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CHAPTER 13
CORPORATION TAX
Companies resident in the UK pay corporation tax on worldwide income and gains.
UK Resident Company:
a) If it is incorporated in UK OR
b) Not Incorporated in UK but centrally managed and controlled from UK.
Centrally controlled and managed means meetings of board if directors.
Period of Account and Chargeable accounting period:
Period of Account: Duration for which company prepares it accounts. It is generally 12 months long, but
can be longer or shorter.
Chargeable Accounting Period: Period according to which corporation tax is paid. It can be ≤12 months
but never >12 months
 When accounting period start?  When accounting period end? It ends on earlier of:
– When a company starts to trade – 12 months after its start
– When the previous accounting period – The end of the company's periods of account
ends. – The company's ceasing to be resident in the UK
– When a co. ceases to trade, or when its profits being liable to
corporation tax are cease
Calculation of Corporation Tax Liability:
X LTD; Corporation Tax Computation For P/E ended XX/XX/XX  Financial Years (FY):
£ The tax rates to be used for corporation tax
Trading Profits XX are set for Financial Years (FY). Financial starts
Interest Income XX on 1st April and ends on 31 march.
Income From Foreign Sources XX FY 2023 = 1 April 2023 to 31 March 2024
Rental Income XX
Chargeable Gains (profit on disposal of assets) XX
Total profit XX
Less: Qualifying Charitable Donations (XX)
Total Taxable Profit (TTP) XX
Add: Dividend received from non-associated companies XX
Augmented Profit XX
Qualifying Charitable Donations: Donations are made gross by companies and deducted from main
proforma. Exceptions: Donation allowable from trading profit and donation to political party are not
deducted as QCD in proforma If donations exceed total profit then unrelieved donations are wasted
except 75% group relief is claimed.
Rate of corporation tax
For the financial years 2021 and 2022, the rate of corporation tax was 19%. This single rate applied
regardless of the level of a company’s profits.
For the financial year 2023, there are two rates of corporation tax:
A small profits rate of 19% which applies where a company’s augmented profits do not exceed a lower
limit of £50,000; and A main rate of 25% which applies where a company’s augmented profits are
£250,000 or more (the upper limit).

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The lower and upper limits are proportionately reduced for short accounting periods and also according
to the number of associated companies (see later for an explanation of associated companies).
Augmented profits are a company’s taxable total profits plus dividends received. However, dividends from 51%
group companies are excluded.
Marginal relief
Marginal relief eases the transition from the small profits rate to the main rate of corporation tax where
augmented profits fall between £50,000 and £250,000.
Corporation tax is calculated at the main rate of 25%, with this figure then reduced by marginal relief.
The formula for calculating marginal relief is:
(Upper limit – Augmented profits) x Standard fraction x Taxable total profits
Augmented profits
If no dividends are received, the final part of the formula (Taxable total profits/Augmented profits) can
be omitted since both taxable total profits and augmented profits are the same amount.
Associated companies
The lower and upper corporation tax limits are effectively shared if a company has associated
companies.
• Companies are associated if they are under the same control. This basically means a shareholding of
more than 50%.
• Companies that are only associated for part of an accounting period count as associated companies for
the whole of that period.
• Dormant companies (not carrying on a trade or business) do not count as associated companies.
• For associated company purposes, it is irrelevant where a company is resident. Therefore, companies
which are resident overseas can be included.
• Do not forget to include the parent company in the number of associated companies.
Short accounting periods
The lower and upper limits are proportionately reduced if a company’s accounting period is less than 12
months in length.
Long Periods of Accounts:
 If period of account >12 month, it will split into two Acc. periods, 1st of 12 months and 2nd of
remaining months.
 The following rule applies in the allocation of profits and charges between the two chargeable
accounting periods:
Income / Charges Method Of Allocation
Trading Profit (before capital allowances) Time apportioned
Capital allowances and balancing charges Calculated for each period
Rental Income Accruals Basis
Interest Receivable Accruals Basis
Chargeable Gains Allocated to accounting period
Charges On Income Deducted in period in which paid
Franked Investment Income Allocated to accounting period.

