WS7 - Corporation Tax and VAT

Question 1

Introduction to VAT: What is VAT charged on?

Answer 1

VAT is charged on:
* Any supply of goods or services made in the UK
* Where it is a taxaable supply
* Made by a taxable person
* In the course of furtherance of any business carried on by that person

Question 2

Introduction to VAT - a) Terminology: What does supply of goods and services mean?

Answer 2

Any supply made in the UK of goods or services done in return for consideration.

Question 3

Introduction to VAT - a) Terminology: What does made in the UK mean?

Answer 3

The place of supply of relevant goods or services must be in the UK and there are complex rules for working out the place of supply for VAT purposes in cross border transactions, outside scope of workbook.

Question 4

Introduction to VAT - a) Terminology: What is a taxable supply?

Answer 4

Any supply made in the UK which is not an exempt supply.

Question 5

Introduction to VAT - a) Terminology: What is a taxable person?

Answer 5

A person who is or is required to be registered for VAT purposes and person includes “individuals, partners, companies and unincorporated organisations.

Question 6

Introduction to VAT - a) Terminology: What is in the course or furtherance of any business carried on?

Answer 6

Business is a very wide term and basically is any economic acitivity carried on, on a regular basis but employees services to employer are excluded.

Question 7

Introduction to VAT - b) Registration: When is a person required to be registered for VAT purposes?

Answer 7

• At end of any month, if value of taxable supplies in period of one year or less has exceeded VAT registration threshold (must noptify HMRC within 30 days of end of that month and will be registered from begining of second month after supplies went over)
• At any time if reasonable grounds for believing value of their taxable of their taxable supplies in a period of 30 days then begining will exceed registration threshold (must ntoify within 30 days and will be registered from begining of this period)

Current registration threshold is £90,000.

Question 8

Introduction to VAT - b) Registration: What can a person do voluntarily?

Answer 8

Register voluntarily as this means that input tax can be recovered which is helpful to reduce costs but also means they wil have to charge outpuut tax to customers which may make them less attractive to non-registered competitors.

Question 9

Introduction to VAT - c) De-registration: When may a person apply to cancel registration?

Answer 9

• Where the value of their future annual taxable supplies will not exceed the VAT deregistration threshold
• This is currently £88,000.

Question 10

Introduction to VAT - d) Output and Input Tax: What is output tax?

Answer 10

VAT chargeable by a business when making a supply of goods and services in which VAT relates to output of the business.

Question 11

Introduction to VAT - d) Output and Input Tax: What is input tax?

Answer 11

VAT paid by a person on goods or services supplied to the person is called in put tax and it realtes to goods and services brought in by a person.

Question 12

Introduction to VAT - d) Output and Input Tax: What can be off set?

Answer 12

A VAT registered business offsets input tax it has suffered (on goods and services purchased) against output tax it has charged its customers or clients (on its own supplies) and only accounts to HMRC with the difference.

**Note - Where no output taxc charged in any VAT accounting period, still possible to reclaim any input tax incurred where it is intende future output will be charged. **

Question 13

Introduction to VAT - e) How much VAT: What does this depend on and what is standard rate?

Answer 13

• Type of supply
• Standard rate is currently 20%

Question 14

Introduction to VAT - e) How much VAT: What is a price deemed to be?

Answer 14

VAT inclusive unless cotnract for supply of goods and services states otherwise.

Question 15

Introduction to VAT - e) How much VAT: See P160 for an example of VAT

Question 16

Introduction to VAT - f) Types of supply: What are the different types?

Answer 16

• Standard rated
• Reduced rate
• Zero rated
• Exempt
• Or could be outside scope all together such as atransfer of a business as a going concern.

Question 17

Introduction to VAT - f) Types of supply - (i): Standard Rated: What is this rate and when will it apply?

Answer 17

• 20%
• Supply will be standard rate unless it falls within one of the three other categories.
• VAT registered bysiness charging at standard rate on output and recovers any VAT on itts inputs (unless it makes supplies falling into exempt below)

Question 18

Introduction to VAT - f) Types of supply - (ii): Reduced Rate: What is this rate and what does it apply to?

Answer 18

• Very limited umber at charged at 5%
• This includes supplies such as comestic heaitng and power, installation of mopbility aids, smoking cessation products and childrens car seats.

