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Tolley® Exam Training

ATT

PAPER 4Corporate Taxation

MEMORY JOGGERS

FA 2015May and November 2016 Sittings

427

Tolley® Exam Training INTRODUCTION

© Reed Elsevier UK Ltd 2015 I FA 2015

INTRODUCTION

The Memory Joggers contain short bullet point summaries of the tax (and accounting where applicable) topics within ATT Paper 4.

The summaries are split into sections as follows:

• Useful Legislation • Corporation Tax • Other Taxes • Accounting Some wording has been highlighted in grey indicating a change from Finance Act 2014 to Finance Act 2015.

The Examination Paper

The paper will have two parts and a mixture of computational and written questions. There is no question choice.

Part 1 accounts for 40% of the marks and consists of “short form” questions worth between 2 and 4 marks each. There will be between 10 and 20 such questions in a paper.

Part 2 accounts for the remaining 60% of the marks and consists of between 3 and 5 longer questions carrying 10 to 20 marks each.

Law and Ethics for Paper 4

Also examinable in the ATT written tax papers are selected chapters from the text books "Professional Responsibilities and Ethics for Tax Practitioners" (2nd edition) and “Essential Law for Tax Practitioners” (4th edition) as detailed below.

The Law and Ethics text books are only available from the ATT and CIOT directly.

Law and Ethics can be tested either as a small part of a long question or as a short form question.

Examinable Law chapters for Paper 4:

Chapter 5 – only sections 5.1 to 5.10 inclusive Chapter 8 – only sections 8.1 to 8.3 Chapter 9 – all sections Chapter 10 – only section 10.9 Chapter 11 – all sections Chapter 12 – all sections Chapter 13 – only sections 1–6, and 11–12


© Reed Elsevier UK Ltd 2015 II FA 2015

Chapter 14 – only sections 1–6 and 9–10 Chapter 16 – only sections 1–6 Examinable ethics chapters for all papers:

New clients and engagement letters Client service Conflicts of interest Other client handling issues Charging for services Complaints Ceasing to act Fundamental principles (of Professional Conduct in relation to Taxation) Tax returns Access to data by HMRC and other authorities Irregularities (including errors) Using your Memory Joggers

Your revision phase is all about practising questions. Put away your study manuals and instead practice the questions.

Remember you have your legislation to help and a useful legislation list is included here. However, at first, you may feel you need a little help remembering the key points of a topic to help you attempt the questions. Turn to these Memory Joggers rather than go back to your study manuals.

The Memory Joggers contain summaries of the study manual chapters and useful proformas.

After this introduction, there is a contents list referring to the original chapter from the study manual that the summary relates to. Therefore, if you did need some more detail from your study manuals you know where to look.

As you practise more questions and gain more confidence, you should start to rely on the Memory Joggers less.

Good luck with your studies and should you need to contact us, you can do so in one of the following ways:

• Phone 020 3364 4500 • Email [email protected] • Post a message on our ATT Papers 1-6 student forum on the Online Academy


© Reed Elsevier UK Ltd 2015 III FA 2015

Please state your examination paper and related manual chapter/question to help us answer technical queries.

Tolley® Exam Training CONTENTS

© Reed Elsevier UK Ltd 2015 V FA 2015

CONTENTS

USEFUL LEGISLATION LISTS

Corporation Tax

Other Taxes

CORPORATION TAX

1 Introduction to Corporation Tax

2 Computation of Corporation Tax

3 Associated Companies

4 Long Periods of Account

5 Corporation Tax Self Assessment (CTSA)

6 Payment of Corporation Tax

7 Interest on Late Paid Tax and Repayments

8 CTSA Penalty Regime

9 Property Income

10 Loan Relationships – Basics

11 Loan Relationships – Connected Companies

12 Relief for Trading Losses

13 Relief for Other Losses

14 Corporate Capital Gains

15 Substantial Shareholding Exemption

16 Intangible Fixed Assets

17 Research and Development Expenditure

18 Companies with Investment Business

19 The Principles of Group Relief

20 Group Relief – Further Aspects

21 Consortium Relief

22 Group Consortium Companies

23 Group Administration

24 Group Capital Gains

Tolley® Exam Training CONTENTS

© Reed Elsevier UK Ltd 2015 VI FA 2015

25 Group Gains – Further Aspects

26 Change in Ownership of a Company

27 Transfer of Trades

28 Sale of Shares v Sale of Assets

29 Close Company Definition

30 Close Company Implications

31 Close Company Implications – Further Aspects

32 Accounting for Income Tax

33 Overseas Matters for Companies

34 Transfer Pricing

35 Purchase of Own Shares

OTHER TAXES

Business Tax

1 Incorporation

2 Disincorporation Relief

3 Limited Liability Partnerships

4 Mixed Partnerships

Personal Income Tax

5 Termination Payments

6 Employed or Self Employed ?

7 Personal Service Companies

Capital Gains Tax

8 Connected Persons

Value Added Tax

9 Bad Debt Relief

10 The Annual Accounting and Cash Accounting Schemes

11 The Flat-Rate Scheme

Accounting

12 Tax in Company Financial Statements

Tolley® Exam Training USEFUL LEGISLATION LIST

© Reed Elsevier UK Ltd 2015 VII FA 2015

USEFUL LEGISLATION LIST

CORPORATION TAX

TCGA 1992152 - 155 Rollover relief170 Gains group definition179 (1, 3, 3A – 3H) Degrouping chargeSch 7AC Paras 3,7,8,9,10,18,19 Substantial shareholding exemption

FA 1998Sch 18 Paras 14–16, 21, 23, 24 CT AdministrationSch 18 Paras 67–75 Group relief

CAA 2001266, 267 Election to transfer P&M at tax wdv

FA 200455 Company notify of chargeability

FA 2007Sch 24 Paras 2, 3, 4, 5, 9, 10, 11, 14 Penalties for incorrect returns

FA 2008Sch 41 Paras 1, 6, 7(1–3) Penalties for late notification

CTA 20099-12 Rules on APs104A, 104M, 104N Research and development

expenditure credits for large companies

457, 458, 461– 463 Non-trading deficits from loan relationships

753 IFA loss relief1039, 1043, 1044, 1052,1054 –1056, 1074, 1123, 1124, 1126, 1140

R&D

FA 2009Sch 55 Paras 3–6 Penalties for late returnsSch 56 Paras 1,4 Penalties for late payments

CTA 201025-27 Associated company determination37 Trading losses current year and carry

back39 Terminal loss relief45(4) Trading losses carry forward relief62 UK property business loss relief66 Overseas property business loss relief131, 151, 152 Group relief definition279F—H Definition of related 51% group

company357A, 357B, 357G Patent box439 Definition of a close company455 Close company implications – loans to

participators518, 528, 530, 531 Real Estate Investment Trusts


© Reed Elsevier UK Ltd 2015 VIII FA 2015

673–674 MCINOCOT944 Transfer of trading losses with transfer

of trade948 Succession of CAs in transfer of trade963 Surrender of tax refund within group1033, 1034, 1035, 1036, 1037, 1042, 1062

