Corporation Tax Flashcards
(28 cards)
Broadly, what is corporation tax and what are the relevant rates of tax?
Corporation tax consists of companies paying tax on income profits and on capital gains
Rates:
- Companies with taxable profits of up to £50,000 – 19%
- Companies with taxable profits over £250,000 – 25% on all taxable profits
- Companies with taxable profits over £50,000, but not exceeding £250,000 – tapered rate between 19-25%; For mainstream companies with straightforward trading profits, apply 19% to first £50k and rate of 26.5% to the balance
There is no annual exemption for CT
There are 4 main steps in a corporation tax calculation. In name only, what are these steps?
- Step 1 – Calculate income profits
- Step 2 – Calculate chargeable gains
- Step 3 – Calculate total profits and apply any available reliefs against total profits
- Step 4 – Calculate the tax at the appropriate rate
How does Step 1 in the CT calculation work?
Most common type of chargeable income is trading profit
Once you have calculated trading profit, move to Step 2
Summary of trading profit
- Chargeable receipts LESS deductible expenditure LESS capital allowances (including AIA) = Trading profit/loss
There are 4 substages to Step 2 of the CT calculation (calculate chargeable gains). What are these (in name only)?
Stage 1: Identify a chargeable disposal
Stage 2: Calculate the gain (or loss)
Stage 3: Apply reliefs
Stage 4: Aggregate remaining gains or losses
Explain Step 2, Stage 1
Stage 1: Identify a chargeable disposal
Disposal can occur via sale or gift
Chargeable assets are likely to be land, buildings and shares in other companies
- Plant and machinery are unlikely to increase in value, so likely no chargeable capital gain
Explain Step 2, Stage 2
Stage 2: Calculate the gain (or loss)
1) To calculate the gain or loss on a chargeable disposal, follow this calculation
- Proceeds of disposal (or market value in case of gift or sale at undervalue) LESS costs of disposal = net proceeds of disposal
- Net proceeds of disposal LESS other allowable expenditure (initial and subsequent expenditure) = gain (before indexation) or loss
- Gain (before indexation allowance) LESS indexation allowance = gain (after indexation)
2) If there is a gift element to a sale at an undervalue, the market value of the asset is used as the figure for proceeds of disposal
- If the sale was to a connected person, it will be deemed to have taken place at market value
- A connected person is one who controls the company, either alone or with others connected to them
3) If disposing of the asset results in a loss, this can be deducted from the chargeable gains, but not from income profits
- Unused losses can be carried forward to future accounting periods to be deducted from first available chargeable gains made by the company
What is indexation allowance?
This was introduced to remove inflationary gains from CT calculation
To calculate the indexation allowance, you need to apply to initial and subsequent expenditure (but not costs of disposal) the percentage increase in the Retail Prices Index from the date the expenditure was incurred to the date of disposal of the asset
- Used when calculating the gain on an asset owned for any period from 31st March 1982 to 31st December 2017 (frozen then)
Give an example corporation tax calculation where indexation allowance applies
Example – Q bought some land for £120k and incidental costs of acquisition were £3000. They later spent £10k on a boundary dispute. They sold the land for £285k and incidental costs of disposal were £2k
- Proceeds less incidental costs of disposal = £283k (net proceeds of disposal)
- Net proceeds less initial expenditure (£120k acquisition cost + £3k incidental costs of acquisition) less subsequent expenditure (£10k dispute) = £150k gain before indexation
- Indexation allowance on initial expenditure = £123k x 0.467 = £57441
- Indexation allowance on subsequent expenditure = £10k x 0.021 = 210
- £150k gain less indexation allowance amounts = £92349 gain
Explain Step 2, Stage 3
Stage 3: Apply reliefs
Main relief is rollover relief on the replacement of qualifying business assets
Allows companies to postpone paying CT, by using consideration received for qualifying asset to buy another qualifying asset
Main qualifying assets are land and buildings – company must use the asset in its trade, so it cannot be held as an investment
- Company shares aren’t qualifying assets
- Can sell one type of qualifying asset and buy another; relief will still apply
Company must acquire the replacement asset within 1 year before or within 3 years after it disposes of the original asset
Gain is notionally deducted from the acquisition cost of the replacement asset
- If a replacement factory is treated as being acquired for £160k (£200k cost - £40000 rolled over gain), when it is sold for £235,000
- £235k - £160k (adjusted acquisition cost) = £75k gain before indexation
After aggregating remaining chargeable gains/losses, we move to Steps 3 and 4 of the CT calculation. How does these steps work?