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Interest Income:
 Interest received or paid is dealt with on accruals basis.
 Loan Relationship Rule: Interest payable on loan taken for trade is deducted from trading profit
while Interest on a loan taken for any other purpose will be deducted from interest income.
 Interest received from HMRC is taxable and interest paid to HMRC is allowable trading expense.
Loan Relationship Deficits:
Non trading interest income XX
Non trading interest expense (XX)
XX/(XX)

Net Interest Income Non trading interest Expense

Option 1 Option 2 Option 3 Option 4
Put in Performa as Set off against Carry back against Carry forward Group relief
interest income total interest income of against any non-
profit before QCD of previous 12 months (or trading profits of
current accounting 36 months if future periods.
period current year is
cessation year.)
 Partial claim is allowed so company has the option to relieve loss as it wants.
 Claim for current period & carry back must be made within 2 years from end of Acc.
period of loss
Dividend Income:
 Dividend received from any company is totally exempt
 Dividend received from non-associated companies is considered to determine payment date of
corporation tax.
Property Income:
 Property income is calculated on accrual basis for chargeable accounting period.
 Interest expense on a loan to buy a rental property is deductible from interest income not property
income
 There is no rent a room relief for companies.
Property loss must be deducted from total profits before QCD of current period and any remaining loss
will be deducted from future total profits before QCD. Partial claims not allowed.
Trading Profit:
Calculation Of Taxable Trading Profit • Private use by owner and employee
For the year ended xx/xx/xx both allowable
Profit From Financial Accounts XX • Dividend payable by company is not an
Add: Disallowable Expenses XX
allowable trading expense.
Taxable Income (not included in the profit figure) XX
Less: Allowable Expenses (XX)
Disallowable Income (included but not taxable under trading profit) (XX)
Taxable Trading Profit XX

CAPITAL ALLOWANCES:
 No private use asset column (Because private by owner is allowed.)
 If POA is >12 months there will be two CAP and capital allowances will be calculated separately for
each CAP.

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 Only one AIA is available to Group of CO’s however, AIA can be shared between group CO.s in any
way.
Related Companies:
 Only one AIA (of £1,000,000) is available to Related companies (companies involved in same
activities or share same premises) which are owned by the same individual and owner of companies
can allocate it as he wants to.
 Unrelated companies owned by the same individual(s) will each be entitled to the full AIA.

Trading Losses
Carry forward relief: Set Off Trading Loss Against Total Profit:
Carry forward and deducted from 1st available total  Deduct trading loss from total profits before QCD
profit of future years. of the current year and only then deduct remaining
loss from total profits before QCD of previous 12
months.
 No CAP Limit
Terminal Loss Relief:
If trading loss arises in last 12 months of trade then this
loss can be set off against the total profit of previous
three years on LIFO basis. Partial claim is not allowed
Restriction on Trading Loss: The restrictions apply in two situations:
 where there is both a change in ownership and a major change in the nature or conduct of the trade
within a five year period beginning no more than three years before the change in ownership, or
 when at any time after the scale of activities of the trade has become small or negligible, and before
any considerable revival of the trade, there is a change in the ownership of the company.
Restriction:
– Losses before change in ownership cannot be deducted from profits which arise after change in
ownership.
– Losses after change in ownership cannot be deducted from profits which arise before change in
ownership.
• Change in nature or conduct means major change in property dealt in or services provided, customers,
product, management, outlets or markets,
Foreign Income:
Any foreign income must be included in TTP. Foreign income is gross up by foreign tax suffered.
Chargeable Gains:
Indexation allowance: Indexation allowance gives a company some allowance for the effect of inflation
in calculating a gain. It is given from the date of expenditure to the date of disposal. IA cannot create nor
increase a capital loss. Indexation Allowance = Cost X Indexation Factor
Indexation Factor = (RPI of Later Date – RPI of Previous date)
RPI of previous date
• When an asset is purchased prior to December 2017 and subsequently sold, then the indexation
allowance will be given from the month of acquisition up to December 2017.