Company buy back own shares

1122–1123 ’Connected person’ definition

Statutory Instruments:SI 1998/3175 Payment of tax by large companies

(instalments)SI 1999/2975 Simplified group relief arrangementsSI 2011/1784 Substantial commercial

interdependence

Statements of Practice:2/82 Purchase of own shares10/91 Changes allowed that do not give rise

to MCINOCOT


© Reed Elsevier UK Ltd 2015 IX FA 2015

OTHER TAXES

BUSINESS TAX

TCGA 1992162, 162A Incorporation relief & election to disapply165 (1 ,2, 4, 7, 8) Gift relief169 H, I, K-N, P Entrepreneur's relief CAA 2001266, 267 Election to transfer P&M at tax wdv

ITTOIA 2005173,175-178 Stock adjustments on cessation of trade850C-E Profits reallocated from corporate to

individual partners863A – C Disguised employment rules for members

of LLPs ITA 200786 Loss relief on incorporation107(1-5), 108(1, 2, 7) Restrictions re loss relief for member of LLP116A Loss relief to individual partners lost809AAZA Transfer of income streams through

partnerships FA 201358–60 Disincorporation relief PERSONAL INCOME TAX

ITEPA 200354 Personal Service Companies deemed

salary calculation401, 403, 413–414 Termination payments NICA 20141,2 National Insurance Contributions

Employment Allowance Miscellaneous V – IR35Misc V Personal Service Companies VALUE ADDED TAX

VATA 1994s.36 Bad debts Statutory Instruments

SI 1995/2518Reg.49 – 54 Annual AccountingReg.55A Flat-Rate SchemeReg.56 – 60 Cash Accounting


© Reed Elsevier UK Ltd 2015 X FA 2015

VAT Notices

Notice 731 Cash AccountingNotice 733 Flat-rate Scheme

Tolley® Exam Training CORPORATION TAX CHAPTER 1

© Reed Elsevier UK Ltd 2015 FA 2015

INTRODUCTION TO CORPORATION TAX

A company pays tax on the basis of its profits for a chargeable accounting period. This is usually the same as its period of account, providing it is twelve months in length or less.

(CTA 2009, ss.8-12)

A chargeable accounting period begins on the earliest of:

• the commencement of trading by the company;

• the acquisition of a source of income;

• immediately after the previous chargeable accounting period ends.

A chargeable accounting period ends on the earliest of:

• the cessation or commencement of trading;

• the end of a company's period of account;

• 12 months after it began.

A chargeable accounting period or CAP can never exceed 12 months in length.

The computation of Taxable Total Profits (TTP) includes many items that are determined in the same way as for an individual. The main differences are:

• No private use adjustments are required.

• Interest payable on trading loans is allowed as a deduction from trade profit.

• Interest payable on non-trading loans (e.g. interest on a loan to buy an investment

property or shares) is added back for trade profit but is deducted from non-trade profits (loan relationships).

• Interest receivable will be treated as non-trade profits (loan relationships) in most

cases.

Donations to charity are paid gross by companies and are deductible in arriving at TTP as a qualifying charitable donation.

(CTA 2010, s.189)

Companies do not normally pay corporation tax on dividends received, nor do they receive tax relief for dividends paid.

Companies pay corporation tax on their net chargeable gains (chargeable gains less capital losses) of the period. Indexation allowance is deducted in arriving at the chargeable gain and runs from the date the acquisition cost / enhancement expenditure is incurred to the date of disposal.

1



PROFORMA CORPORATION TAX COMPUTATION

Company name

Corporation tax computation for the chargeable accounting period

£Trading IncomeAdjusted profits before capital allowances XLess: Capital allowances (X)Trade profit X

Other IncomeNon-trading profits (loan relationships) XNon-trading gains (IFAs) XMiscellaneous income XUK property business XOverseas property business XNet chargeable gains X

Less: Qualifying charitable donations (X)Taxable Total Profits (TTP) X

TTP × appropriate rate XLess: Marginal relief (not applicable for CAP beginning on/after 1 April 2015) (X)Corporation tax liability X

2



REMINDER OF COMMON ADJUSTMENTS TO PROFITS IN CALCULATION OF TRADING INCOME FOR A COMPANY

£Profit before tax per accounts per period of account X

Add back disallowable expenditure:Depreciation of fixed assets(unless finance lease) XCapital expenditure XLosses on disposal of fixed assets XEntertaining (unless staff entertaining) XGifts (unless cost ≤ £50 and are not food/drink/tobacco and bear a clear advert)

X

15% of hire cost of cars with CO2 emissions > 130 g/km XFines and penalties XBribes X

Less income not taxed as trading income:Rental income/ interest income/ dividend income (usually exempt) (X)Profits on disposal of fixed assets (X)Tax adjusted profit before capital allowances X

Less: Capital allowances (calculated for the CAP — NO private use adjustments)

(X)

Trade profit X

The following expenses are allowable in calculating trade profits:

Legal fees re renewal of a short lease

Maximum of 4 × statutory redundancy payments on the cessation of trade

Pension contributions paid in the period

Wages and salaries accrued provided paid ≤ 9 months from period end

3



CAPITAL ALLOWANCES ON PLANT AND MACHINERY FOR A COMPANY

Per Chargeable EachAccounting Period FYA @ AIA @ General pool Short life Special rate Total CAs

100% 100% asset pool£ £ £ £ £ £

WDV b/f X X XAdditions X X XDisposalsLower of:– cost– sale proceeds ___ ___ (X) (X) ___

X X X XBalancing adjustment X/(X) X/(X)

FYA @ 100% (X) X

AIA @ 100% (X) X

WDA @ 18% (X) X

WDA @ 8% (X) X___ ___ ___ ___

WDV c/f Nil Nil X X ___CA claim X

See notes on reverse side of page.

4



Notes:

1. 100% FYA is available for certain types of qualifying expenditure (see your tax tables).

2. 100% AIA limit is £500,000 from 1 April 2014 to 31 December 2015 (£200,000 from 1 January 2016) for 12 month chargeable accounting periods. The AIA is not available for cars.

