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8/7/2019 Lecture 10 - Corp tax
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Taxation
DFA 3004
Lecture 10
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Corporation Tax
Company: any corporate body (limited or unlimited) orunincorporated association, e.g. sports club
Corporation Tax: tax that companies pay on their profits
A companys chargeable profits include its income and
its chargeable gains Corporation tax is charged in respect of accounting
periods
Important to distinguish between: Accounting period: period for which corporation tax is charged
Period of account: period for which a company prepares set ofaccounts
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Accounting Period
An AP starts when: Company starts to trade (or receives income chargeable to CT) or
The previous AP ends
AP ends on the earliest of: 12 months after beginning of AP
The end of the companys period of account The date the company begins or ceases to trade
Important: length of AP can never exceed 12 months. If a companyhas a period of account exceeding 12 months (a long period), it issplit into 2 APs: the first 12 months and the remainder
E.g: If X ltd prepares accounts for the 30 months to 31 March 2010,
the AP are: 12 months to 30 Sept 2008, 12 months to 30 Sept 2009 and 6 months
to 31 March 2010
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Financial Year
Tax rates are set for financial years
A financial year runs from 1 April to the
following 31 March. For e.g. the yearended 31 March 2010 is the Financial year
2009 (FY 2009)
This should not be confused with a tax
year, which runs from 6 April to the
following 5 April
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Residence of companies
Company is UK resident if: It is incorporated in the UK or
If it is incorporated abroad and its central management andcontrol are exercised in the UK
Central management and control are taken to be wherethe board of directors meet
E.g: Smallville is a company incorporated in France. Ithas its head office in London where the Board ofDirectors meet monthly. It trades throughout the
European Union.
Is Smallville resident in the UK?
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PCTCT
Computation of Profits Chargeable to
Corporation Tax (PCTCT):
Trading income xInterest income x
Dividends from non-UK companies x
Property business profit x
Chargeable gains x
Total profits x
Less: Gift Aid donations (x)
PCTCT X
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Trading income
Important: dividends received from UK residentcompanies are usually exempt and so notincluded in PCTCT
Trading income of companies is derived fromthe net profit figure in the accounts, just as forindividuals
There are some minor differences
Gift Aid donations are paid gross by a companyand deducted when computing PCTCT
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Profits
A company pays corporation tax on its profits chargeable tocorporation tax.
Profits is PCTCT plus franked investment income (FII)
Although we tax PCTCT, another figure needs to be calculated(profits) to determine the rate of corporation tax to use to tax
PCTCT FII: grossed up (x 100/90) amount of dividends received from UK
and non-UK companies
Exception: Dividends which are received from a company which is a51% or more subsidiary of the receiving company or from acompany of which the recipient company is a 51% or more
subsidiary of the paying company. These dividends are completelyignored for corporation tax purposes.
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Rates
Rates of corporation tax are fixed for financial years
It is determined by: The financial year
Profits of the company
If profits are < 300,000 (the lower limit), the small companies rateapplies and PCTCT is charged at the small companies rate
If profits are > 1,500,000 (the upper limit), the full rate appliesand PCTCT is charged at the full rate
In exams, the rates will be provided.
Where profits are between 300,000 and 1,500,000, a specialmarginal relief applies.
Note: Although corporation tax is calculated on the PCTCT, it is theprofit figure that determines which rate to use.
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Marginal relief
Small companies marginal relief applies where the profits of an APof a UK resident company are over 300,000 but under 1,500,000.
Step 1: Calculate the corporation tax at the full rate (PCTCT x fullrate)
Step 2: Deduct the marginal relief from the corporation tax where
marginal relief is: (M-P) x I/P x marginal relief fraction
Where M = upper limit (currently 1,500,000)
P = profits
I = PCTCT
The marginal relief fraction is 7/400 for FY 2009 and FY 2008.
All this information is given in exams but need to remember what M,P and I stand for!
Do Lenox e.g
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Example
Lenox Ltd has the following for the year ended 31 March 2010:
PCTCT 296,000
Dividend received 1 Dec 2009 12,600
Calculate the corporation tax liability.
Small companies rate: 21%
Full rate: 28%
Lower limit: 300,000
Upper limit: 1,500,000
Marginal relief fraction: 7/400
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More on AP
An AP may fall within more than one Financial Year FY
If rates and limits for corporation tax are the same in both FYs, taxcan be computed for the AP as if it fell within one financial year
If rates and/or limits for corporation tax are different in the Financialyears, PCTCT and profits are time apportioned between the
Financial years. This will be the case where a company is a small company with an
AP partly in FY 2008 and partly in FY 2009.
Important: It is necessary to adjust the upper and lower limits.
Do the Elliot e.g.
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Short APs
If an AP lasts less than 12 months, the upper and lower limits whichare used to determined tax rates are pro-rated on a time basis.
E.g: Spot Ltd prepares accounts for the 6 months to 31 March 2010.PCTCT for the period were 200,000 and no dividends werereceived.Calculate the corporation tax for the period;
Solution: Upper limit 1,500,000 x 6/12 = 750,000
Lower limit 300,000 x 6/12 = 150,000
As profits fall between the limits small companies marginal relief applies.