Question 19

Introduction to VAT - f) Types of supply - (iii): Zero Rated: What supplies will this include?

Answer 19

These are zero rated for public policy reasons and include:
* Foods (within certain categories)
* Sewerage and water
* Books/newspapers
* New Houses and construction of them
* Public transport
* Childrens clothing

Note - These supplies still fall into category of taxable supplies so when a VAT registered business makes zero rates supplies it charges VAT at 0% on its outputs and can recover VAT suffered on its inputs

Question 20

Introduction to VAT - f) Types of supply - (iv): Exempt: What supplies does this include?

Answer 20

Isnurance, finance, education/health and the sale of land and buildings unless it comprises a new commercial buiilding or supplier of commercial has chosen to make it standard rated.

Question 21

Introduction to VAT - f) Types of supply - (iv): Exempt: What is the position for VAT?

Answer 21

If business makes exempt supplies, it does not charge VAT on its supplies and equally is not able to recover any VAT suffered on inputs and will be a cost to the business.

Question 22

Introduction to VAT - g) Accounting for VAT to HMRC - (i) Vat Invoice: What must be supplied for standard rated/reduced rate supply?

Answer 22

Must supply customer/client with VAT invoice within 30 days of the supply and keep a copy and HMRC will regular carry out inspections of businesses to ensure copies are kept of input and output invoices.

Question 23

Introduction to VAT - g) Accounting for VAT to HMRC - (ii) VAT Return: What must be submit every three months?

Answer 23

• Taxable businesses must submit VAT return.
• Due tdate for payment usually wihtin one month and seven days after end of VAT period

Question 24

Introduction to VAT - g) Accounting for VAT to HMRC - (ii) VAT Return: What must VAT return show?

Answer 24

• Total output tax charged on making fo taxable supplies during that VAT period less the total input tax attributable to making of the supplies.
• At same time, business must pay to HMRC excess of output charged over input tax suffered.

Question 25

Introduction to VAT - g) Accounting for VAT to HMRC - (ii) VAT Return: What if business normally pay more than 2.3 million a year in VAT?

Answer 25

Must pay monthly payments on account and then pay balance when submitting quarterly return.

Question 26

Introduction to VAT - g) Accounting for VAT to HMRC - (iii) Special Schemes: What do these scehmes provide?

Answer 26

Number of special schemes designed to simplify accounting for VAT or to reduce VAT liability.

Question 27

Introduction to VAT - g) Accounting for VAT to HMRC - (iii) Special Schemes: What is the retail scheme?

Answer 27

Special schemes used by retailers who find it difficult to issue VAT invoices for large number of suppleis they make direct to public.

Question 28

Introduction to VAT - g) Accounting for VAT to HMRC - (iii) Special Schemes: What is cash accounting scheme?

Answer 28

Business whose annual turnover less than 1.3m (excluding VAT and exempt supplies) may opt to use cash accounting scheme if they comply with certain conditions:
* Output tax is accounted for when invoice paid rather than issued.
* However, input tax can onyl be recovered when business pays the supplier.

Question 29

Introduction to VAT - g) Accounting for VAT to HMRC - (iii) Special Schemes: What is annual accounting scheme?

Answer 29

Business with annual tyurnover not exceeding 1.3m excluding VATa nd exempt supplier may be permitted by HMRC to make an annual VAT return.

VAT is paid by isntallments during the year based on previous years VAT liaiblity with balance being paid when VAT return submit,.

Question 30

Introduction to VAT - g) Accounting for VAT to HMRC - (iii) Special Schemes: What si the flat rate scheme?

Answer 30

• If business has annual urn over not exceeding £150,000 excludijng VAT and total annual turnover not exceeding £230,000 the business may elect VAT be charged at flat rate on turnover rather than every single transaction.
• There is however, not normally any relief for input tax.
• Flat rate will depend on type of business and HMRC publish table setting out applicable rates for different types of business such as hairdressers and estate agents.

Question 31

Intrdouction to corporation tax: When is corporation tax payable?

Answer 31

It is payable on:
* All income profits and
* Chargeable gains
* Of a body corporate
* That arise in its accounting period

Question 32

Intrdouction to corporation tax: What is the sum of company’s income profits and chargeable gains known as?