3. Special rate pool consists of integral features, long life assets and cars acquired with CO2 emissions of > 130g/km.

4. There are NO private use adjustments for companies.

5. All WDAs and AIA limits are time apportioned for the length of the chargeable accounting period.

5



LEASES SUMMARY

Finance Lease Operating Lease Hire PurchaseLegal No legal ownership

but bears all risks and rewards of ownership

No legal ownership, short term rental agreement only

Legal ownership at end of agreement

Accounting Fixed asset on the balance sheet

Not on balance sheet

Fixed asset on the balance sheet

Depreciate through P&L

Rental expense through P&L

Depreciate through P&L

Finance lease interest through P&L

Hire purchase interest through P&L

Tax No capital allowances

No capital allowances

Capital allowances

Allow depreciation and FL interest in P&L but restrict where:

Allow rental expense in P&L but restrict where:

For cars:

Car and CO2 >130 g/km (disallow 15%)

Car and CO2 >130 g/km (disallow 15%)

• CO2 ≤75* g/km or electrically propelled: FYA 100%• CO2 76–130 g/km: general pool 18% WDA• CO2 >130 g/km: special rate pool 8% WDA

Allow interest expense in P&L

* - for expenditure incurred on/after 1 April 2015 (≤ 95g/km pre 1 April 2015)

6



COMPUTATION OF CORPORATION TAX

Companies pay corporation tax for a chargeable accounting period on TTP.

The rate of corporation tax for FY 2015 is 20%.

For FY 2014, there are two rates of tax:

Main rate 21%Small profits rate 20%

For FY 2014, companies pay tax based on the level of their augmented profits:

TTP XFII = dividends received × 100/90 XAugmented profits X

However, it is always the TTP that is subject to corporation tax.

UK and foreign dividends received from non-associated compares form part of FII and not TTP. Dividends should be grossed up by 100/90.

The upper limit is £1,500,000 for a company with a 12 month chargeable accounting period and no associated companies. Where augmented profits are above the upper limit corporation tax is charged at the main rate (21% for FY 2014) on the whole TTP.

The lower limit is £300,000 for a company with a 12 month chargeable accounting period and no associated companies. Where augmented profits are below the lower limit corporation tax is charged at the small profits' rate (20% for FY 2014) on the whole TTP.

“Marginal relief” applies to companies whose augmented profits are between the relevant limits.

The formula for marginal relief is:(CTA 2010, s.19)

Fraction × (Upper Limit – Augmented Profits) × (TTP/Augmented Profits)

The standard fraction for FY 2014 is 1/400.

The marginal relief amount is deducted from the initial calculation of corporation tax at the main rate to give the actual corporation tax liability.

Where a company makes up its accounts for less than 12 months, it is necessary to adjust the corporation tax limits on a pro-rata basis.

(CTA 2010, s.24(4))

Limits × n/12

n = number of months in the short chargeable accounting period.

These adjusted limits are used in the marginal relief calculations.

7



Where a chargeable accounting period straddles FY 2014 and FY 2015, the period is split into two notional accounting periods.

8



ASSOCIATED COMPANIES

For FY 2014 (and earlier years) it is necessary to determine the number of associated companies in order to calculate the corporation tax payable.

The rules in respect of associated companies have been repealed from 1 April 2015.

Associated companies are companies under common control (i.e. >50%).

Common control can be by another company or an individual.(CTA 2010, s.450)

Dormant companies are excluded.(CTA 2010, s.25(3))

Overseas companies are included.

The profits limits are divided by the number of associated companies.

Dividends received from associated companies are ignored in determining FII.

If a company has a short chargeable accounting period together with associated companies the corporation tax limits are apportioned both for the short chargeable accounting period and the number of associates.

(CTA 2010, s.24(3)(4))

Companies which become associates or cease to be associates during the chargeable accounting period count as associates for the whole chargeable accounting period.

(CTA 2010, s.25(1))

When looking at sub-subsidiaries there is no need to multiply through to find an effective interest – the sub-subsidiaries will be associated with the top company in the group provided there is control (i.e. > 50%) at each level.

It is only necessary to aggregate holdings of an individual's associates, for the purposes of determining associated companies, where there is “substantial commercial interdependence” (i.e. financial, economic or organisational interdependence) between the companies under consideration.

(CTA 2010, s.27)

A pure holding company will be treated as dormant provided that all of the following apply:

(CTA 2010, s.26)

• It has no assets other than shares in 51% subsidiaries.

• It is not entitled to any deductions for qualifying charitable donations or management expenses in respect of any outgoings.

• It has no income or gains other than dividends which it has distributed in full to its

members.

9



LONG PERIODS OF ACCOUNT

For a company with a period of account that exceeds 12 months, the period of account must be split into two chargeable accounting periods (CAPs) – the first CAP will be the first 12 months and the second CAP will be the balance (n months).

A separate tax computation must be performed for each CAP.

The adjustment of profits, before capital allowances, is done for the period of account as a whole.

The income and gains are then split between the two CAPs as follows:

Adjusted trading profit Time apportionment

Capital allowances Two computations required – one for each CAPScale down WDA by n/12 in short CAPTime apportion AIA limit by n/12Do not time apportion FYA

UK Property business Accruals basis

Non-trading profits (LR) Accruals basis

Chargeable gains Date realised (i.e. date of disposal)

Qualifying charitable donations Date paid

Dividends received Date received

10



CORPORATION TAX SELF ASSESSMENT (CTSA)

NOTIFICATION OF CHARGEABILITY:For first coming in/coming back into the charge to Corporation Tax

Company must notify HMRC within 3 months of the start of its 1st CAP.

(FA 2004, s55)

For existing company If no CT603 received notify HMRC within 12 months of end of CAP.

(FA 1998, Sch 18 para 2)

FILING THE CORPORATION TAX RETURN (CT600):

The CT600 return and the financial statements of the company must be submitted to HMRC by the later of:

• 12 months after the end of the accounting period, and

• 3 months from the receipt of the filing notice (CT603)

(FA 1998, Sch 18 para 14)Corporation tax returns must be filed online, with a full copy of the company accounts, suitably ‘tagged’ in iXBRL format.

For a long period of accounts there are two CAPs and two CT600s but both are due on the same day.

AMENDING AND CORRECTING RETURN:By HMRC 9 months from date of receipt

(FA 1998, Sch 18 para 16)By company 12 months from due filing date to

correct errors or change claims(FA 1998, Sch 18 para 15)

TIME PERIOD FOR ENQUIRIES:Filed on time 12 months from actual filing date*

Late filing 12 months from next quarter day following late filing (31 Jan, 30 April, 31 July, 31 October)

(FA 1998, Sch 18 para 24)

* This deadline only applies for single companies and companies in a small group. The deadline for large groups of companies is 12 months from the due filing date.

RECORDS: Records must be kept by a company for 6 years from the end of CAP

(FA 1998, Sch 18 para 21)

11



DISCOVERY ASSESSMENTS: HMRC have the right to raise discovery assessments if:

(FA 1998, Sch 18 para 41 – 45)• the loss of tax was brought about carelessly or deliberately by the company, or

• HMRC have not been provided with sufficient information to allow them to make a correct assessment of the company's profits.

