of at least 10% existes for at least 12 months in the last 6 year period.
Conditions - The company disposed of must be a trading company or the holding comapy of a trading company both during the 12 month period and through the period of disposal..

Shareholdings of 51% group companies will be taken in to account when determining if the share holding is substatial.
In a share for share exchange the holding periof for original shares is added to replacement shares when determining holding period.

Ownership conditions can also be met if;
* Shares are in a new company, and
* The new comapny received assets from another 75% group company, and
* the assets transferred where held and used in the trade of another group company for 12 months prior to transfer.

Question 47

What level of relief is available for R&D Expenditure?

Answer 47

For SME’s - 130% deducted against trading income
For Large Companies - 13% above the line tax credit.
Qualifying Expenditure - Revenue expenditure
* Salaries - inc. NIC’s, and Pensions contributions, but excluding taxable benefits.
* Consumables
* Computer Software
* Power, Water & Fuel
* Payments to Agency Workers
* Subcontracted expenses (65%)

Capital expenditure qualifies for 100% FYA but not the super deduction.
If deduction creates a loss it may be surrendered for a cash payment:
* 14.5% x Surrendered amount.
* Trading loss carried forward is reduced by the amount of loss surrendered.

Surrender of loss Is an option:
Surrender results in increased cash inflow
Roll forward loss results in CT saving in futuer AP.

Question 48

How are R&D Expenditure credits (RDEC) applied for large companies?

Answer 48

1. Calcualte the Credit - 13% of Qualifying R&D expenditure.
2. Include the RDEC as taxable income in the Corporation Tax Computation.
3. Deduct the RDEC from the Corporation tax liability
4. Calculate the cash payment, if the RDEC cannot be fully netted off then the excess can be paid Cash net of CT, capped at total PAYE & NI liability for R&D staff.
5. Remaining RDEC can be carried forward to offset against first available future CT or group relieved.

Question 49

How are intangible assets treated for Tax purposes?

Answer 49

Intangible Fixed Assets (IFA’s) are taxable under trading income.
Allowable expenses inc. - Payment of Royalties, Loss on sale of IFA & Amortisation (Not Goodwill)
Taxable income Inc. - Receipt of Royalties payment, Profit on sale of IFA & Revaluation of IFA.

Alternative is to claim 4% WDA, this can be done as an irrevocable election up to 2 years from the end of the AP the asset was acquired in.
This is useful if there is no amortisation or the asset has a very long useful life.
Disposal
* Will result in either a trading profit or loss.
* Proceeds of the sale will not include indexation as this is not a calculation of Capital Gain.
* The TWD will be either Capitalised cost less amortisation or Capitalised cost less WDA claimed (Adj to accounting profit will be required)

Question 50

How is the disposal of Goodwill Dealt with?

Answer 50

Amortisation/Impairment of Goodwill is not a Tax allowable expense there is also no option to claim 4% WDA.
Profit on Disposal - treated as Trading income
Loss on disposal - treated as non trading Debit and can be;
* Set against total profit for the current period.
* Group relieved if part of a 75% group
* C/F and offset against total profits of future periods (cannot be carried back)

Question 51

What is transfer pricing and how is it applied?

Answer 51

Transfer Pricing - Anti avoidance legislation to counter transactions taking place between connected companies at a price other than market value in order to shift profits from higher paying company to lower paying company.
Applys - Where a UK Tax advantage is obtained by either reducing profit subject to UK taxes or increasing losses, and
To Large Companies, SME’s only is buying/Selling to overseas company that are resident in non qualifying countries.
Covers - Transactions between 2 UK companies or between a UK and Overseas company.
Treatment - Goods & Services -
* Advantaged company - increase profits to reflect arms length transaction
* Other compay - equal and opposite adjustment (if in UK)

Treatment - provision of Loan finance
* Amount Loaned - if more than an independant 3rd party would lend (Thin Capitalisation) the difference is disallowed.
* Rate of interest charged - Allowable interest expense is what would be charged on the amount that would be lent at market rates, balance is disallowed.