Answer 32

Taxable total profits which are chargeable to corporation tax.

Question 33

Intrdouction to corporation tax: When are companies assessed?

Answer 33

By reference to the financial year (1 April to 31st March) however as a company can choose its accounting period, it is often different to financial year which is same for all companies.

Question 34

Intrdouction to corporation tax: What does TTP determine and what is the rate?

Answer 34

• TTP will determine amount of coporation tax payable.
• Main rate of coporation tax for 2024/2025 is 25% for companies with a TTP of greater than £250,000.
• If company TTP is £50k or less, then the corporation tax rate is 19%.
• If company TTP is over £50k and upp to £250,000, then a company may claim marginal relief which has effect of tapering effect on the tax rate.

Question 35

Intrdouction to corporation tax: What is the calaculation for TTP?

Answer 35

Question 36

Intrdouction to corporation tax: What should you remember regarding basic rule for income and capital?

Answer 36

Income receipts and expenditure arise through everyday trading whereas capital receipts and expenditure arise from one of transactions.

Question 37

Corporation Tax Calaculation - Step 1: Calaculate the income Profits: What constitutes company income?

Answer 37

• Rental Income
• Trading Income
• Interest (e.g from bank savings)
• Dividend Income

Question 38

Corporation Tax Calaculation - Step 1: Calaculate the income Profits: What should be noted regarding dividends?

Answer 38

• Dividends paid to UK companies are subject to corporation tax unless dividend falls within one of a number of exemptions. However, they are very broad and general effect of rule is that all dividends are exempt from corporationt ax unless certain anti avoidance provisions apply.
• Dividend income received by a company is therfore generally exempt from corporation tax and is therefore not included in that company’s TTP for tax purposes
• For the same reason, dividend is not tax deducible for the company paying it out as paying out of already taxed profits.

Question 39

Corporation Tax Calaculation - Step 1: Calaculate the income Profits: How do you calaculate the taxable income profits?

Answer 39

Must aggregate all chargeable income reciepts and deduct all tax-deductible expenditure:
* Chargeable Income Receipts: These are receipts of an income nature which arise from the company’s business or trading activity (which are not exempt)
* Tax deductible expenditure: This is expenditure by a company that the company is permitted to deduct from income receipts, thereby reudcing overall tax bill.

Question 40

Corporation Tax Calaculation - Step 1: Calaculate the income Profits - (i) Deducible expenditure for income What must expenditure be in order for it to be deductible?

Answer 40

To be deductible for tax purposes must:
* Be wholly and exclusively incurred for purposes of the trade (expenditure which is partially by way of gift will not be, whereas if expenditure needed to produce an item for sale such as raw matierals, then it will be.)
* Not Prohibted by statute: Such as business entertainment expenditure (money spent by business to entertain clients) and provisions made in accounts for doubful debts (Those not written off but if uncertainty about if they wil be paid or not)
* Be of an income nature: Where is has an eleemnt of recurrence such as rent, utility/energy costs/interest paid/wages/repairs

Question 41

Corporation Tax Calaculation - Step 1: Calaculate the income Profits - (i) Deducible expenditure for income What is the position for interest paid on business loans?

Answer 41

• Generally a deducible income expense (i.e a company can deduct te amount of interest paid from its profits to reduce the TTP and thereby overall tax bill.

Note - Where a compny or group of companies has mroe than 2 million of net interest expense in the UK any year, te amount of interest a company may deduct is restricted to, broadly, a maximum amount equal to 30% of its income receipts.

Question 42

Corporation Tax Calaculation - Step 1: Calaculate the income Profits - (i) Deducible expenditure for income What is the corporate interest restriction?

Answer 42

Where a company or group of has more than 2m net interest expense in the UK any year, the amount of interest a company may deduct is restricted to broadly, a maximum amount equal to 30% of its income profits known as CIR.

Question 43

Corporation Tax Calaculation - Step 1: Calaculate the income Profits - (ii) Capital allowances What is capital allowance and why introduced?

Answer 43

• Generally, only deductible from capital receipts and not income profits and in addition, depraciation is not an allowable deduction for tax purposes.
• So, capital allowance are given which are capable of deudction against income receipts which allow businesses to spread costs of certain capital assets over time.
• Note - Also available to individuals and partnerships carrying on trade as well as companies

Question 44

Corporation Tax Calaculation - Step 1: Calaculate the income Profits - (ii) Capital allowances What does qualifying expenditure included for capital allowance?