EXCESSIVE ASSESSMENT CLAIMS: Companies can make claims if they think they have overpaid tax on an earlier return

(FA 1998, Sch 18 para 51, 51B)

12



PAYMENT OF CORPORATION TAX

Large companies are required to pay their corporation tax by instalments(SI 1998/3175)

Other companies are required to pay 9 months and one day after the end of the chargeable accounting period.

For accounting periods beginning on or after 1 April 2015, a company is large if augmented profits exceed £1,500,000.

Augmented profits are:

£TTP XFII Dividends received × 100/90 X

X

FII excludes dividends received from 51% subsidiaries (more than 50% of ordinary share capital, profits and assets).

The £1,500,000 limit is proportionately reduced for short accounting periods and the number of related 51% group companies (directly or indirectly hold more than 50% of ordinary share capital).

(CTA 2010, s.1154)

A company (B) is a related 51% group company of another company (A) if for any part of the accounting period

– A is a 51% subsidiary of B

– B is a 51% subsidiary of A

– both A and B are 51% subsidiaries of the same company.

Related 51% group companies include worldwide companies but exclude inactive companies and passive holding companies.

(CTA 2010, s.279F)

There are 2 exceptions where instalments are not required even when a company is large:

• where the tax due is under £10,000, or

• the company was not large in the previous chargeable accounting period and the augmented profits are less than £10 million (for a twelve month period and £10m is divided by the number of related 51% group companies at the end of the previous accounting period).

For companies which are large the required instalments are due on the 14th of months 7, 10, 13, and 16 counting from the start of the 12 month CAP.

13



The amount of corporation tax due for each instalment is calculated as:

3/n × estimated CT liability

Where n = number of months in CAP.

The first instalment is due on the 14th day of month 7 from the start of CAP.

The final instalment is always due 3 months + 14 days after the end of CAP.

Any further instalments are 3 months from the previous instalment.

14



CORPORATION TAX – INSTALMENT PAYMENTS TIMELINE

Large Ltd – CAP year ended 31 March 2016

Period start Year End1 Apr 15 31 Mar 16

COMPANY CAP

14 Oct 15 14 Jan 16 14 Apr 16 14 Jul 16

1st instalment

2nd instalment

3rd instalment

4th instalment

6 months 3 months 3 months 3 months& 13 days from from & 14 daysfrom start previous previous from endof period instalment instalment of period

Amount due per instalment:

3/n × estimated corporation tax liability(where “n” is the number of months in the accounting period)

15



INTEREST ON LATE PAID TAX AND REPAYMENTS

Interest runs on tax paid late from the due date to the date of payment.

Tax repaid as a result of a loss carry back is treated as tax repaid for the year giving rise to the loss, unless the chargeable accounting period of the carry back falls wholly within the twelve months before that of the loss.

Tax repaid as a result of a non-trading profit (LR) deficit carry back is treated as a repayment of corporation tax for the year in which the deficit arose.

Interest paid on overdue tax is a non-trading debit and deducted from non-trading profit (LR) income.

Interest received on overpaid tax is taxed under non-trading profits (LR).

16



CTSA PENALTY REGIME

PENALTIES FOR FAILURE TO NOTIFY CHARGEABILITY The penalty is charged as a % of the amount of corporation tax which is unpaid 12 months after the end of the chargeable accounting period as a result of the failure to notify.

(FA 2008, Sch 41 para 7(3))

The following table details the maximum and minimum penalties that could apply;(FA 2008, Sch 41 para 13)

Behaviour Maximum penalty

Minimum penalty with unprompted

disclosure

Minimum penalty with prompted

disclosure

Deliberate and concealed

100% 30% 50%

Deliberate but not concealed

70% 20% 35%

<12m* ≥12m* <12m* ≥12m*Any other case 30% Nil 10% 10% 20%

*from the date of the tax becoming unpaid

The penalty is due within 30 days of the assessment being raised. Failure to pay will result in interest being charged on the penalty.

(FA 2008, Sch 41 para 16)

The penalty can be avoided if there is a reasonable excuse or can be reduced if special circumstances apply.

(FA 2008, Sch 41 para 20 & 14)

PENALTIES FOR LATE RETURNS The penalties are:

(FA 2009, Sch 55 paras 3–6)

• immediate £100 fixed penalty where return is filed late, plus

• potential penalties of £10 per day for a maximum of 90 days where return > 3 months late; plus

• penalty of 5% of the liability to tax (or £300 if greater) if return > 6 months late; plus

• additional penalties where returns filed > 12 months late, as follows:

17



Behaviour Max penalty

Min penalty with unprompted

disclosure

Min penalty with prompted disclosure


100% 30% 50%


70% 20% 35%

Any other case 5% N/A N/A

Minimum penalty of £300 if greater.

The penalty for late filing is charged in addition to the penalty for late payment if both apply.

PENALTIES FOR FAILURE TO KEEP RECORDS A penalty of £3,000 per chargeable accounting period applies where there has been a failure to keep records for 6 years from the end of the chargeable accounting period.

(FA 1998, Sch 18 para 23)

PENALTIES FOR INCORRECT RETURNS The penalties are a percentage of lost revenue:

(FA 2007, Sch 24 paras 4 & 10)

Behaviour Maximum penalty

Min penalty with unprompted

disclosure

Min penalty with prompted disclosure


100% 30% 50%


70% 20% 35%

Careless 30% 0% 15%

A penalty for a careless error may be suspended for two years.(FA 2007, Sch 24 para 14)

Both the penalties for late filing and incorrect returns are due within 30 days of the assessment being raised. Failure to pay will result in interest being charged on the penalty.(FA 2007, Sch 24 para 13 )

(FA 2007, Sch 55 para 18 )

The penalties can be avoided if there is a reasonable excuse or they can be reduced if special circumstances apply.

18



PENALTIES FOR LATE PAYMENT OF TAX For corporation tax, a 5% penalty of the outstanding tax is charged in respect of each of:

(FA 2009, Sch 56 paras 1 & 4)

• tax outstanding after the filing date of the return; and

• tax outstanding more than 3 months after the filing date of the return; and

• tax outstanding more than 9 months after the filing date of the return.

If the taxpayer has entered into an agreed time to pay arrangement, late payment penalties will not be charged.

The penalty is due within 30 days of the assessment being raised. Failure to pay will result in interest being charged on the penalty.

(FA 2009, Sch 56 para 11)

The penalty can be avoided if there is a reasonable excuse or it can be reduced if special circumstances apply.

(FA 2009, Sch 56 paras 16 & 9)

19



PROPERTY INCOME

UK property business income is taxed on an accruals basis.