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• When an asset is purchased from January 2018 onwards and subsequently sold, then no indexation
allowance will be available.
Calculating net chargeable gains of a company Calculation of gains and losses for companies
Capital gains arising on disposals in CAP X Disposal proceeds (or market value) X
Less: allowable losses arising on disposals in CAP (X) Less incidental costs of disposal (X)
Less: b/f capital losses (X) Net proceeds X
Net chargeable gains X Less allowable costs (X)
Un-indexed gain X
Less indexation allowance (X)
Chargeable gain X

DISPOSAL OF SHARES AND SECURITIES: ROLLOVER RELIEF :

All rules are same as individuals except Rollover relief is the only capital gains relief available
Matching Rule: to companies. It allows the deferral of the indexed
a) Shares acquired on same day gains arising on the disposal of qualifying business
b) Shares acquired on previous 9 days assets.
c) Shares in share pool.
All rules for rollover relief are same as
On disposal or acquisition of shares indexation allowance
individuals except that the qualifying assets for
is added in cost.
companies are:
Bonus Issues:
 Land and buildings used in business
• Bonus shares are added in share pool with no increase in
 Fixed plant and machinery (unmovable)
cost.
Goodwill is not a qualifying asset for rollover
• Not index the cost of original shares to the date of bonus
relief for CO.
Rights Issues
• It increases the number of shares and cost of share pool.
• Pool is indexed to the date of the rights issue.

Capital losses: Capital losses are relieved against Current year capital gains, then Capital gains of future
CAPs
Transfer Pricing Legislation:
• It is applicable upon transactions between connected companies. Companies are connected if:
– On company directly or indirectly participate in the management, control or capital of the other
company, or
– A third party directly or indirectly participates in the management, control or capital of both
companies.

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Large Company Small Or Medium Company

Transaction with any Transaction with overseas company Transaction with UK SME or overseas
company resident in non -qualifying territory company resident in qualifying territory

Transfer pricing rules apply Transfer pricing rules not apply

• If transfer pricing rules apply then the transaction between related parties are recorded at an arm’s
length price.
• Non-qualifying territory is one which is not in UK and has no DTR agreement with UK.
Goodwill and intangible non-current assets

Expenditure relating to Intangible Assets other than goodwill

(e.g patents, copyright, trademark, brands, intellectual property and know-how)

Use deduction made under accounting Rules

Elect to disapply accounting deductions
Research Expense = Initial
Claim tax allowance @ 4%/annum on straight line basis
Amortisation & Impairment Expense = Subsequent
• Election for choice of treatment is irrevocable and should be made within 2 years from year of
acquisition of asset
• If a company disposes off an intangible assets then profit or loss will be the difference between the
disposal proceeds and carrying value.
• Company has the option to elect to rollover the trading profit upon disposal of intangible assets if
disposal proceeds are reinvested within 1 year before or 3 year after disposal.
Tax treatment of goodwill
No amortisation or impairment on goodwill are allowable for tax purposes.
On a disposal of goodwill profit is taxable as trading income but a loss is a non-trading loss which can
be:
– Set off against total profits of the current period
– Carry forward and deducted from non-trading profit of next period.
– Transferred to a 75% group member as group relief.

Special intangible rollover relief

• If a profit is made on disposal of any intangible asset and a new intangible asset is acquired
within 12 months before or up to 36 months after disposal:
– part of the taxable profit may be deferred.
• The maximum deferral = (Lower of disposal proceeds or amount reinvested) Less: Cost of the
original intangible asset
• Special intangible rollover relief is available for goodwill as well as other types of intangible
asset.

