CT Return 2 - 7: Trading Profits Flashcards
The legislation/rules governing what companies must do, may do, and how they are formed,
Companies Act 2006.
The 2 different types of company
Unlimited
1) Unlimited companies - Owned by shareholders
Limited
2) PLC - Public Limited companies
3) Private Limited companies:
4) Companies limited by guarantee:
Unlimited
1) Unlimited debts accrual apportioned to their shareholding
Limited
2) Limit of liability to shareholding value - Share capital = 50,000. : On stock exchange (usually) and open to public
3) limit of liability to shareholding value. A private limited company must have one shareholder, or member, and one director.
4) shareholders guuarantee liability up to a fixed amount
Different types of shares
There are loads, but the main 2 are
1. Ordinary Shares:
2. Preferred Ordinary Shares
1) Dividends only payable if profits are made, vote at shareholders meetings and share in surplus assets in winding up
2) Dividend is paid on these before any is paid on ordinary shares - often issued to investment banks as part of financing arrangements
What period is a company charged to profits on?
A company is charged to corporation tax on its profits for an AP.
Income plus chargeable gains less specified deductions
1) How are CT profits calculated?
2) Where to start for computing CT?
1) To compute CT payable we must determine the CT profit:
Taxable income from all sources wherever it arises
PLUS
any chargeable gains
LESS
certain specified deductions
2) The starting point for computing CT is the profit or loss shown in the company’s accounts
Profits chargeable to CT include all a company’s income and its capital gains too. A company is not chargeable to capital gains tax and, usually, is not chargeable to income tax either.
The starting point for computing a company’s taxable trading profit or loss for corporation tax purposes is the profit or loss shown in the company’s accounts
Addbacks include (4)
Addbacks include:
1) chargeable gains
2) Business entertainment or gifts (Section 1298)
4) non-trade related income/expenses - not wholly and exclusively for purposes of trade
5) remuneration not paid within 9 months of the end of POA
Deductions for CT include (5)
Deductions include:
1. Capital Allowances
2. Replacing or altering capital not otherwise disallowed as capital allowance
3. Employee Restritive undertakings (as long as these are taxable for employee)
4. Non-trade related income
5. Redundancy payments
Is cost of repairing an asset a deduction?
Yes - remember capital allowances!
The cost of repairing a capital asset is not capital expenditure and would be allowed as a deduction.
Difference between assets used in and individual and a company?
A company cannot use assets privately. (No adjustment to profits but BIK)
An individual can
It is the employees of the company who use the company’s assets for private purposes. If they do so, they are taxed on the value of the benefit arising and pay tax under the rules in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).The company does not have to adjust its profits.
Sometimes costs or expenses which may otherwise be disallowed are, in fact, allowed, an example being the company paying the costs of a holiday for the director. That cost may actually be part of the director’s remuneration package, so would be allowed as an expense of the company but it would also be taxed under ITEPA in the hands of the director.
What is a company?
“…Any body corporate or unincorporated association”
and excludes…
partnerships, a local authority or a local authority association.
Section 1121 CTA10 defines in wide terms
Many clubs and societies are, in fact, unincorporated associations but are treated as companies and pay CT.
Is a Non-resident company liable to CT in uk?
7.3.2 Non-resident companies
Liable to CT on its profits if carries on trade in the UK through a **permanent establishment. **
What is a Financial Year?
CT’s equivalent to SA tax year
A financial year (FY) is the CT equivalent of the income tax year for individuals and partnerships. However, it runs from 1 April to 31 March rather than from 6 April to
5 April. Each FY is known by the year in which it starts. So, the FY starting on 1 April 2021 is FY21.
If an AP were to fall into more than one FY, the amount of the profits, or indeed loss, arising in that AP must be apportioned between the FYs in which the AP falls. Section 8(5) CTA09 refers here.
Most common badges of trade for CT
1) a profit-seeking motive.
2) Goods are modified
3) Goods serving no purpose to the trader unless they are disposed of
4) Legislation extends the meaning of trade to include offices and farming.
Current CT rates
Small profits rate: 19% profits of <£50,000
Marginal Relief - £50,000 - £250,000
Main rate: 25% if profits >£250,000