Relief is given for expenses incurred wholly and exclusively for the UK property business.

Interest on loans taken out to buy properties is never a UK property business expense for companies, it is instead relieved under the loan relationship rules.

Dividends from Real Estate Investment Trusts (REITs) are taxed as UK property business income and are received gross by companies.

20



LOAN RELATIONSHIPS – BASICS

A loan relationship arises where a company has a money debt arising from the lending of money.

(CTA 2009, s.302)

Tax treatment of loan relationships:

Debits / Expenses Credits / IncomeTrading loan Deducted from trade profits

(CTA 2009, s.297)Included in trade profits

Non-Trading loan Treated as non-trading expense (LR)

Treated as non-trading income (LR)

This can best be summarised by a flowchart:

Purpose of the loan?

Trading Non trading

Debit Credit Debit Credit

Trade profit Trade profitexpense income Pool

NET NETDEBIT CREDIT

Non-trading Non-tradingDeficit (LR) Profit (LR)

Trading loan relationships include:

Funds used to generate trading income, fund working capital, loan to buy stock used in the trade, loan to purchase office/warehouse used in the trade.

Non-trading loan relationships include:

Loans to buy an investment property, loans to buy shares in a subsidiary company, loans to/from other group companies.

Non-trading income and expenses are pooled.

21



LOAN RELATIONSHIPS – CONNECTED COMPANIES

Loan Relationships are accounted for at fair value or amortised cost – connected companies must use amortised cost.

(CTA 2009, s.349)

This will involve adjustments in the period companies become connected if the loans are held at fair value.

(CTA 2009, s.350)

No income or expense is recognised in respect of impairments or released debts between connected companies.

(CTA 2009, s.354 & 358)

If companies become connected, impairment losses up to the date of connection are recognised, with corresponding income in the debtor company.

(CTA 2009, s.362 & 358)

If an unconnected consortium member has a deduction for an impairment on a loan to a consortium company and claims consortium relief, restrictions apply to prevent double economic relief.

(CTA 2009, s.364)

Interest is deductible when payment is made if it is payable to:

• a participator (or his associate) in a close company(CTA 2009, s.375)

and

• it has not been paid within 12 months of the end of the accounting period,

and

• it has not been taxed in the hands of the recipient.(CTA 2009, s.373)

22



RELIEF FOR TRADING LOSSES

When a company makes a trading loss it can relieve it against:

i. total profits of the same chargeable accounting period then,(CTA 2010, s.37(3)(a))

ii. total profits of the previous 12 months, and any unused loss is then automatically(CTA 2010, s.37(3)(b))

iii. carried forward against future trade profits only(CTA 2010, s.45(4))

Total profits means income and gains before deducting qualifying charitable donations.

A carry back claim can only be made after a current year claim has been made.

Care needs to be taken if there is a short chargeable accounting period, as the carry back must be against 12 months worth of profits, if the loss is large enough.

Where the company ceases to trade, the trading loss of the final 12 months can be carried back against total profits of the 36 months ending immediately before the loss making period rather than the normal 12 months.

(CTA 2010, s.39)

When a loss is carried back it will generate a repayment of CT paid for the earlier accounting period.

Both current year and carry back claims are ‘all-or-nothing’ – partial claims are not permitted.

The time limit for these claims is two years from the end of the loss making chargeable accounting period.

23



CORPORATION TAX TRADING LOSS PROFORMA

Period ended£

Trade profit XLess: Losses b/fwd - S.45(4) (X)

XUK property business income XNon trading profit (LR) XOverseas property business income XNon trading gains (IFAs) XChargeable gains X

XLess: Current year loss - S.37(3)(a) (X)

X

Less: Carried back loss - S.37(3)(b) (X)X

Less: Qualifying charitable donations (X)TTP X

24



RELIEF FOR OTHER LOSSES

Losses from a UK property business must be set off against total profits of the current period. If excess losses remain these can be carried forward against future profits.

(CTA 2010, s.62)

Overseas property business losses are pooled together with profits on overseas properties. Losses are then carried forward and set against profits of the overseas property business of future accounting periods.

(CTA 2010, s.66)

Non-trading income and expenses are pooled. If the non-trading debits exceed the non-trading credits then loss relief is available for the resulting deficit.

Deficits (or losses) from a non-trading loan relationship can be offset against any profits in the period, although a 12 month carry back against non-trading profits (LR) is also possible. These claims can be done in any order and are very flexible.

(CTA 2009, s.461 and s.462)

Unused non-trading (LR) deficits are automatically carried forward against future non-trading income and gains unless the company elects for them not to be offset in this way.

(CTA 2009, s.457)

25



SUMMARY FOR THE USE OF TRADE AND OTHER LOSSES

Trading losses Non-trading deficits (LR) Losses of a UK property business

CURRENT YEAR Against total profits

Up to the amount of total profits (in priority to both trading and UK property

business losses)

Against total profits (compulsory)

CARRY BACK

12 months c/b – against total profits (must do

current year claim first) [3 years c/b for loss

made in final 12 months of trade]

12 months c/b – against non-trading profits (LR) only (no need to make current year claim first)

N/A

CARRY FORWARD

Against future profits of same trade (automatic)

Against any future profits except trading (can claim for this not to

occur)

Against any profits

Total profits means income and gains before deducting qualifying charitable donations.

26



CORPORATE CAPITAL GAINS

Companies include gains in their TTP and pay corporation tax on that. Companies do not get an annual exemption and are not eligible for reliefs such as entrepreneurs' relief.

Indexation allowance is available to reduce gains for companies calculated as:

Cost × (RPI at sale − RPI at acquisition) / RPI at acquisition (rounded to 3 dp)

If enhancement expenditure is incurred it may need to be indexed separately.

Indexation cannot create or increase a loss.

Rollover relief (TCGA 1992, s.152) is available when qualifying assets are disposed of and the proceeds are reinvested in other qualifying assets. Goodwill is only a qualifying asset for companies where it is bought or created before April 2002.

If proceeds are not fully reinvested a gain equal to the cash retained must be left chargeable.

(TCGA 1992, s.153)

If a company purchases a depreciating asset, rollover relief works differently in that the gain on the asset being replaced is not deducted from the base cost of the asset acquired.

(TCGA 1992, s.154(1))

Instead the gain on the old asset being deferred is frozen.

The frozen gain crystallises on the earliest of:

• sale of the depreciating asset;

• ceasing to use the depreciating asset for trade purposes;

• 10 years from acquisition of the depreciating asset.(TCGA 1992, s.154(2))

When shares of the same class in the same company that have been bought in tranches over time are sold, we use matching rules to identify which shares are being sold.

