CORPORATION TAX

1. CORPORATION TAX WEEK 6

2. INTRODUCTION All UK resident Companies are assessed to CT on there worldwide income and chargeable gains. Exam! Very important topic with a 25 or 30 mark question. Bases of Assessment • CT is assessed on chargeable gains & income for the chargeable accounting period (CAP). • CAP is the period for which a charge to CT is made. • Period of account is the period for which a company prepares accounts; usually 12mths but may be longer or shorter.

3. Chargeable Accounting Period (CPA) • A CAP starts either when a company starts to trade (receives income) or when the previous accounting period ends. • It ends 12 months after the beginning of the accounting period; the end of the company’s period of accounts; or the date when a company ceases to trade. • For CT a CAP can never be long than 12 months. • Where a company has an accounting period of more than 12 months, the CAP must be divided into the first 12 months and than the remaining months.

4. Residency • A company is resident in the UK if it is incorporated in the UK or if it is incorporated overseas but it’s central management and control is in the UK. • A company is not resident incorporated overseas or if it is it’s central management and control overseas. Taxable Total Income • It’s the aggregate of income from all world wide sources (income and chargeable gains) less gift aid payments.

5. Layout of a CT Computation Company Name Corporation tax computation for the Year Ended 31 march 2011. £ Trading profits X Interest received X Property Income X Chargeable gains X Total trading Profits X Less Gift Aid (X) Taxable Trading Profits X

6. Example Westmorland Ltd has the following income and outgoings for the year ended 31 March 2011. £ Tax adjusted trading profit 1,456,500 Property business profit 25,000 Interest receivable 10,000 Chargeable gains 35,000 Dividend from UK companies 14,400 Gift Aid donation (10,000) Compute the taxable total profit for the ended 31st March 2011

7. The CT Liability The tax rate is determined by the financial year (FY) and the augmented profits (A). • FY runs from 1April to 31 March (different from a tax year that runs from 6 April to the 5 April) • The following rates apply. Augmented Profits Rate £0 – £300,000 21% Between £300,000 and £1,500,00 28% less marginal Relief Over £1,500,000 28% The Upper and lower limits relate to a financial year. Where such is not the case, the limits must adjusted accordingly.

8. Augmented Profits It is arrived at as follows £ Taxable total profits X Plus: Franked investment Income (FII) X Augmented Profits X Franked Investment Income [FII] Although All divided from UK and overseas companies is exempt from CT it is used in determining the corporation rate • FII is the divided received plus the associated 10% [tax deducted at source] • FII is used to arrive at the augmented profit figure used in determining CT rate as above. • Divided received from a 51% group is not included in the FII

9. Marginal Relief If augmented profit falls between the lower & upper limit, the company is said to be marginal and it taxable profits are calculated as follows; £ Taxable total profits @ main rate (28%) X Less: Marginal relief Standard fraction X [U-A] X N/A (X) Corporate Tax liability X Where; U is “augmented profits” up limit for the year A = Augmented profits N = Taxable total profits Standard fraction = 7/400

10. Example Small Ltd has the following total profits for year ended 31st March 2011. £ Trading profits 260,000 Property business income 40,000 300,000 Less: Gift Aid donation (10,000) Taxable Profits 290,000 Calculate the company’s tax liability if: • No dividends are received • £9,000 of the divided are received • £45, 000 of the dividend are received [solution needed]

11. Accounting Period Straddling 31st March • Where a company’s accounting period fall into two financial years and the CT calculated for each year. Please note that the CT rates are the some as they were in 2008. Example Flute has taxable profits of £400,000 and received dividend from UK companies of £45,000 in the year ended 30 September 2011. Calculate Flute’s CT liability for the year ended 30th September 2011. [solution needed]

12. Taxable Total Profits Trading Profits The rules are very similar to those in the calculation of sole traders trading profit. And the following adjustment are Made [which also apply to sole traders]; • Disallow expenditure that is not wholly and exclusively for the purpose of the business • Disallow entertainment [except staff] • Capital expenditures are disallowed • Adjust for leased high emission cars • Adjust for gifts to customers • Disallow depreciation • Adjust for lose or gain on disposal of capital items • Add back gift aid • Adjust for non trading income

13. Key Differences • Private use adjustment; they are no restriction on private use for companies. Any private expense is an allowable deduction: the private use of assets is ignored as there is no restrictions on private use. However the employee might suffer income tax on the benefits received as an employee. • Interest payable/receivable; companies apply the loan relationship rules • Interest payable in relation to trading is deductable against trading profits • Interest payable in relation to non trading must be added back to trading profits • Any interest received must be deducted from trading profits • Dividend; Any dividend payable are a distribution of profits and not a trading expense and must therefore be disallowed as a deduction.

