CORPORATION TAX (CT) Scope of Corporation Tax Payable by UK resident companies on their profits chargeable to corporation tax (PCTCT)
for a chargeable accounting period (CAP). Definition for CT: UK Resident- Company incorporated in the UK or centrally managed and controlled in the UK. PCTCT- Worldwide income and gains CAP- A CAP is the period for which a charge to corporation tax is made and is usually a companys period of account. Chargeable accounting Period (CAP) A CAP begins when: A company starts trade; or The profits of a company first become liable to corporation tax; or The previous chargeable accounting period ends The company must notify HMRC within 3 months of the start of its first CAP. A CAP ends on the earlier of the followings: 12 months after its start The end of the company's period of account The commencement of the company's winding up The company's ceasing to be resident in the UK The company's ceasing to be liable to corporation tax Financial Year A financial year runs from 1 April to the following 31 March and is identified by the calendar year in which it begins. For example, the year ended 31 March 2011 is the Financial year 2010 (FY 2010). This should not be confused with a tax year, which runs from 6 April to the following 5 April. PROFORMA A company's taxable total profits are arrived at by aggregating its various sources of income and its chargeable gains and then deducting losses and gift aid donations. Here is a pro forma computation. Trading profits Investment income Foreign income Miscellaneous income Property business profits Chargeable gains Total profits Less losses deductible from total profits Less gift aid donations Taxable total profits for an accounting period X X X X X X X (X) (X) X
Dividends received from UK resident companies and from non-resident companies, for the purposes of the F6 exam, are usually exempt and so not included in taxable trading profits.
Trading Income The trading income of companies is derived from the profit before taxation figure in the income statement, just as for individuals, adjusted as follows. Profit before taxation Add expenditure not allowed for taxation purposes Less: income not taxable as trading income expenditure not charged in the accounts but allowable for the purposes of taxation capital allowances Profit adjusted for tax purposes xx xx (xx) xx
Long Period of Account As we saw above, if a company has a long period of account exceeding 12 months, it is split into two accounting periods: the first 12 months and the remainder. Where the period of account differs from the corporation tax accounting periods, profits are allocated to the relevant periods as follows: Trading income before capital allowances and property income are apportioned on a time basis. Capital allowances and balancing charges are calculated for each accounting period. Other income is allocated to the period to which it relates (e.g. interest accrued). Miscellaneous income, however, is apportioned on a time basis. Chargeable gains and losses are allocated to the period in which they are realized. Gift aid donations are deducted in the accounting period in which they are paid. Ex-1 Xenon Ltd makes up an 18 month set of accounts to 30 September 2012 with the following results. Trading income (no capital allowances claimed) 180000 Interest income18 months @ 500 accruing per month 9000 Capital gain (1 August 2011 disposal) 250000 Less: Gift aid donation (paid 31 March 2011) (50000) 389000 What are the taxable total profits for each of the accounting periods based on the above accounts?
CORPORATION TAX LIABILITY Financial year Corporation tax is payable on the profits of a particular CAP. Corporation tax rates and limits are set for financial years, which run from 1 April to 31 March. The rates of corporation tax The rate of CT for F/Y 2011-26% and it was 28% for F/Y-2010 and 2009 and applies to companies with augmented profits of 1,500,000 or more. Companies whose profit not more than 300000, corporation tax rate is 20% for F/Y 2011 and 21% F/Y 2010 and 2009. Marginal Relief Marginal relief applies where the augmented profits of an accounting period of a UK resident company are over 300,000 but under 1,500,000. We first calculate the corporation tax at the main rate and then deduct: Standard fraction x (U A) x N/A where U = upper limit (currently 1,500,000) A = augmented profits N = taxable total profits The standard fraction is 3/200 for F/Y-2011 and was 7/400 for FY 2010, FY 2009.
Augmented Profits
Augmented profits are taxable total profits plus franked investment income (FII). Augmented profits means taxable total profits plus the grossed-up amount of dividends received from UK and non-UK companies. These dividends are completely ignored for corporation tax purposes. Ex-1 Magic Ltd had the following results for the year ending 31 March 2012. Trading income 100000 Rental income 20000 Bank interest 25000 Capital gain 18000 Dividend received net 90000 Compute the corporation tax liability. Ex-2 Crystal ball Ltd had the following results for the year ending 31 march 2012. Trading income 1450000 Dividend received (net) 45000 Compute the corporation tax liability. Ex-3 Cindrella Ltd had the following results for the year ending 31 March 2012. Trading income 397880 Bank interest 720 Capital gains 2000 Donation to charity (1000) Dividend received (net) 90000
Compute the corporation tax liability. CAPs across financial year Where a company has a CAP which is not 31 March, it will have a CAP that will fall across two different fiscal years. The rates and marginal relief fractions may be different for different financial years. Ex-1 Wentwrorth Ltd makes up its accounts to 31 December each year. For the year to 31 December 2011, it has taxable total profits of 174000. It receives a dividend of 5400 on 1 December 2011. Ex-2 Elliot Ltd has the following results for the year to 31 December 2011. Trading profit 360000 Patent royalities (gross) 24000 Loan interst (gross) 10000 Bank interst 15000 Capital gains 20000 Uk dividends (net) 13950 Patent royalities payable (15000) Donation to charity (2000) Capital loss B/F 5000 Compute the CT for Elliot. Short Accounting period
The upper and lower limits which are used to be determine tax rates are pro-rated on a time
basis if an accounting period lasts for less than 12 months. Ex-1 Ink Ltd prepared accounts for the six months to 31 March 2012. Taxable total profits for the period were 200,000. No dividends were received. Calculate the corporation tax payable for the period. Long periods of accounting An accounting period cannot be more than 12 months long. If the period of account exceeds 12 months it must be split into two accounting periods, the first of 12 months and the second of the balance. Ex-1 Xenon Ltd (in the previous chapter) made up an 18 month set of accounts to 30 September 2011. The 18 month period of account is divided into: Year ending 31 March 2011 6 months to 30 September 2011 Results were allocated: Trading profits 12:6 Property income Capital gain (1.8.11) Less: Gift aid donation (31.3.11) Taxable total profits
Y/e 31.3.11 6m to 30.9.11
120000 6000 (50000) 76000
60000 3000 250000 313000
Assuming Xenon Ltd received FII of 27,000 on 31 August 2012, calculate the corporation tax payable for each accounting period. Assume that the corporation tax rates in FY1 are the same as in FY11. Associated companies. The upper and lower limits which are used to determine tax rates are divided by the total number of associated companies. Broadly, associated companies are worldwide trading companies under common control.
If a company has one or more 'associated companies', then the profit limits for small profits rate purposes are divided by the number of associated companies + 1 (for the company itself). An associated company is ignored for these purposes if it has not carried on any trade or business at any time in the accounting period (or the part of the period during which it was associated) ie it is 'dormant'. Ex-1
For the year to 31 March 2012 a company with two other associated companies had taxable total profits of 200,000 and no dividends paid or received. Compute the corporation tax payable.