(TCGA 1992, s.107)

The matching rules for companies are:

1st Shares acquired on the same day2nd Shares acquired in the previous 9 days3rd Shares acquired from 1 April 82 to 9 days prior to disposal (s.104 pool)

Once the disposals have been matched with the acquisitions, a gain is calculated for each match.

The Section 104 pool is a single asset for capital gains purposes. Where shares in the pool are sold, each share in that pool will be treated as having a base cost equal to the average cost of the shares in the pool at the date of the disposal.

(FA 2000, Para. 68 Sch 15)

27



CHARGEABLE GAINS PROFORMA – COMPANY

COST£

Gross sale proceeds XLess: Incidental selling cost (X)Net sale proceeds XLess: Original acquisition cost (X)Less: Incidental costs of acquisition (X)Less: Enhancement expenditure (X)Unindexed Gain X

Less: Indexation allowance* on cost (X)Less: Indexation allowance on enhancement (X)

Indexed gain X

Less: Roll over relief (if available and claimed) (X)Gain after relief X

Less: Current year capital losses (X)Less: Brought forward capital losses (X)Net chargeable gain (included in TTP and charged to corporation tax)

X

* Indexation allowance (3dp) = (RPI disposal − RPI acquisition) / RPI acquisition × cost

RPI at acquisition is replaced by RPI at enhancement when calculating indexation allowance on enhancement expenditure.

28



SOLE TRADERS V COMPANIES

Sole Traders/partners CompaniesTax rates set for tax years: Tax rates set for financial years:6 April – 5 April 1 April – 31 MarchTaxed on income and gains for a tax year

Taxed on income and gains for a chargeable accounting period

Basis period rules used to allocate results to tax years (opening years, closing year, change of accounting date rules with overlaps)

Chargeable accounting periods (“CAP”) (can never be more than 12 months and no overlaps)

No deduction from trade profits for private expenditure by sole traders/partners

Deduction from trade profit allowed for employee/director as private expenditure is taxed on employee/director as employment benefit

Capital allowances per accounting period (can be > 12 months)

Capital allowances per CAP (can never be more than 12 months)

Restrict capital allowances for private use by sole traders/partners

No restriction of capital allowances for private use by employee/director

Trade profits included in net income and charged to income tax

Trade profits included in TTP and charged to corporation tax

Trade losses: Trade losses:CY – against net income CY – against TTP before donationsCB – against net income (CY/CB any order)

CB – against TTP before donations (but CY must be done first)

Extend CY/CB against gains CF – against trade profitsCF – against trade profits On cessation – CB against TTP for 3 yearsEarly years – losses in first 4 years carry back (FIFO) against previous 3 years net incomeTerminal losses – carry back (LIFO) 3 years against trade profitsNIC – Class 2 and 4 NIC Class 1 Secondary, Class 1A and

Class 1B (payable by company as employer) but allowed as a corporation tax deduction

Due dates for returns: 31 Jan following tax year (electronic)

Due dates for returns: 12 months following CAP (unless period of account > 12 months then 12 months from end of period of account)

Can self assess or HMRC to calculate tax Must self assessDue dates for payments: Due dates for payments:POA 1: 31 Jan in tax yearPOA 2: 31 July after tax year Large – instalments Balance: 31 Jan after tax year (instalment amount 3/n × estimated CT

liability)(POA 50% prior year IT and Class 4 NIC due)

Others – 9 months 1 day from end of CAP

Capital gains charged to CGT – no indexation but AE given

Capital gains included in TTP - indexation but no AE given

Range of CGT deferral reliefs available Only deferral relief available for capital gains is rollover relief.

29



SUBSTANTIAL SHAREHOLDING EXEMPTION

Under SSE gains on shares held by companies are exempt from corporation tax and losses are not allowable provided that:

• at least 10% stake has been held throughout a period of 12 months in the last 24

months of ownership.(TCGA 1992, paras 7 & 8 Sch 7AC)

• both companies are trading companies (or members of a trading group) throughout the 12 month holding period AND immediately after the disposal.

(TCGA 1992, paras 18 & 19 Sch 7AC)

Shareholdings of all group companies (51% holdings) are aggregated to determine whether the conditions have been satisfied.

(TCGA 1992, para 9)

30



INTANGIBLE FIXED ASSETS

From 1 April 2002, new rules were introduced for Intangible Fixed Assets (IFAs).

Tax treatment of IFAs (debits and credits arise in line with the accounting treatment):

Debits CreditsTrading IFA Deducted from trade

profitsIncluded in trade profits

Non Trading IFA Treated as non-trading expense (IFAs)

Treated as non-trading income (IFAs)

Non-trading debits and credits are pooled – if the non-trading debits exceed the non-trading credits then loss relief is available.

(CTA 2009, s.751)

A non-trading loss (IFAs) can be:(CTA 2009, s.753)

• set off against total profits in the current year

• carried forward to the next period and treated as if it were a non trading debit on IFAs of that period.

Amortisation of an IFA is allowed or the company can elect for a 4% straight line write off.

(CTA 2009, s.730)

Royalties are brought in on an accruals basis for tax following the accounts.

Disposals of IFAs such as goodwill give rise to an income gain or loss.

Rollover relief is available where the proceeds are reinvested 12 months before to 36 months after the sale of the IFA as follows:

(CTA 2009, s.755)

Proceeds of sale XLess: WDV of IFACost of IFA sold XLess: Amortisation given tax relief to date (X)

(X)IFA gain XLess: Rollover relief (proceeds reinvested in new IFA – cost of IFA sold) (X)IFA gain chargeable in year of disposal (tax relief taken to date + proceeds not reinvested) X

Transactions with related parties are treated as taking place at market value.

(CTA 2009, s.845)

Late paid royalties (more than 12 months from the end of an accounting period) to related parties may be deductible on a paid basis.

(CTA 2009, s.851)

31



For goodwill acquired on/after 3 December 2014, corporation tax relief is not available where it is acquired from an individual who is a related party in relation to the company.

(CTA 2009, s.849B-D)

Companies can elect for profits from IP and patents to be taxed at a lower rate. Rules commenced 1 April 2013 and are being phased in over 5 years to give an effective rate of 10%.

Relief is given by allowing a deduction to be made in calculating the trade profits for the period as follows:

Relevant IP profits x (Main rate of CT — IP Rate of CT)/Main Rate of CT(CTA 2010, s.357A)

The relevant IP profits used in the above calculation are reduced as follows:

Financial Year % of IP Profits2013 60%2014 70%2015 80%2016 90%

32



RESEARCH AND DEVELOPMENT EXPENDITURE

For expenditure incurred on or after 1 April 2015, SMEs can claim a tax deduction of 230% for qualifying R&D (for expenditure incurred pre 1.4.15, the deduction was 225%).