14. Capital Allowances: the same principles as those taught in week five of the course will apply here. However there is additional rules apply as follows: • Motor cars: • the treatment is the same as in sole traders the start date is how ever 1st April instead of 6th April 2009. • Those cars that are purchased after 1st April will treated according to carbon emission table. [See Table on Slide 11 week 5] • Those that are purchased before 1st April 2009 will be treated according to the old rules [inexpensive & expensive cars]. • Exam! There will be no new purchases of cars but there will be balances brought forward in relation to old cars.

15. Short and Long Accounting Period • CA are given in relation to dates of acquisition and disposal in the account period. • AIA and WDA are proportional reduced to reflect accounting periods less than twelve months • However FYA is given in full • Where the accounting period is longer than twelve months, the period is divided into two periods: first full twelve months and the other the balance: CA will computed for both periods. • Private use Adjustments • No private use CA adjustments are made on companies for assets used by directors or employees. • Pre Trading Expenditure • The rules are the same as those for sole traders. • Trading expenses incurred in the seven years before comment of trade is treated as incurred on the first day of trade. CA will be claimed in the first CA computation.

16. Example Bill Ltd prepares accounts to 30 April. The company’s tax written down values on 1st May 2010 were as follows: General pool £23,500 Expensive car £16,600 The expensive car is used by the managing director for 25% of the time for private purpose. In the two years ended 30th April 2012 the following capital transactions took place: Year Ended 30th April 2011 1st November 2010 Purchased plant for £13,260 10th November 2010 Sold two lorries [bought for £8,450 each] for £2,500 each. And two replacement lorries were bought for £5,250 Year ended 30th April 2012 1st November 2011 Bought a car with emissions of 149g/km for £7,500 1st December 2011 Sold the expensive car for £12,000 Calculate CA available to Bill Ltd for the ended 30th April 2011 and 30th April 2012. Assume the FY 2010 rules apply throughout. Solution Needed

17. Interest Income: Loan Relationship Rules All interest received or paid by a company is dealt with under the loan relationship rules and for the to be applied correctly, there has to be a correct identification of trading and non trading which are: • Payments related with borrowing money for example • Interest on overdraft, bank loans, corporate debts • Other costs such as arrangement fees • Income received from the leading of money: • Interest income [deposits, loans, government stock and corporate bond ]

18. Trading Vs non trading purpose • All interest received will be non trade unless the business is in the trade of lending money. • Non trade interest received would include interest from: gilts, loan notes, loan stock and bonds. • Examples of trading interest payable include: • interest on a loan taken out to purchase plant and machinery for the business • Loan or overdraft to fund the daily operation [working capital] • Issue of loan note to fund trading operation • Examples of non trading interest payable include: • Interest on a loan taken to acquire the share of another company • Interest on a loan to purchase a commercially let property [interest related to trading property]

19. Interest income • This is treated as non trading interest income • Interest receivable should be deducted from adjusted profits and added to corporation tax as interest income [reclassification] • Accrued interest income [received & to be received] to included in interest income. • Interest is received gross by companies, hence no grossing up is required. • Interest Paid • Interest paid or to be paid for a trading purpose is deductable as a trading expense. • Non trading interest is added back to trading profits and deducted from interest income • Assessment in taxable profits • All interest is deductable on an accrual basis • Account are on accrual basis there the accounts figure is also the tax amount • They maybe an adjustment for opening and closing accruals of interest where there is only cash payments • Where interest income is more than interest payable, the net is assessed as taxable interest income • The situation where interest payable exceeds interest receivable, is not examinable in F6

20. Property Business Income • Treatment for companies • It has to be property that is surplus to the current company needs • The rules are the same as sole traders • Taxed on an accrual basis • Allowable expenses are those associated with the normal running and upkeep of the property • Differences from sole traders property income • Assessed on the profit arising in the accounting period and not the tax year • Treatment of interest payable: interest on a loan to acquire or improve an investment property is not an allowable deduction from property income: it is deducted from interest income [loan relationship rules] • Treatment of property losses: profits and losses are added together to obtain the property business loss or profit. The loss is: • 1st set off against profits [before gift aid] of the same accounting period • 2nd carried forward to be set off against profits [before gift aid] in the future • Also available for group relief.

21. Lease Premium • This is treated the way same as for sole traders where an element is treated of the premium is taxed as property business income [Week 2 Slide 1-9]

22. Gift Aid for Companies Tax treatment is different from that of individuals. • For individuals • Gift aid payments are paid net of tax at the basic rate • Tax relief is given by extending the basic rate bands by gross of the gift aid paid in the tax year • For Companies • Gift aid payments are paid gross • The amount paid in the accounting period is deducted from total profits in calculating taxable total profits • If the amount of Gift aid paid exceeds the total profit, no relief is given for the excess • Home Work! Comprehensive Example: Page 597 in the text book

23. Long Accounting Periods • Where the accounting period is over twelve months, it will be divided into two with the first being twelve months and the rest making the second. • Below are the rules for income allocation.