Answer 44

Expenditure incurred on plant and machinery (There are other special capital allowance such as long life assets, research and development, certain construction costs for commercial buildings but outside scope)

Question 45

Corporation Tax Calaculation - Step 1: Calaculate the income Profits - (ii) Capital allowances What does capital allowance allow for on plant and machinery?

Answer 45

Companies can deduct 18% of the value of plant and machinery (P&M) from their income receitps each year on a reducing balance basis.

So, if a company claaims capital allowance one year on P&M, value of P&M for tax purposes is reduced by 18% and this value referred to as “tax written down value” of the P&M. Then when company claims captal allowance following year, it will claim 18% of the TWDV of P&M after it has been reduced by previous years capital allowance claim.

Question 46

Corporation Tax Calaculation - Step 1: Calaculate the income Profits - (iii) Annual Investement Allowance: What does this allow to be deducted?

Answer 46

• Enables company (or unincorporated business) to deudct 100% of expenditure on new, used or refurbished P&M up to a spoecified amount.
• This is currently £1million for any qualfying purchases in each year.

Question 47

Corporation Tax Calaculation - Step 1: Calaculate the income Profits - (iii) Annual Investement Allowance: How does this interact with normal capital allowance?

Answer 47

• Capital allowance of 18% above can be applied to any sum above the 1million.
• So, if comapny spent more than 1 million in that year on P&M, the company can deduct from income profits the 1million, plus 18% of the balance above.
• After the first year, the allowance reverts back to 18% per annum on a reducing balance basis.

POTENTIAlL QUESTION TO UNDERSTAND CALACULATION OF BOTH CA AND AIA OVER TWO TAX YEARS

Question 48

Corporation Tax Calaculation - Step 1: Calaculate the income Profits - (iv) Capital Allowances: Super-deduction: What does this allow companies to claim?

Answer 48

• 130% first year relief on expenditure incurred from 1st April 2021 until 31st March 2023 on qualfying P&M.

Question 49

Corporation Tax Calaculation - Step 1: Calaculate the income Profits - (iv) Capital Allowances: Super-deduction: What does this not include and include?

Answer 49

• Did not apply to second-hand, used or leased assets.
• Included expenditure on assets such as fire alarm systems, security systems, bathroom sanitaryware, carpets, computer equitment, servers, tractors, lorries and vans, ladders, drills and cranes, office desks and futuirue, refrigeration units and electric vehicle charging points.

Question 50

Corporation Tax Calaculation - Step 1: Calaculate the income Profits - (iv) Capital Allowances: Super-deduction: Is there a limit like A&A?

Answer 50

• Unlike AIA, there was no expenditure limit on this allowance.

Question 51

Corporation Tax Calaculation - Step 1: Calaculate the income Profits - (v) Losses: What can a company also offset?

Answer 51

Companies can offset income profits with trading losses.

Question 52

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (i) Identify chargeable disposal: How are chargeable assets defined for companies?

Answer 52

Defined in almost exactly same way as CGT and most likely assets will include:
* Land
* Buildings
* Shares in other companies

Question 53

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (i) Identify chargeable disposal: What must these assets not form part of?

Answer 53

The companies income stream, otherise they will be classed as income profits rather than chargeable gains.

Question 54

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (ii) Calaculate the gain(or loss): What is the calaculation?

Answer 54

In order to calaculate the gain/loss, it should be sale proceeds, less:
* Allowable expenditure
* Indexation allowance

INDEXATION ALLOWANCE IS A REUDCTION/RELIEF IS TO ALLOW FOR THE FACT THAT SOME OF THE GAINS MADE OVER PERIOD OF OWNERSHIP WILL BE PURELY INFLATION SO ARGUMENT IS THAT YOU SHOULD NOT BE PENALISED FOR OWNERSHIP. WS TOLD US THAT WE WILL BE TOLD THIS IN THE QUESTION AND SIMPLY REMEMBER TO DEDUCT THIS.

• Capital/trading losses

Question 55

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (ii) Calaculate the gain(or loss): What is allowable expenditure?