The relief relates to “qualifying” expenditure on:(CTA 2009, s.1052)

• staff costs

• software and consumable items

• relevant payments to subjects of clinical trials

• externally provided workers

For expenditure incurred on/after 1 April 2015, relief is not available for consumables reflected in goods/services sold as part of the company’s trade.

SMEs with losses can surrender them to HMRC and receive a tax credit/repayment(CTA 2009, s.1058)

The surrenderable amount is the lower of:

• Qualifying R&D × 230% (225% for expenditure incurred pre 1.4.15).

• Unrelieved trading losses.

The tax credit is 14.5% of the surrenderable loss for the period since 1 April 2014.

Large companies can claim a tax deduction of 130% for qualifying R&D. This deduction will be available until 31 March 2016.

For expenditure from 1 April 2013, an R&D expenditure credit (RDEC) of is available. This may be claimed instead of the 130% deduction, which it replaces from 1 April 2016.

(CTA 2009, s.104A)

The RDEC is treated as a taxable receipt in calculating the profits of the trade for the accounting period. The company will also receive a credit against its tax liability of the same amount. This credit is equal to 11% of the company’s qualifying R&D expenditure incurred on or after 1 April 2015. The credit is 10% of expenditure incurred prior to this date.

33



COMPANIES WITH INVESTMENT BUSINESS

A company with investment business is a company deriving its income wholly or partly from the making of investments.

(CTA 2009, s.1218B)

The Taxable Total Profits (TTP) of a company with investment business are found by adding together income and gains and deducting management expenses before any other deductions and reliefs.

Management expenses include agents' commissions, professional fees, premises costs and reasonable directors' salaries, but exclude expenses of a capital nature or for an unallowable purpose.

(CTA 2009, s.1219)

Management expenses are deductible based on when they are debited in the accounts.(CTA 2009, s.1224)

If management expenses exceed profits, a company has “excess management expenses”. These excess management expenses can be carried forward.

(CTA 2009, s.1223)

When an investment company has a capital loss on the disposal of shares that it subscribed for in a qualifying company, it can claim to set that loss off against income of that period or the previous period.

(CTA 2010, s.68)

An investment company is a company whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom.

(CTA 2010, s.90(1))

34



PROFORMA CORPORATION TAX COMPUTATIONINVESTMENT COMPANY / COMPANY WITH INVESTMENT BUSINESS

Company name

Corporation tax computation for the chargeable accounting period

£

Other Income:Non-trading profits (loan relationships) XNon-trading gains (IFAs) XMiscellaneous income XUK property business XOverseas property business XNet chargeable gains X

Less: Management expenses (X)Less: Qualifying charitable donations (X)Taxable total profits (TTP) X

TTP × appropriate rate XLess: Marginal relief (if applicable) (X)Corporation tax liability X

Tutorial Note:

An investment company or a company with an investment business may also carry on a trading activity and have trade profits. Management expenses would arise to the extent they were made in relation to the investment business. Management expenses would still be set against income and gains before qualifying charitable donations.

35



THE PRINCIPLES OF GROUP RELIEF

When a company makes a trading loss it can surrender it to another member of the same 75% group.

To be in a 75% group all of the following conditions must be met:(CTA 2010, ss.151-152)

i. The parent company has at least 75% ownership of the ordinary share capital of the company; and

ii. Those shares entitle the holder to at least 75% of the distributable profits that are

available to the equity holders; and

iii. Those shares entitle the holder to at least 75% of the company's assets that are available for distribution to the equity holders on a winding up.

It is possible for a company to participate in more than one group relief group.

The maximum amount that can be surrendered is the lower of:

i. the loss of the surrendering company, and

ii. the TTP of the claimant company

Only current year losses can be surrendered and they must be used by the claimant company in the current year.

There is no requirement for the surrendering company to use the loss against its own income before surrender but it may do if it so chooses.

Non-trading LR deficits may also be group relieved in the same way.

Excess UK property business losses, excess qualifying charitable donations, excess management expenses and excess losses on non-trade IFAs can also be included in a group relief claim.

Excess means amounts over the profit-related threshold, which consists of the gross profits of the surrendering company before any losses are set off.

(CTA 2010, s.99 & s.105)

The loss is allocated to relieve income taxed at the highest rates. For a loss incurred in FY 2015, the highest rate of tax may be saved by the loss making company claiming relief in the current year, then carrying the loss back to the previous year (and saving tax at 21%) rather than a group relief claim.

The marginal rates for FY 2014 are:

£0 - £300,000 20%£300,001 - £1,500,000 21.25%over £1.5m 21%

36



GROUP RELIEF – FURTHER ASPECTS

Where the two companies do not have the same year-end, it is necessary to time apportion the profits and losses. The group relief becomes the lower of:

i. the loss, and

ii. TTP

of the corresponding (same) chargeable accounting period.

A corresponding chargeable accounting period starts when a company joins the group. Therefore group relief is not available for losses made before the company joined the group.

Similar rules apply when a company leaves the group, with the date of leaving being the date that “arrangements for sale” come into being.

Relief is available between two UK companies if they are 75% connected via a non-resident company.

37



CONSORTIUM RELIEF

A consortium exists where 75% of the shares of the company (the consortium company) are owned by other companies (the consortium members). The consortium members must each own 5% or more of the consortium company.

(CTA 2010, s.153(1) & (2))

A consortium can be established using non UK resident companies, but losses cannot be claimed from or transferred to companies which are not trading in the UK (i.e. not within the charge to UK corporation tax).

Where the consortium company makes a loss, each member may claim its share of that loss, providing it is not greater than its profits for the same period.

(CTA 2010, s.143 (2))

The consortium company must relieve (or is deemed to have done so) its own income in the current period before the consortium relief is calculated.

(CTA 2010, s.147)

If the consortium member makes a loss, it can surrender the loss to the consortium company, up to its share of the consortium company's profits. No deemed current period claim is required.

(CTA 2010, s.144 (2))

38



GROUP CONSORTIUM COMPANIES

If the consortium company is a group consortium company then any losses which could be group relieved are deemed to have been group relieved when calculating the loss available for consortium relief. If any actual group relief claims are made between the subsidiaries of the group consortium company, these are taken into account when calculating the deemed group relief claim.

(CTA 2010, ss.148–149)

If the consortium company is a consortium holding company then losses can flow between its 90% trading subsidiaries and the consortium members.

(CTA 2010, s.153)

39



GROUP ADMINISTRATION

GROUP RELIEF

A group relief claim must be made on the claimant company's tax return.(FA 1998, Sch 18 para 67)

It must specify the amount claimed, the name of the surrendering company and the accounting period of the claimant to which the claim relates.

(FA 1998, Sch 18 para 68)

A claim requires the written consent of the surrendering company.(FA 1998, Sch 18 para 70)

The basic time limit for making and withdrawing group relief claims is the first anniversary of the filing date of the claimant.