CT (FY 09) is 200,000 x 28% = 56,000
Less Small companies marginal relief:
7/400 x (750,000 200,000) = 9,625Therefore, CT = 56,000 9,625 = 46,375
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Long Periods of Account
Remember: an AP cannot be more than12 months long
If period of account is >12 months, it mustbe split into two APs, the first fo 12 monthsand the second of the balance
Need to pro-rate the upper and lower limits
on a time basis for the second (short) AP
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Trading Profit
Earlier, we adjusted a sole traders trading profit for taxpurposes
Rules for companies are similar: Disallow expenditure which is not wholly and exclusively for
trade purposes Disallow entertaining (except entertaining staff)
Disallow expenditure on capital items
Adjust for expensive leased cars
Adjust for gifts to customers
Disallow depreciation Adjust for profits/losses on disposal of capital items
Adjust for non-trading income
Add back Gift Aid donations
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Trading profit
Differences are: Private use adjustments:
Any private use of assets by director/employee is ignored inthe capital allowances calculation.
Private expenses of director/employee are fully allowable
Interest payable/receivable: For companies, we have the loan relationships rules
If a company borrows or lends money, including issuing orinvesting in debentures or buying gilts, it has a loan
relationship Trading loan relationships are dealt with as trading income.
Non-trading loan relationships are dealt with as interestincome.
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Trading profits
Trading loan relationships:
Any interest payable or other debt costs, charged
through its accounts are allowed as a trading
expense and are therefore deductible incomputing trading profits
Any interest income or other debt returns, arising
on a trading loan are treated as a trading receipt
and are taxable as part of trading profit. This is
not common.
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Trading profits
Non-trading loan relationships: Any debits and credits must be pooled.
For e.g, a company paying interest on a loan
taken out to purchase an investment property willnot be able to deduct the interest from tradingprofits for tax purposes.
Instead, this non-trade debit must be netted offagainst non trade credits such as bank interest
A net credit (i.e. income) on the pool ischargeable as interest income.
Relief is available if there is a net deficit (i.e.loss)
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Trading profits
Dividends payable Dividends payable by a company are an
appropriation of profit and are not allowable as atrading expense
Capital allowances A companys accounting period can never exceed
12 months
If period of account > 12 months, it is divided into
two: one for the 1st 12 months and one for thebalance. Capital allowances must be computed foreach period separately.
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Classwork
Xenon Ltd makes up an 18 month set ofaccounts to 30 September 2010 with thefollowing results. Trading profits 180,000
Property income: 18 months @ 500 accruing permonth 9,000
Capital gain (1 Aug 2010 disposal) 250,000
Gift aid donation (paid 31 March 2010) 50,000
Question: what is PCTCT for each of the accountingperiods based on the above figures?
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Corporation Tax
Chargeable gains for companies are computed
in broadly the same way as for individuals
However, indexation allowance applies and
there is no annual exemption
Companies do not pay capital gains tax
Instead their chargeable gains are included in
the PC
TC
T
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Corporation tax
Therefore, when computing chargeable
gains for companies, bear in mind the
following 3 major differences:
Relief for inflation is available. Relief is called
the indexation allowance.
No annual exemption is available.
Different matching rules for shares apply if theshareholder is a company.
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Indexation Allowance
What is its purpose?
To remove the inflation element of a gain from taxation
In economics, inflation is a rise in the general level ofprices of goods and services in an economy over a
period of time. Companies are entitled to indexation allowance from the
date of acquisition until the date of disposal of an asset
Indexation factor is: RPI for month of disposal RPI for month of acquisition
R
PI for month of acquisitionThe calculation is expressed as a decimal and is rounded to 3 d.p.
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Indexation Allowance
Indexation allowance is available on the
allowable cost of the asset from the date of
acquisition (including incidental costs of
acquisition) It is also available on enhancement expenditure
from the month in which such expenditure
becomes due and payable.
Indexation allowance is not available on the
costs of disposal.
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Illustration
An asset is acquired by a company on 15 February 1983(RPI = 83.0) at a cost of 5,000. Enhancementexpenditure of 2,000 is incurred on 10 April 1984 (RPI= 88.6). The asset is sold for 25,500 on 20 December
2009 (RPI = 207.2). Incidental costs of sale are 500.Calculate the chargeable gain arising.
Indexation allowance (IA) cannot create or increase anallowable loss: If there is a gain before IA, the IA can reduce that gain to zero
but no further If there is a loss before the IA, there is no IA
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Capital losses
Capital loss arises if proceeds for asset are lower thanthe allowable expenditure
Remember: IA cannot create or increase a capital loss
Where allowable losses arise, they are set off againstcapital gains arising in the same AP
Any loss remaining, is carried forward againstchargeable gains of futures APs, as soon as they arise
Capital losses can never be set off against any other
income of a company
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Shares and securities
There are special rules for matching shares sold
by a company with shares purchased
For companies, the matching of shares sold is in
the following order: Shares acquired on the same day
Shares acquired in the previous 9 days. If more than
one acquisition, on a FIFO basis
The shares in the same pool (s104 pool)
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Shares and securities
Nor Ltd acquired the following shares in Last plc:
Date of acquisition No of shares
9.11.02 15,000
15.12.04 15,000
11.7.09 5,000
15.7.09 5,000
Nor Ltd disposed of 20,000 shares on 15 July 2009. How to
match it?