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Substantial Shareholding Exemption (SSE)
Substantial shareholding is, holding of ≥10% shares in another CO. which are owned for ≥12
months out of 6 years before date of disposal.
• For substantial shareholding exemption both investor & investee companies should be
trading companies.
• Gain on disposal of shares out of substantial shareholding is exempt and loss is not allowable.
• If disposal of shares qualifies for SSE and remaining shareholding falls below 10% then remaining
shares will also qualifies for SSE if sold with in next 5 years.
• In order to determine substantial shareholding the shares held by connected companies will also be
considered.
• If there is a share for share exchange then the combined period of ownership of both the holdings
will be considered to determine minimum period of ownership.
• SSE will be available even if the shares are not owned for 12 months if:
a) the shares being disposed of are in a new company, and
b) the new company received assets from another 75% group company, and
c) the assets transferred were held and used in trade of another group company for 12 months before
transfer.
Research and development expenditure
R&D expenditure incurred by a company may be 100% allowable expenditure if it relates to company’s
trade.
R&D relief: SMEs (Question in exam will state whether or not the company is a SME.)
In case of SME all of the revenue expenses incurred upon R&D (including cost of developing or buying
software for purpose of R&D only) would be allowed to be deducted from trading profits.
 Enhanced Relief: If any expenses qualify for “enhanced relief” than extra 86% of these expenses will
be allowed to be deducted from trading profits.
If the deduction creates a loss it may be surrendered in return for a cash payment from HMRC = 10%
of the surrendered amount.
• The surrendered amount is the lower of:
– unrelieved trading loss (after a deemed current year claim and any actual carry back and group relief
claims)
– 186% of qualifying R&D expenditure
• If surrendered in return for cash, the loss cannot also be carried forward for future relief.
• The government has introduced a cap on the amount that a loss making SME can claim in R&D tax
credits.
This cap is not examinable

Expenses which will qualify for enhanced relief are as follow:

a) All direct costs; material, fuel, power, water & staff cost including employee NIC of that staff (but
excluding cost of benefits in kind)
b) Software either purchased or developed to be used for R&D only
c) 65% of the payment made to subcontractors if any (i.e. 86% of 65%)

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Notes:
• If payments made to independent party, e.g. Research body, amount paid would be
allowable to be deducted from trading profits but would not qualify for Enhanced relief.
• Expenses which are covered under grant or subsidies will be allowed trading expenses but
would not qualify for enhanced relief.
BUSINESS FINANCIAL MANAGEMENT
 Sources of Finance:
Equity Finance Debt Finance
Amount Company can issue shares up to maximum of There is no limit of debt finance which a company
authorized share capital. can raise through debt instruments and banks
loan until investor is ready to invest.
Return Company is required to pay dividend which is Entity is required to pay mandatory interest which
based on profits and this will not be treated as is regardless of profit and it is treated as allowable
allowable expense. expense.
Investor • If investor is a company any dividend received • If investor is an individual interest will be liable to
by company is exempt. income tax.
• If investor is an individual dividend will be liable • If investor is a company then interest will be
to income tax. received gross and it will liable to CT.
 Differences between sole trader and company:
Sole Trader Company
Trading profits are liable to income tax on tax year Trading profits are liable to corporation tax for
basis. accounting period.
Application of basis period. No application of basis period.
Capital allowances are available but with Private use Capital allowances are available but No Private use
adjustment. adjustment is required.
Personal Allowance is available No personal allowance is available.
Class 2 and Class 4 NIC will become payable. No payment of NIC is required for trade.
Six Loss relief options are available. 3 loss relief options are available
Group relief is also available.
No tax implication at the time of withdrawal of profit Profit after tax from company can be withdrawn in form
after tax from business. of dividend or employment income.
Business may have VAT registered. Company may have VAT registered.
Upon disposal of business it will be treated as Upon disposal of shares it will be treated as chargeable
chargeable disposal however entrepreneur relief, gift disposal however rollover relief is available.
relief, and rollover relief is available.
If an individual has expected losses in initial years of If an individual has profit in initial years of trade and has
trade then individual should preferably start business as no intention to withdraw funds in initial years then it is
sole trader to take advantage of tax saving at high rate. better to operate in form of company to take advantage
of low corporation tax rates.