Answer 55

The same rules apply as for individuals:
* Initial expedniture
* Subsequent expenditure
* Costs of disposal

Question 56

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (ii) Calaculate the gain(or loss): What is the position for sale at an undervalue?

Answer 56

• If it is just a bad bargain, the actual sale price will be used as figure for proceedings of disposal.
• If there was a gift element to the sale at undervalue, then the market value will be used as the figure for proceedings of disposals.
• If a connected person, it will also be markert value and this will be a person controlling company or with others connected.

Question 57

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (ii) Calaculate the gain(or loss): What are the differences from individuals?

Answer 57

• No annual exemption fro companies.
• Indexation allowance continues to be available for companies but frozen up to 31 December 2017.
• Substantial shareholding exemption is available
• A company can use trading and capital losses to offset chargeable gains to reduce the corporation tax liability.

Question 58

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (ii) Calaculate the gain(or loss): What is the substnaitloa shareholding exmeption?

Answer 58

• This is a relief that can exempt from corporation tax the whole of a chargeable gain when a company disposes shares in a trading company (or holding company of a trading group.
• Providing certain conditions are met.
• Disposing company must have held at least 10% of ordinary share capital fo the company whose shares are being disposed of for at least 12 consecutive months in the last six years.

**Note - Not available for individual sellers but companies cannot reduce tax they pay they pay through busienss asset disposal relief or investors relief unlike individuals. **

Question 59

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (iii) Apply Reliefs: What relief is available to companies?

Answer 59

Rollover relief for replacement of business assets.

Question 60

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (iii) Apply Reliefs: Wat does rollover relief allow for?

Answer 60

• Gain from a disposal of a qualfying asset is carried forward and rolled into the acquisition cost of a qualfying replacement asset costs.
• Acqusition cost of repalcement asset is reduced by amount of gain rolled over.
• Therfore, tax is postponed until replacement asset sold and no new qualfying replacement asset is purchased and therfore possible to roll over indefinetly provided qualfying replacements bought within time,

Question 61

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (iii) Apply Reliefs: What is a qualfying asset in respect of rollover relief?

Answer 61

• Land and buildings
• Goodwill
• Fixed P&M
• Ships and Govercraft
• Aircraft
• Lloyds syndicate capacity

Note - They do not need to be same type of asset when sold and bought, just need to fall within definition and this is really important to remember e.g WS question in which client bought P&M and sold land, it could be used as they dont need to be the same

Question 62

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (iii) Apply Reliefs: What is the timing for relief to apply

Answer 62

• Replacement must bepurchased within 12 months before or three years after sale of old asset.

Question 63

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (iii) Apply Reliefs: Example of rollover relief

Answer 63

Question 64

Corporation Tax Calaculation - Step 2: Calaculate the Chargeable Gains - (iii) Apply Reliefs: When can roll over relief be restricted?

Answer 64

• If not all sale proceeds of original asset are used to aquire the new asset.
• If this is the case, the gain to be rolled over is reduced for £1 for every £1 of sale proceeds not reinvested.

Question 65

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits: What must you now done after calaculating company’s income profits and capital gains?

Answer 65

• You must add together company income profits and capital gains.
• This gives the total profits

Question 66

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - (i) Loss relief - Deducitbility of trading losses: When does a trading loss occur and how cane they be offset against taxable profits?

Answer 66

Trading loss occurs where tax deducible expenditure exceeds income receipt for a specific period and trading losses can be offset by:

• Current year profits
• Previous year profits
• Future trading profits
• Group Relief

Question 67

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - (i) Loss relief - Deducitbility of trading losses: How can trading losses be offset against current year profits?

Answer 67

They can be offset against all other profits (i.e both income profits and chargeable gains) in the same accounting year and a claim must be made within two years after end of accounting period in which trading loss arose.

Question 68

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - (i) Loss relief - Deducitbility of trading losses: How can trading losses be offset against previous year profits?

Answer 68

• If trading losses cannot be used in whole or part against current profits, a company can carry back any remaining trading losses against taxable profits (so both income and chargeable gains) from the previous accounting period.
• Company must have carried same trade in both years to be able to do so.
• Claim must be made within 2 years after end of acocunting period in whiich loss arose and if they cease trading, any loss in final 12 months can be carried back and set against any profits made in three year prior.
  *

Question 69

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - (i) Loss relief - Deducitbility of trading losses: How can trading losses be offset against future trading profits?

