Lecture 7- Corporation tax

Corporation tax- Tax levied on [blank_start]profits[blank_end] of [blank_start]companies[blank_end] & [blank_start]unincorporated[blank_end] associations such as clubs & political associations but not [blank_start]partnerships[blank_end]. It is paid by all [blank_start]corporate[blank_end] bodies & there are no special rules for opening & closing years (always taxed on [blank_start]actual[blank_end] basis)

Accounting period- Period for which [blank_start]corporation tax[blank_end] is charged. It starts firstly when company starts to [blank_start]trade[blank_end] & can also start immediately after [blank_start]cessation[blank_end] of last accounting period. Accounting period ceases at latest [blank_start]12[blank_end] months from beginning of accounting period & also cease at end of [blank_start]period of accounts[blank_end]. In addition, it can cease at [blank_start]commencement[blank_end] of winding up, ceases to be [blank_start]UK resident[blank_end] & ceases to be [blank_start]liable[blank_end] to corporation tax

Period of account- Period for which company makes up [blank_start]its accounts[blank_end]

If there is period of account greater than [blank_start]12[blank_end] months, accounting period needs to be split into [blank_start]first 12[blank_end] months & [blank_start]balance[blank_end] of [blank_start]time[blank_end]

Profit allocation to accounting periods (for long periods of account) are trading profits ([blank_start]time apportioned[blank_end]), capital allowances ([blank_start]separate calculation[blank_end] for [blank_start]each[blank_end] accounting period), property & miscellaneous income ([blank_start]time apportioned[blank_end]), net credit on non-trading loan relationships ([blank_start]accruals basis[blank_end]), other income or chargeable gains (when [blank_start]incurred[blank_end]), qualifying charitable donations (when [blank_start]paid[blank_end]) & dividends (when [blank_start]received[blank_end])

Income from non-trading loan relationships- Net [blank_start]interest[blank_end] received by company but also includes all other [blank_start]credits[blank_end] & [blank_start]debits[blank_end] in respect of non-trading loan relationships. It is taxed on [blank_start]accruals[blank_end] basis & consists of all bank & building society [blank_start]interest[blank_end] & [blank_start]interest[blank_end] received from other companies. It is net credit so total [blank_start]credits[blank_end] less [blank_start]debits[blank_end]

For non-trading items if [blank_start]credits[blank_end] > [blank_start]debits[blank_end] it is income from [blank_start]non-trading[blank_end] loan relationships. This is part of [blank_start]total taxable[blank_end] profits. If [blank_start]debits[blank_end] > [blank_start]credits[blank_end], deduct from income to arrive at chargeable profits ([blank_start]total taxable[blank_end] profits). It is usually calculated on [blank_start]accruals[blank_end] basis

Property income (i.e. rental income) follows [blank_start]same[blank_end] basis as that for an individual. Capital allowances are [blank_start]allowed[blank_end], but interest on loans is not [blank_start]deducted[blank_end] to arrive at property income. It is [blank_start]debit[blank_end] that is treated with other [blank_start]interest[blank_end]. Losses can be set off against other [blank_start]income[blank_end] of same accounting period & [blank_start]excess[blank_end] carried forward to set against total profits of future accounting periods

Dividends received by UK [blank_start]company[blank_end] from another UK [blank_start]company[blank_end] are not [blank_start]taxable[blank_end] but they may affect [blank_start]date of payment[blank_end] of corporation tax

Qualifying charitable donations is treated as normal [blank_start]trading[blank_end] expense. This would include [blank_start]small[blank_end] donations to local charities. In calculating adjusted trading profits you need to [blank_start]add[blank_end] back what has been [blank_start]charged[blank_end] in accounts (which would have been calculated on [blank_start]accruals[blank_end] basis), but amount that is deducted to arrive at total taxable profit is on [blank_start]paid[blank_end] basis

Chargeable gains have to be included in [blank_start]total taxable[blank_end] profit for company. Company's chargeable gains are liable to [blank_start]corporation[blank_end] tax. They are computed in similar way to those of individuals, but there are few differences. One is that companies can claim [blank_start]indexation allowance[blank_end]. Amount to be included in [blank_start]total taxable[blank_end] profit is total of all separate [blank_start]gains[blank_end] during chargeable accounting period, less all [blank_start]losses[blank_end] (net loss would be carried forward & set against future net gains)

Exemptions that apply to companies include motor [blank_start]cars[blank_end], [blank_start]tangible[blank_end] non-current assets ([blank_start]chattels[blank_end]) sold for less than [blank_start]£6,000[blank_end], “[blank_start]wasting chattels[blank_end]” (unless capital allowances claimed on them), [blank_start]gilt-edged[blank_end] securities & qualifying [blank_start]corporate bonds[blank_end]

Exemptions that do not apply to companies include [blank_start]principal private residence[blank_end] & [blank_start]annual exemption[blank_end]