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 Extraction of Funds from a Company:
Salary Dividend
Income tax payable @ 20%, 40% or 45% by individual. Income tax payable @ 7.5%, 32.5% or 38.1%.
Class 1 employee NIC payable by individual @ 12% or NO NIC is payable by individual.
2%
Company is liable to pay class 1 Employer NO NIC is payable by company.
Salary and NIC paid to individual is treated as Dividend is not an allowable for company.
allowable expense for company.
Individual can make personal pension contribution Don’t qualify as relevant earning for personal
in respect of salary received from the company pension cont. because it is not a earned income.
 Rental Income from company
• Individual should try to own the assets of the company instead of owning assets through the
company in this way individual will be able to withdraw profits after tax from the company in the form
of rental income although this will be liable to income tax as a property income but company will be
able to claim allowable deduction in respect of rent paid for the property from trading profits.
• If asset is being used in trade in such a manner as mentioned above individual can avoid double
taxation at the time of disposal of asset. However BPR would be reduced to 50% for the IHT purpose.
 Interest income from the company
• If an individual makes a loan to the company then any interest income received by individual will be
taxed in the year of receipt of interest @20%, 40% or 45%.
• Interest paid by company is an allowable expense from company trading profit on accrual basis.
 Personal pension contribution
• Individual can withdraw funds from the company by making persona pension contribution for himself
as an employee through other company however pension funds are not withdrawn up to the age of 55
years.
 Purchase of Non-Current Assets
• If an asset is purchased capital allowances are available in normal way.(AIA, WDA)
• If individual is VAT registered then Capita allowance will be claimed upon VAT exclusive amount.
 Hire Purchase Agreement/Finance Lease. Assets acquired under hire purchase agreement will be
treated as outright purchase of the asset and capital allowance will be claimed in normal way upon
cash equivalent value of asset. Any interest paid along with installment amount will be treated as
allowable expense.
 Operating Lease Any rent paid for asset acquired under operating lease for trading purpose is
allowable trading expense with the exception of high emission car (CO₂ >50 gram/km) for which 15%
of rent paid is disallowed.
Close Company
Company controlled by 5 or less than 5 shareholders or if there are more than 5, all shareholders should
be directors. Control means holding >50% of: ‘’share capital or voting rights, or distributable profits or
net assets on winding up”

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Provision of benefits from Close Company to an individual who is shareholder and director:
 For directors it will be a taxable benefit liable to income tax calculated using the rules of
employment income.
 For company cost of providing benefit will be allowable expense from company’s trading profit.
Provision of benefits from Close Company to an individual who is just a shareholder:
 For individual it is dividend income equal to taxable value of benefit calculated using employment
income rules.
 For company it will be assumed that company has pay dividend equal to value of taxable benefit.

Loan taken by shareholder to make a loan or purchase shares of a Close Company:

Loan will be called qualifying loan and any interest paid is deductible expense from his total income
provided the company is personal trading company (owns ≥ 5% shares).
Benefit in respect of interest: If company provides loan to employee at less than 2.25% then:
 If individual is a shareholder it will deemed to have been received net of dividend equal to value of
taxable benefit which will be calculated using employment income rules and
 If individual is shareholder & director then it will be taxable benefit for related individual.
Loan from close company to its shareholders only or shareholder plus employee:
Tax Charge: If a close company lends a loan to its shareholders then company has to pay a tax charge
@33.75% upon the amount of loan.
Due date to pay tax charge is same as due date to pay corporation tax (9 month & 1 day or quarterly
basis).
No tax charge will be due by company if individual repays loan before due date of payment of tax by
company.
 Exemption from tax charge: No tax charge will arise if following three conditions are satisfied:
a) Amount of loan is ≤ £15,000.
b) Individual is full time employee of CO.
c) Individual owns ≤5% shares in CO.
 This tax charge is refundable into a situation:
a) When shareholder repay the loan to company.
b) When the company writes off the loan into its own books.
Note: Amount of loan written off by company will be treated as dividend income of shareholder. Loan
written off will not be an allowable expense for company.
Companies with investment Business:
• Companies holding investments are called companies with investment business.
• Management expenses of company is allowed to be deducted from total profit before QCDs of
current year and any unrelieved management expenses will carry forward against the total profit of
future years OR Company can choose to transfer the unrelieved management expenses to 75% group
member.
• Management expense includes remuneration of the employees, audit fee, bank interest, head office
overheads, commissions, office rent and rates.

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75% Loss Relief Group:
75% Loss Relief Group is formed when at-least 75% main holding at every level and effective holding of
at-least 75%.
• Group can be formed without ultimate parent company and one company can be part of more than
one group.
• Overseas Companies can become part of this group but relief is only available to UK resident
companies unless overseas company is EEA and loss can’t be utilized in any other way.
Tax Implications:
Surrendering company can transfer current year: Surrendering company can transfer brought
– Trading losses (no need to claim against its own forward:
profit first) – trading losses
– Non trading interest expense (no need to claim – Non trading interest expense
against its own profit first). – management expenses of an investment
– Unused QCD. company
– Unused Property business loss. – property losses
– Unused management expense (if investment CO.)
• Only corresponding period losses are eligible for relief.
Surrendering CO:
(CO. that surrenders its loss) may surrender as much of loss as it wants to (partial claim is allowed) & it is
not necessary to relieve loss against its own income & gains 1st
Claimant CO:
(CO. to which loss is surrendered) can offsets loss against Taxable Total Profits of its corresponding
Accounting Period but after offsetting its own b/f trading loss.
• Claimant CO. may make payments to surrendering CO. for group relief. Any payment up to the amount
of loss surrendered is ignored for corporation tax purposes.
• Losses which arise before joining the group or after leaving the group are not eligible for group relief.
• Group relief restriction applies where there has been a change of ownership of a company, A Ltd. A
Ltd’s pre-acquisition losses carried forward cannot be surrendered to companies in its new group for a
period of five years from the date of the change in ownership. This restriction operates in one direction
only, i.e new group companies can transfer losses to new entrant in the group.
Consortium
When two or more companies (UK or overseas) mutually owns ≥75% shareholding in another company
provided each company own at least 5% but up to maximum of 74%. This is called consortium
arrangement.
• Investor Company is called consortium member and Investee Company is called Consortium Company.
• A consortium company can transfer its loss upward to consortium member but up to maximum of the
%age holding of a consortium member but for this purpose consortium company has to offset loss
against its own total profit 1st.
• Consortium Member CO. can also transfer its loss downward to consortium CO. but up to maximum of
its %age holding. There is no need to consortium member to offset the loss against its own total profit
1st.