Step 3 – Calculate total profits and apply any available reliefs against total profits
- Add together the income profits and capital gains, which gives the total profits for the accounting period
- Trading loss reliefs would be deducted from total profits at this stage
Step 4 – Calculate the tax at the appropriate rate
- Apply appropriate tax rate to taxable total profits
Based on the below facts, go through the 4 steps for the corporation tax calculation:
X company has total sales of £2,250,000 in the most recent accounting period
They incurred various costs:
- purchase of second-hand machinery for £226,000
- stock for £435,000
- salaries of £340,000
- utility bills of £110,000
- rent of £25,000
- insurance of £7,000
X also sold a factory for £510,000 in May 2024 (indexation factor is 0.298), which it purchased for £360,000 and paid incidental costs of £12000 at the time. Costs of disposal were £21,000
X’s existing pool of plant and machinery had a written-down value of £460,000
Step 1 – Calculate income profits
Chargeable receipts (£2,250,000) less deductible expenses (income in nature, wholly and exclusively for purposes of trade):
- Stock, salaries, utility bills, rent and insurance (£917,000) = £1,333,000
£1,333,000 less capital allowances:
- Second hand machinery qualifies for annual investment allowance (£226,000)
- Existing pool of £460,000 x 18% (written down allowance) = £82,800
- £308,800 in capital allowances
Total income profits = £1333,000 - £308,800 = £1,024,200
Step 2 – Calculate chargeable gains
- Premises of £510,000 less incidental costs of disposal (£21,000) = net proceeds (£489,000)
- Less initial expenditure (acquisition cost + incidental costs of acquisition = £372,000) = £117,000 (gain before indexation)
- Less indexation (£360,000 acquisition cost x 0.298 = £107,280) + (£12,000 incidental costs of acquisition x 0.298 = £3576) = £110,856
- Gains after indexation = £117,000 - £110,856 = £6144
- No reliefs applicable
Step 3 – Calculate total profits
- Add income profits + chargeable gains = £1,030,344
- No reliefs
Step 4 – Calculate tax at appropriate rate
- £1,030,344 at 25% = £257,586 CT to pay
- If the taxable profits were £103,034 instead
- £50,000 at 19% = £9500
- £53,034 at 26.5% = £14,054.01
When can reliefs for a trading loss be claimed?
Where trading income results in a loss, the company can choose which relief to claim (if more than one available) + can claim more than one if one relief does not absorb all the losses
Cannot claim for the same loss twice though
To summarise
- Carry/across/carry-back relief and terminal carry-back relief give a refund for tax already paid
- Carry-forward relief reduces the amount of CT to pay in the future
What are carry-across and carry-back relief?
Carry-across relief – carry across trading loss for an accounting period and set it against total profits for the same accounting period
Carry-back relief – after using carry-across relief, if there are losses remaining, they can be carried back and set against total profits from the accounting periods falling in the 12 months prior to the accounting period of the loss
- Can also be used where there are no profits at all in the current accounting period to set against
Must claim the relief within 2 years from the end of the accounting period in which the loss was incurred
What is terminal carry-back relief?
When a company ceases to trade, it can carry back any trading losses and set them against total profits in the 3 years prior to the start of its final 12 months, taking later periods first
- Loss must occur within the final 12 months of trading
Example:
- Company makes a trading loss in 2024, and its accounting period ends on 31st December, which is when it ceases trading
- Can set 2024 losses against profits in 2024, and remaining losses can be set against 2023, 2022 and 2021
- Relief applies for the 3 years before the start of its final 12 months (so before 1st Jan 2024)
Must claim the relief within 2 years from the end of the accounting period in which the loss was incurred
What is carry-forward relief?