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Share pool
The share pool for companies is different to the share pool forindividuals
The pool keeps a record of the: Number of shares acquired and sold
Cost of the shares
Indexed cost of the shares (i.e. cost plus indexation allowance) Disposals and acquisitions which affect the indexed value of the
share pool are termed operative events
Each purchase and sale is recorded in the pool, but the indexed costmust be updated before recording the operative event
When calculating IA in the share pool, the indexation factor is not
rounded to 3 d.p.
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Share pool
Bonus Issues: When bonus shares are issued, all that happens is
that the size of the original holding is increased
Since bonus issues are at no cost, no need to adjustthe original cost and there is no operative event
Rights issues: Size of original holding is increased
New shares are paid for and this results in an
adjustment to the original cost
When calculating the IA, expenditure on a rights issueis taken as being incurred on the date of the issue
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Securities and shares
Example:
S Ltd bought 10,000 shares in T plc in May 2000(RPI = 170.7) at cost of 45,000.
There was a 2 for 1 bonus issue in October 2002.There was a 1 for 3 rights issue in June 2006 (RPI= 198.5) at a cost of 4 per share. S Ltd took upall of its right entitlement.
S Ltd sold 20,000 shares in T plc for 120,000 in
Jan 2010 (RPI 206.8). Calculate the chargeablegain.
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Rollover relief
The only relief available to companies is roll-over relief
As for individuals, a gain may be rolled over by a company wherethe proceeds on the disposal of a business asset are spent on areplacement business asset under rollover relief
Conditions:
Old assets sold and new asset bought are both used only in the trade Old and new assets both fall within either land and buildings or fixed
plant and machinery
Reinvestment of proceeds takes place in a period beginning 1 yearbefore and ending 3 years after date of disposal
New asset is brought into use in the trade on its acquisition
Note: Goodwill is not a qualifying asset.
The gain deferred is the indexed gain (i.e the gain after IA)
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Losses
Trading losses may be relieved.
The following reliefs are available:
Set-off against current profits
Carry back against earlier profits
Carry forward against future trading profits
A company must set off a trading loss which is
carried forward against income from the same
trade in future APs.
Relief is against the first available profits
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Losses
Example: Poppy Ltd has a current tax adjusted trading loss of 25,000 forthe year ended 31 March 2009.
The companys projected trading profits are as follows:
Y/ended 31 March 2010: 14,000
Y/ended 31 March 2011: 6,500
Y/ended 31 March 2012: 15,600Poppy Ltd also receives property business income of 5,000 each year.
Calculate Poppy Ltds PCTCT for the 4 years ended 31 March 2012 assumingthat the loss for year ended 31 March 2009 is carried forward and offsetunder s393(1) ICTA 1988.
Loss relief against total profits is given before gift aid donations.
A company may claim to set a trading loss incurred in an AP against total
profits before deducting gift aid donations of the same AP
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Losses
Current year relief: must be for the whole loss. Itis not possible to restrict the amount of the lossoffset.
Carry back relief: trading losses are set offagainst total profits (before deduction of Gift Aid)of the previous 12 months (LIFO basis)
Where loss-making period is < 12 months, noapportionment
The loss can be carried back in full, againstprofits within the preceding 12-month period
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Losses
Terminal loss:
Trading losses in the last 12 months of tradingcan be carried back and set against profits of
the previous 36 months without limit Property business losses:
Set off first against non-property businessincome and gains for the current period and
then carried forward against future income
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Groups A group exists for taxation purposes where 1company is a subsidiary of another
The % shareholding involved determines the
taxation consequences of the fact that there is agroup
3 types of relationship for tax purposes: Associated companies
75% subsidiaries Groups for chargeable gains purposes
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Associated companies
Associated companies: 2 companies are associated with each other if either:
One of the companies is under the control of the other or
They are both under the control of the same person or persons(can be company, individual or partnership)
Control means ownership of more than 50% of thecompanys issued ordinary share capital
Note: Companies which are associated for part of an AP are deemed
to be associated for the whole AP Both UK resident and overseas resident companies are included
Dormant companies are excluded
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Associated companies
Tax implications:
Upper and lower limits forCT are divided by
the number of associated companies
Intra-group dividends are not treated as FII
when calculating profits
Only one AIA is available for the group
(50,000 per annum)
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Groups
Within a 75% group: A company is a 75% subsidiary of another.
2 companies are members of a 75% group where one is a 75%subsidiary of the other or both are 75% subsidiaries of a 3rd
company current period trading losses, excess property business lossesand excess gift aid donations can be surrendered between UKcompanies.
CGT group: At each level, there is a 75% holding
The top company has an effective interest of over 50% in thegroup companies
assets are transferred at no gain and no loss
O Ltd e.g and P Ltd e.g