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• Losses cannot be transferred between consortium members. Overseas company can become part of
consortium arrangement but it cannot take advantage of consortium features.
75% Capital gains Group
75% Capital gain Group is formed when at-least 75% main holding at every level and effective holding of
at-least 50%.
• Group cannot be formed without ultimate parent CO. and one CO. cannot be part of more than one
group.
• Overseas Companies can become part of this group but relief is only available to UK resident
companies.
Tax Implications:
• Group CO.s can transfer assets between themselves at no gain / no loss & deemed to take place at
indexed cost.
• Group companies can transfer only Current year capital gains or capital losses to other group
members. While b/f capital loss is not allowed to transfer. Election must be made in 2 years from end of
accounting period of disposal
• Rollover relief is available on a group wide basis Where:
– one company sells qualifying asset, and
– Another company buys a qualifying asset within the rollover relief qualifying time period. Gain can
be rolled over against purchased asset of other CO.
De-grouping charge: It can arise if a 75% gain group member leaves the group, and still holds an asset
which it had received from another 75% group member via no gain no loss transfer. It will be calculated
as:
M.V at date of original intra group transfer XX
Less: original cost plus indexation allowance (XX)
De-grouping Charge XX
• Charge is taxable to Transferor CO. however it will be exempt in case of substantial shareholding
exemption.
• Transferor Company can choose to transfer de-grouping charge to the other 75% gain group members.
Stamp Duty: SDLT is exempt on transfer between 75% gain group companies but exemption will be
withdrawn if recipient company leaves the group within 3 years from date of intra-group transfer.
Pre Entry Capital Loss: Capital losses of a company before joining 75% gain group can be offset against
gains:
a) From disposal of assets before joining the group
b) From disposal of assets which were owned before joining the group and sold after joining group.
c) From disposal of assets which were acquired after joining the group and sold to third party.

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Transfer of trade within a group:
A Ltd. Mr. A
75% 75% 75% 75%

B Ltd. C Ltd. B Ltd. C Ltd.

Transfer of assets from B Ltd to C Ltd. Transfer of assets from B Ltd to C Ltd.
Special rules apply and this is a gain group Special rules apply but this is not a gain group (same person
must own ≥75% of trade at some time; within 1 year before
transfer & at any time within two years after transfer.)
Transfer of trade and Assets without change in ownership
Special Rules Capital Gain
Trade Losses Capital Allowances If gains group If no gains group
Transferred with trade &  P&M will be transferred at WDV. Assets transferred Capital gain/loss arises on
deducted from future  No BC/BA for transferor at no gain no loss chargeable assets sold.
trading profits of C Ltd.  No AIA or FYA for transferee co.

Overseas Aspects
UK Resident Company: Companies incorporated in the UK, or incorporated overseas but centrally
managed and controlled in the UK are called UK resident companies.
All UK resident Companies are chargeable to corporation tax on their worldwide income and chargeable
gains.
Permanent establishment:
Means having a place of management or a branch or an office or a factory or any work related area.
Overseas Subsidiary
• Will be classed as an associated company (reduces the limits) if ownership is > 50%
• Profits will be subject to overseas Corporate Tax but are not charged to UK corporation tax
• UK capital allowances are not available
• Intra-group transactions between overseas subsidiary and a UK resident group member will be subject
to the Transfer Pricing rules.
• No group relief is available for trading losses of an overseas subsidiary
• Dividend received from overseas subsidiary will be exempt and ignored in computing augmented
profits.
Overseas Branch
• An overseas branch of a UK company is effectively an extension of the UK trade, and 100% of the
branch profits will be assessed to UK corporation tax.
• Trading profits are treated as UK profits and will be calculated in same way.
• UK capital allowances are available on oversees plant and machinery purchased.
• Trading losses of an overseas branch are available for set off, against the profits of other companies in
the group.
• All implications of capital gains of overseas companies are same as UK capital gains.
• Corporation tax limits are not divided

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Double Tax Relief (DTR) DTR is lower of:
(i) Overseas tax on overseas income.
(ii) UK corporation tax on overseas income.
Exemption of overseas Branch:
• An irrevocable election can be made for exemption of profits of overseas branch. In this case branch
profits (trading, interest, rent, capital gains) are exempt from UK tax.
• No loss relief available, no capital allowance is available.
• If election is made it will be irrevocable and will be applicable to all overseas branches.
CONTROLLED FOREIGN COMPANY (CFC):
An overseas resident company will be CFC if:
a) controlled by UK resident companies and/or individuals, and
b) has incorporated or acquired to artificially divert profits from UK
CFC Charge:
Individuals control (E.g. Mr A, & Mr. B)
UK Resident companies CFC