Answer 69

• If still trading losses unused, they are automaitcally carried forward and set against all company’s axable total profits (so both income profits and chargeable gains) in the future.
• Comapny must continue to trade in loss making trade in period which losses are used, but use of losses is not restricted to profits of same trade.
• Company may use carried forward losses against taxable profits of up to 5million in each accounting period (the deductions allowance) provided that hte deductions allowance not already used for purpose of setting off carried forward capital losses against capital gains in that same peirod.
• Where, in any accounting period, company has unrelieved taxbale profits in exceess of aviaable deductions allowance for that period, carried forward losses may e used to relieve maximum of 50% unrelieved profits known as loss restriction./

Note - Fact deductions allowance applies for purposes of both carried forward trading losses and carried forward capital losses, means company must make tactical decisions on how to allocate.

Question 70

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - (i) Loss relief - Deducitbility of trading losses: How can trading losses be offset against group relief?

Answer 70

If groupr elief exists, one company with trading loss can surrender that loss to anothe rporifable company in the group so the surrendered loss can reduce or elimate that company’s profits.

Note - There are anti avoidance rules which prevent trading losses being carried forward or back where company sold to new owner and nature of trade has susbtantially changed within 5 years of sale.

Question 71

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - (i) Loss relief - Deducitbility of trading losses: What is temporary extension of carry back of trading losses?

Answer 71

• Due to pandemic, government temorarily extended period which companies could carry back losses.
• Trading losses incurred in accounting peirods ending between 1 April 202 and 31 March 2022 could be carried back as follows:

(a) One year without a cap
A further two years, but against more recent years first subject to cap of 2million

Question 72

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - (i) Loss relief - Deducitbility of trading losses: NOTE SO AS YOUY SEE ABOVE, TRADING LOSSES DEDUCTED FROM BOTH CAPITAL GAINS AND CAPITAL LOSSES AS SEEN IN THE DIAGRAM FOR TTP

Question 73

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - (ii) Loss relief - Deducitbility of capital losses:What is the general psotion for offset of capital losses?

Answer 73

• They can only be offset against capital gains.
• They can be off set against capital gains in the current year, but generally, they cannot be carried back to a previous year.

Question 74

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - (ii) Loss relief - Deducitbility of capital losses: What if there are unused capital losses?

Answer 74

They can be carried forward and set against any capital gains in future accounting peirod.

Question 75

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - (ii) Loss relief - Deducitbility of capital losses: How may company used carried forward capital losses?

Answer 75

They may use against capital gains of up to available deudctions allowance in relevant period, provided it has not already been used for setting off carried forward trading losses against trading profits in that same peirod, see abbove for trading losses about cap/allowance.

Question 76

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - (ii) Loss relief - Deducitbility of capital losses: What is position for ubnrelieved capital gainst in excees of avialable deductions allowance?

Answer 76

Carried forward capital losses may be used to relieve a maximum of 50% of unrelieved gains.

Question 77

Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - (ii) Loss relief - Deducitbility of capital losses: How long can capital losses be carried forward?

Answer 77

They can be carried forward indefinately within company that made them but in order to crystalise the lo9ss, a claim mus be made to HMRC within four years form end of accounting period which loss arose.

Question 78

**Corporation Tax Calaculation - Step 3: Calaculate taxable total profits - LOSS SUMMARY OF ABOVE FROM WS

Answer 78

THE WORKSHOP STATES THAT YOU SHOULD START WITH THE CAPITAL GAIN AND LOSS SIDE

Question 79

Corporation Tax Calaculation - Step 4: Calculate the tax: What must you then do?

Answer 79

Apply to appropiate tax rate to taxable profit to calaculate tax payable.

Question 80

Mechanics of corporation tax self-assessment: What will determine this process?

Answer 80

There are different procedures:
* Companies with TTP of 1.5million or less
* Companies with TTP or 1.5million or more

Question 81

Mechanics of corporation tax self-assessment - (a) TTP of 1.5m or less: What is the process?

