Corporation Tax

Question 1

Who pays corporation tax?

Answer 1

Companies

Question 2

What is the corporation tax year?

Answer 2

1 April to 31 March

Question 3

How do you calculate corporation tax?

Answer 3

1. Calculate income profits
2. Calculate chargeable gains
3. Calculate total profits & apply any available reliefs against total profits
4. Calculate tax at the appropriate rate(s)

Question 4

2. Calculate chargeable gains

How do you calculate chargeable gains for corporation tax?

Answer 4

1: Identify chargeable disposal (sale or gift of chargeable assets)

2: Calculate the gain after indexation (apply indexation allowance to initial & subsequent expenditure)

3: Consider reliefs (main one available is rollover on replacement of qualifying business assets)

4: Aggregate remaining gains or losses

Question 5

2. Calculate chargeable gains

How is the gain after indexation calculated for the purposes of corporation tax?

Answer 5

1. Calculate gain before indexation: proceeds of disposal less initial & subsequent expenditure less costs of disposal

(If sale was to a connected person, deemed to have taken place at market value)

2. Apply indexation allowance to the initial & subsequent expenditure (separately)
3. Calculate gain after indexation: gain before indexation less indexation allowance

Question 6

2. Calculate chargeable gains

What is the main relief available for companies?

Answer 6

Rollover relief on replacement of qualifying business assets

Must be used in the trade of the business (eg. land, buildings, ships not shares or goodwill)

Time limit: must acquire replacement 1 year before or 3 years after disposal of original asset

Question 7

3. Calculate total profits & apply any available reliefs against total profits

What are total profits?

Answer 7

Income profits + capital gains

Question 8

3. Calculate total profits & apply any available reliefs against total profits

What are the 3 main reliefs for any losses which can be applied?

Answer 8

Carry-across/carry-back relief

Carry-back terminal relief

Carry-forward relief

Question 9

3. Calculate total profits & apply any available reliefs against total profits

What is carry-across/carry-back relief?

Answer 9

Loss in any year of trading set against total profits from same tax year

If still losses remaining, can be carried back & set against total profits in the 1 year preceding the loss

Question 10

3. Calculate total profits & apply any available reliefs against total profits

What is carry-back terminal relief?

Answer 10

Losses incurred in the final 12 months of trading are set against total profits in 3 years preceding the loss

Question 11

3. Calculate total profits & apply any available reliefs against total profits

What is carry-forward relief?

Answer 11

Losses incurred in any year of trading are carried forward & set against subsequent profits

Question 12

4. Calculate tax at the appropriate rate(s)

What are the tax rates for corporation tax?

Answer 12

Companies with taxable profits up to £50,000 → 19%

Companies with taxable profits between £50,000.01& £250,000 → 19% for first £50k of taxable profits; 26.5% for remaining balance

Companies with taxable profits of more than £250,000 → 25%

Question 13

What is a close company?

Answer 13

A company controlled by
a. 5 or fewer participators or
b. Participators who are (shadow) directors

Participator = person who owns shares / right to acquire shares in company

Controlled = own more than half shares / voting power

Question 14

What must a close company do if it loans money to a participator (or their associate)?

Answer 14

Pay HMRC money equivalent to 33.75% of loan

Exceptions

a. Loan is made in ordinary course of money-lending business or

b. Loan is:
1. No more than £15,000
2. To a borrower who works full time for the company and
3. Owns no more than 5% of shares

Question 15

Do companies pay corporation tax on distribution of dividends?

Answer 15

No - exempt

Question 16

When is corporation tax payable?

Answer 16

Within 9 months & 1 day from end of relevant accounting period

(Unless large company paying in instalments)

Question 17

When can corporation tax be paid in 4 instalments instead of 1?

Answer 17

If the company is a large company (ie. taxable profits of £1.5m+

Question 18

1. Calculate income profits

What is the most common type of income profit & how is this calculated?

Answer 18

Trading profit

= Chargeable receipts less Deductible Expenditure less Capital Allowances

Nb. dividends paid to shareholders & payment to shareholders for shares bought back are not deductible expenditure

Question 19

Example - Trading Profit Calculation
Q: How is trading profit calculated for this scenario?
Scenario:

Chargeable Receipts: £3,540,300.

Expenses: £1,975,000 (stock, salaries, utilities, rent, insurance).

Capital Allowances:
* AIA (new machinery): £75,000.
* WDA (18% of £150,000): £27,000.
* Total: £102,000.

Answer 19

Calculation:

£3,540,300 (chargeable receipts) −£1,975,000 (deductible expenses) −£102,000 (capital allowances) = £1,463,300

A: Trading profit = £1,463,300.

Question 20

Example- Corporation Tax (Using Indexation Values)

Flashcard: Corporation Tax on Chargeable Gains
Q: How is the chargeable gain calculated for the sale of company premises?
Scenario:

• Sale Price: £300,000.
• Incidental Costs of Disposal: £6,000.
• Acquisition Cost: £150,000.
• Incidental Costs of Acquisition: £2,000.
• Indexation Factor (August 2011 to 31 December 2017): 0.3.
• No Reliefs Apply.

Answer 20

Steps to Calculate the Chargeable Gain:

1. Gain Before Indexation:

• £300,000 − £6,000 − £150,000 − £2,000 = £142,000.

2. Indexation Allowance (to adjust initial purchase for inflation):

• Acquisition cost (£150,000) + incidental costs of acquisition (£2,000) = £152,000.§ always add the initial acquisition costs + incidental costs related to the initial purchase○ £152,000 × 0.3 = £45,600.

3. Chargeable Gain:

• £142,000 − £45,600 = £96,400.

Answer: The total chargeable gain is £96,400