UK Resident company control Owns CFC

(can be controlled by more than 1 UK resident co. in which
case each co. must own at least 25% interest in CFC)
CFC Charge will arise on UK Resident Companies No CFC Charge

CFC Charge: £
(Amount of CFC chargeable profit caught by CFC Legislation X
% shareholding of UK company X main rate of corporation tax) X
Less: DTR (X)
CFC charge X
Chargeable Profits
 Income of CFC (but not chargeable gains) that are artificially diverted from the UK, calculated as per UK tax
rules is called chargeable profit
 CFCs will have no chargeable profits (so no CFC charge) if any of the following conditions are satisfied:
– the CFC does not hold any assets or bear any risks intended to reduce UK tax
– the CFC does not hold any assets or bear any risks that are managed in the UK
– the CFC would continue in business if the UK management of its assets and risks were to cease
Exemptions to CFC charge:
The CFC charge is not applied if any one of the following exemptions applies (even if CFC has chargeable
profit):
Exempt period No CFC charge will arise in first year (first 12 months) if it will be CFC in the second
exemption accounting period and no CFC charge in second year.
Excluded CFC is resident in an excluded territory (Territory approved by HMRC where rate of
territories corp tax is higher than UK) than no CFC charge arises.
Low profits The CFC’s TTP ≤£500,000 of which non-trading profits is ≤£50,000.
Low profit margin CFC’s accounting profit is ≤10% of relevant operating expenditure.
Tax exemption The tax paid in the overseas country is at least 75% of the UK corporation tax
which would be due if the CFC were a UK resident company

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Re-Construction & Re-Organization
Share for share exchange: Step-2
Step-1 If substantial shareholding exemption is not available
Claim substantial shareholding exemption if – Claim share for share exchange rule.
available. – Cost of old shares will become cost of new
- No gain/loss on shares transferred due to SSE shares.
- Cost of shares received will be MV – No Gain NO loss arise
Consequences of Disposal of Shares:
• Substantial shareholding exemption can be available.
• Stamp duty @ 0.5% will be payable.
• The company being disposed of will be treated associated company for whole accounting period
• There may be de-grouping charge.
• Transfer of trade special rules might be applicable.
Liquidation
At the time of liquidation, liquidator is appointed, assets of the company are realized, any obligations of
the company are paid and finally the surplus amount is distributed to shareholders.
Payment received by shareholder before appointment of liquidator is treated as dividend while
proceeds received after appointment of liquidator will be treated as capital receipt and gain (DP – cost)
will be liable to capital gain tax.
Winding Up (closure of company without appointment of liquidator):
In this case consideration received will be considered as capital proceeds, if all of the following
conditions are fulfilled:
a) Shareholder was paid, when company has been wound up.
b) All of the liabilities have been agreed and paid.
c) Total payment is not more than £25,000.
If any of the above condition is not fulfilled amount received would be considered as Dividend Income.
Purchase of its own shares by company (Buy Back)
Proceeds received by individual may be taken as income distribution (dividend) or a capital payment.
Capital Repayment:
Conditions:
a) Company must be an unquoted trading CO. and Buy back of shares by CO. must be for benefit of
trade.
b) Shares must have been owned for at least five years if purchased and it will be 3 years if inherited.
c) The shareholder is resident in UK
d) Shareholding after buy back should be ≤75% of the shareholding before buy back
e) After buy back individual must not be able to exercise more than 30% control of the company.
Capital gain/loss = Disposal Proceeds – purchase price
Note: If Co. buy back its shares from another CO. HMRC will always treat the event as capital disposal
(substantial shareholding exemption may apply.
Income Distribution: If any of the above conditions is not satisfied then dividend income: Dividend =
Proceeds received less Original subscription price (issue price)

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