Answer 81

• Company estimates its tax liability and pays HMRC within 9 months and one day of end of accoubnting period.
• Company must file (electronically) a tax return within 12 months of the end of the accounting period to which it relates, together witb its accounts.
• Unless HMRC examine or make enquiries into tax reutnr to establish whether or not correct tax paid, company tax computation will usually be regarded as finalisted 12 months ater filing date.
• Interest will accure on any udner or over payments.

Question 82

Mechanics of corporation tax self-assessment - (b) TTP of 1.5m or more:

Answer 82

Companies with more are required to pay tax bills in four isntallments over court of relevant accounting period.

Question 83

Introduction to close companies - a) Intro: What are these companies subject to?

Answer 83

Companies which are “close” companies (broadly small companies but see below) are subject to special tax treatment and is example of anti avoidance legislation to prevent exploits.

Question 84

Introduction to close companies - b) Definitions: When will a company be a close company?

Answer 84

If it is under the control of:
* Five or fewer participators or
* Any number of partipators are also directors

Question 85

Introduction to close companies - b) Definitions: What is a participator?

Answer 85

A participator is a person having a shae or interest in capital or income of the company, such as SH’s or some creditors.

Question 86

Introduction to close companies - b) Definitions: What is the meanin of control?

Answer 86

Control means the ability to exercise control over company’s affairs, normally by voting rights, or the possesion of or entitlement to to:
* Issued share capital allowing great part so more than 50% of income of company if distrubted or - So, if question sets out 5 of SH’s have ownership of more than 50% together such as 8 shareholders own 12.5% then 5 together will own more than 50% and if 8 shareholders and 3 are directors than this would only be 37.5% so it would be clsoe company on basis of five or fewer
* Greater par of assets on winding up

Question 87

Introduction to close companies - b) Definitions: What ate the exclusions from the definition?

Answer 87

A company will not be a close company if:
* Its shares are qyuoted on recognised stock exhcnage or
* It is controlled by one or more non-closed companies and it could only be close company by treating a non-close company as one of the five or few participators having control.

E.G: A company wholly owned subsidiary of non-close company will not be subject to close company tax regime.

Question 88

Introduction to close companies - b) Definitions: How is a persons control assessed?

Answer 88

• The right snad entitlements of that persons nominees, associates and companies controlled by the individal need to be considered.
• Associate means any close releative such as spouse, aprent, child, brother or sister.
• Nominee means person owning property on behalf of another.

Question 89

Introduction to close companies - c) Close companies: Taxation effect - Loans to particpators: What does loan include?

Answer 89

Loans incldue all advances of credit except for:
* Loan in form of credit given by copany in respect of goods or services nomrally suppied by the company in course of business where the duration of credtit does not exceed six months or company normal limit.
* Loan made in ordinary course of a company’s business which incldues money lending, or
* A loan to a borrower which together with other outstanding loans made by the company to that borrower does not exceed £15,000 in aggregate and borrower works full time for company and does not have material interest in the close company.

Material interest means indirect control of more than 5% of ordinary share capital of company or entitlement on winding up of more than 5%.

Question 90

Introduction to close companies - c) Close companies: Taxation effect - Loans to particpators (i) What is the tax effect for company: What must company pay?

Answer 90

Corporation tax to HMRC on amount of loan, calaculated at rate of income tax payable on dividends by higher rate tax payers and must be paid within nine months and one day after end of accounting period.

Company may claim refund of tax if loan if repaid, satisfied, written off or waived.

Question 91

Introduction to close companies - c) Close companies: Taxation effect - Loans to particpators (ii) What is the tax effect for paricipator: What happens if loan written off or waived?

Answer 91

Participator is deemd for income tax purposes to receive a dividend equal to amount loan written off/waived but no tax effect if they pay back loan in full.

Question 92

Introduction to close companies - d) Close companies: Taxation effect - distrubtions and IHT implications What do distrubtions include?

Answer 92

Extended meaning for close companies and includes living accomodation and other benefits in kind provided to participators but not where such benefits are provided by reaosn of employment.

Question 93

Introduction to close companies - d) Close companies: Taxation effect - distrubtions and IHT implications What is the position for IHT?

Answer 93

As only individuals pay IHT, it is possible to form a company and make a transfer through the company.

However, there is anti avoidance legislation which emans a tranfer of value by a close company results in the value of the give being approoined between its shareholders.