Aim of indexation allowance was to [blank_start]exclude[blank_end] part of gain due to [blank_start]inflation[blank_end]. This was frozen from [blank_start]31/12/17[blank_end], so still partly applies to companies. [blank_start]Indexation[blank_end] relief will apply now from date of purchase/incurred up to [blank_start]31/12/17[blank_end]. It has to be calculated [blank_start]separately[blank_end] for each item of expenditure. It is calculated by applying change in [blank_start]retail price[blank_end] index

Indexation factor is calculated as: (RPI [blank_start]month of disposal[blank_end] less RPI [blank_start]month of expenditure[blank_end]) divided by RPI [blank_start]month of expenditure[blank_end]

Restrictions to indexation are that it is frozen from [blank_start]31/12/2017[blank_end], if retail price index goes [blank_start]down[blank_end] (between purchase & sale) there is no [blank_start]allowance[blank_end]/no [blank_start]charge[blank_end], there is no indexation allowance on [blank_start]incidental costs[blank_end] of [blank_start]disposal[blank_end] & finally, indexation allowance cannot convert [blank_start]gain[blank_end] into [blank_start]loss[blank_end], or increase [blank_start]loss[blank_end]

Corporation tax is chargeable according to [blank_start]financial years[blank_end]. [blank_start]Financial year 2020[blank_end] is from 1st April 2020 to 31st March 2021. Corporation tax rates are usually set for financial year by [blank_start]Budget[blank_end] in advance. Then, if necessary allocate [blank_start]total taxable[blank_end] profit to appropriate [blank_start]financial year[blank_end] & will be taxed at [blank_start]rates[blank_end] that apply for those years. Profits are allocated on [blank_start]time[blank_end] basis

Corporation tax must be paid [blank_start]electronically[blank_end] since 1/4/11. Date of payment of corporation tax for small & medium sized companies is [blank_start]9 months & 1 day[blank_end] after end of accounting period. Large companies pay by [blank_start]instalments[blank_end]

Large company (for this purpose) is one with augmented profits of over [blank_start]£1.5m[blank_end]. Very large company (for this purpose) is one with augmented profits of over [blank_start]£20m[blank_end]. Augmented profits are [blank_start]total taxable[blank_end] profits plus any [blank_start]dividends[blank_end] received. However, dividends from companies which are [blank_start]51%+ subsidiaries[blank_end] are ignored. In working out applicable augmented profits, profits are [blank_start]divided[blank_end] by number of companies in group. If accounting period is [blank_start]less[blank_end] than 12 months, limit is [blank_start]adjusted[blank_end] accordingly. Basis of instalments is based on company's own [blank_start]estimate[blank_end] of current year profits. Interest would be charged if there are any [blank_start]underpayments[blank_end] & paid if there are any [blank_start]overpayments[blank_end]

Payment dates for large company is in instalments which are paid on [blank_start]14th[blank_end] day of [blank_start]7th[blank_end] month of year, [blank_start]14th[blank_end] day of [blank_start]10th[blank_end] month of year, [blank_start]14th[blank_end] day of [blank_start]1st[blank_end] month of next year & finally, on [blank_start]14th[blank_end] day of [blank_start]4th[blank_end] month of year. They are paid on [blank_start]quarterly[blank_end] intervals

Payment dates for very large company is in instalments which are paid on [blank_start]14th[blank_end] day of [blank_start]3rd[blank_end] month of year, [blank_start]14th[blank_end] day of [blank_start]6th[blank_end] month of year, [blank_start]14th[blank_end] day of [blank_start]9th[blank_end] month of year & finally, on [blank_start]14th[blank_end] day of [blank_start]12th[blank_end] month of year. They are paid on [blank_start]quarterly[blank_end] intervals

Companies have to do [blank_start]self-assessment[blank_end]. HMRC issues notice ([blank_start]CT603[blank_end]) to company to do corporation tax return. Corporation tax return ([blank_start]CT600[blank_end]) has to be submitted to [blank_start]HMRC[blank_end] due later of [blank_start]12[blank_end] months after end of [blank_start]chargeable[blank_end] accounting period, [blank_start]12[blank_end] months end of [blank_start]period of account[blank_end] in which accounting period falls or [blank_start]3[blank_end] months after Inspector issues notice. It must be completed [blank_start]online[blank_end]

Interest on unpaid corporation tax runs from [blank_start]due date[blank_end] to [blank_start]date paid[blank_end]. Interest on overpaid corporation tax runs from [blank_start]due date[blank_end]/[blank_start]date paid[blank_end] to [blank_start]date repaid[blank_end]. Amounts paid/received on under/over paid corporation tax are treated as part of [blank_start]non-trading loan[blank_end] relationship so it will be net debit/net credit for [blank_start]non-trading loan relationship[blank_end]

Penalties can apply if [blank_start]returns[blank_end] or [blank_start]accounts[blank_end] are filed late. There can also be penalties for not notifying [blank_start]HMRC[blank_end] of company's [blank_start]liability[blank_end] to corporation tax or for [blank_start]submission[blank_end] of incorrect corporation tax return & for failure to keep [blank_start]records[blank_end]