Company can carry forward its trading losses and set them against subsequent profits, until the loss is absorbed
Must claim the relief within 2 years within 2 years of the end of the accounting period in which the company will apply the losses to reduce total profits
Maximum amount that can be claimed is £5 million
How does corporation tax apply to goodwill and IP?
Goodwill and IP are intangible fixed assets.
- They are capital in nature, but receipts from transactions in intangible fixed assets are treated as income receipts for the purposes of the CT calculation
Expenditure on intangible fixed assets is generally deductible when calculating income profits
When disposed of, any profit can be rolled over into acquisition of replacement intangible fixed assets
What is a close company?
Close company is either:
- Controlled by 5 or fewer participants; or
- Controlled by participators (any number) who are directors or shadow directors
A participator is a person who owns shares or has the right to acquire shares
Control means they own more than half the shares or have more than half of the voting power or have the right to acquire more than half of the shares
What rule applies when a close company lends money to a participator?
When a close company loans money to a participator or their associate (close relative or business partner), they pay the equivalent of 33.75% of the loan to HMRC, which is refunded when the loan is repaid or written off
No tax payable if:
- Loan is made in ordinary course of a money-lending business; or
- If the loan is no more than £15,000 + borrower works full-time for the company + owns no more than 5% of the ordinary shares
This aims to prevent tax avoidance
In a group of companies, each company in a group is a separate legal entity, so will be charged to tax separately.
What is group relief for income losses and expenses?
Group relief allows the company to transfer certain losses and expenses to another in the same group. The transferee can use the loss or expense to reduce its taxable profit
A group for the purposes of group relief means that:
- One company is a 75% subsidiary of the other
- Both companies must be 75% subsidiaries of a third company
- This means the holding company must own 75% or more subsidiary’s ordinary shares (directly or indirectly)
Example - If A owns 80% of B, who owns 80% of C
- A + B = same group
- B + C = same group
- A + C = not in same group as they have an indirect shareholding of 64% only (80% x 80%)
Company A, in the same group as Company B, can transfer trading losses and management expenses to B, if the loss or expense was incurred in an accounting period which overlaps with the transferee’s
- B will use losses/expenses to reduce profits in that period
Group relief does not apply to capital losses, only income losses
A group of companies can arrange for a company to dispose of a chargeable asset owned by another group company, to maximise tax benefits.
When will this ‘chargeable disposals’ relief apply?
For this relief, a group is a company, its direct 75% subsidiaries and the direct 75% subsidiaries of these and so on
- All subsidiaries in the group must be effective 51% subsidiaries of the principal company, meaning the principal is beneficially entitled to more than 50% of the available profits and assets of the subsidiary
- Only one principal company allowed
Example – If A owns 80% of B, who owns 80% of C, who owns 75% of D
- A, B + C – same group as A owns 64% of C
- D – not in the same group as A has an indirect shareholding of only 48%
Company A, in the same group as Company B, can transfer a chargeable asset to the B on a tax neutral basis. B can use the loss to reduce its chargeable gains, so the group of companies pays less tax overall
How does rollover relief work when a company is in a group for chargeable disposals/gains purposes?
When a company is in a group for chargeable gains purposes and it disposes of a chargeable asset outside the group, it can either:
- Roll over gain into qualifying assets which it acquires
- Roll over gain into qualifying assets acquired by another group company
How do VAT and SDLT work within a group of companies?
Stamp duty and SDLT will not be charged on transfers of assets between companies in a qualifying group
A group of companies may be able to register for VAT under a single registration
How are dividends treated for corporation tax purposes?
Many dividends are exempt from CT
How does profit for the seller on a buyback of shares work for CT purposes?
If the buyback satisfies the CGT rules test (see CGT chapter), the profit will be taxed as part of the selling company’s chargeable gains
If not, it will be taxed as income