(FA 1998, Sch 18 para 74)

There are simplified arrangements for group relief available. Under these the claim for group relief is made by the authorised company and does not have to include a consent to surrender.

(SI 1999/2975)

GROUP PAYMENT ARRANGEMENTS

Where there is a 51 % group, the group can apply for the nominated company to make all payments of tax for the group and allocate the payments after the closing date. This is called a group payment arrangement.

(TMA 1970, s.59F(3))

GROUP TAX SURRENDERS

If the group payment arrangements are not used, amounts of tax overpaid can be surrendered within a 75% group (75% direct and indirect relationship). This is called group tax surrenders.

(CTA 2010, ss.963–966)

40



GROUP PAYMENT ARRANGEMENTS

A

51% 51%B C

51% 51% 51%

D E F

51%

G

HOW GROUP PAYMENT ARRANGEMENTS WORK:

• Group above eligible for and submits a group payment arrangement

• B is the nominated company here and pays CT to HMRC for all the group

• Nominated company can be any member of the group, does not need to be

ultimate parent

• B apportions the CT payments amongst the group members 30 days from the closing date (later of last filing date of the group and HMRC receipt of last return)

CONDITIONS FOR GROUP PAYMENT ARRANGEMENTS:

• 51% subsidiaries

• One or more companies liable to CT by instalment payments

• Usually all companies have same period of account

• Submit application for group payment arrangements at least 1 month before 1st

instalment due

EFFECT:

• Reduce interest on over/under payments

• Reduce group's administration

41



GROUP TAX SURRENDERS

Overpays £5,000 A

Asurrenders£5,000 to

B

100% 75%Underpays £5,000 B C

75% 75%

E D

HOW GROUP SURRENDERS WORK:

• Group with A, B, C and E only eligible for group surrenders

• A and B submit a joint notice to make the surrender

• A surrenders its overpayment to B and so treated as if A did not overpay and B did not

underpay

CONDITIONS FOR GROUP SURRENDER ARRANGEMENTS:

• 75% direct relationship AND

• 75% indirect relationship

• Not in a group payment arrangement

• All companies have same CAP

• Member of group throughout period

EFFECT:

• Reduce interest on over/under payments

42



GROUP CAPITAL GAINS

A gains group requires a 75% relationship between companies. However, unlike group relief groups it is possible to include sub-subsidiaries of 75% subsidiaries, providing the effective holding is more than 50%.

(TCGA 1992, s.170)

Assets transferred between members of a gains group automatically move on a no gain no loss basis under TCGA 1992, s.171, i.e. the new company inherits the indexed cost of the old one.

Companies can elect to treat current year gains or losses as accruing to another group member.

(TCGA 1992, s.171A)

Gains groups can claim rollover relief on a group wide basis.(TCGA 1992, s.175)

43



CORPORATION TAX GROUPS

1. ASSOCIATES (For FY 2014 and earlier years only) a. Companies under common control at any time during CAP

b. Include overseas resident companies

c. Ignore companies that are dormant for whole CAP

d. Include shareholdings owned by individuals

e. Control is demonstrated by > 50% of either

i. Votes, or

ii. Ordinary issued shares, or

iii. Distributable profits, or

iv. Assets when winding up

f. Divide corporation tax limits by number of associates

g. Ignore dividends received from associates in calculating FII

2. GROUP RELIEF GROUP a. 75% direct holding (each direct holding) and ≥ 75% indirect holding

b. 75% applies to all three of:

i. Ordinary shares, and

ii. Distributable profits, and

iii. Assets when winding up

c. Ignore shareholdings owned by individuals

d. Can be a member of more than 1 group relief group

e. Can only surrender current period trading losses, non-trading deficits (LR), excess UK

property business losses, excess management expenses, excess non-trading losses on IFAs and excess qualifying charitable donations.

f. Maximum loss that can be surrendered is the lower of the current period loss and the

available taxable total profits of the claimant company for the corresponding CAP

g. Can surrender current CAP losses only to other members of group relief group if an election is made (2 years from end of claimant company's CAP)

44



3. CAPITAL GAINS GROUP a. 75% direct holding (each direct holding) and > 50% indirect holding

b. 75% applies to ownership of Ordinary shares only

c. Ignore shareholdings owned by individuals

d. Can NOT be a member of more than 1 group

e. Transfers of chargeable assets automatically at no gain no loss within the gains group

(intra group transfers)

f. Can make election to reallocate a current period chargeable gain or loss to another group company (2 years from end of CAP in which gain was made)

g. Can claim group wide rollover relief 4 years from later of end of CAP in which gain

was made or CAP in which new asset is acquired.

4. CONSORTIUM COMPANY a. Consider for any company NOT in group relief group

b. Consortium if owned ≥ 75% by companies with each company holding ≥ 5%

(consortium members)

c. Can surrender current CAP losses between consortium member and consortium company (based on consortium member's ownership of consortium company)

45



GROUP GAINS – FURTHER ASPECTS

If a company leaves the group within 6 years of receiving an asset in a no gains no loss transfer there will be a degrouping charge. This is calculated by treating the asset as having been sold for its open market value at the date of the original transfer.

(TCGA 1992, s.179)

This degrouping charge is assessed on the vendor of the company’s shares, as an adjustment to the sale consideration.

(TCGA 1992, s.179 (3D))

As the degrouping charge now forms part of the gain arising on the disposal of the company's shares, it is subject to the Substantial Shareholding Exemption, if the conditions for the exemption are met. It can also be reallocated to another group member under s.171A.

Where IFAs are transferred intragroup, the transfer is tax-neutral. (CTA 2009, s.775)

If the transferee leaves the group within 6 years of the IFA transfer, a degrouping charge arises on the transferee in the accounting period in which it leaves the group. This is calculated as the profit or loss that would have arisen if the transfer had taken place at market value at the date of the transfer. This can be rolled over or reallocated.

(CTA 2009, s.780)

IFA rollover relief is available on a group wide basis provided the company that buys the new asset is within the same group at the time of the IFA purchase as the company that has made the IFA income gain. In addition, the new asset must be bought from outside the group.

(CTA 2009, s.777)

There are anti-avoidance rules to prevent a company acquiring another company in order to utilise its capital losses or gains.

When a company joins a group there is restriction on how its capital losses can be used by the new group. Realised pre-entry capital losses can only be set against:

i. gains on assets held by the company at the time it joined the group; and

ii. gains on assets bought from non-group members after joining the group for use in the

company's trade and/or business. This category includes gains on assets bought from non-group members by any group company which is continuing to undertake the trade or business of the new joiner company (post a s.171 transfer of assets).

(TCGA 1992, Sch 7A para 7(1A))

“Realised” pre-entry capital losses are losses on assets sold before joining the group.

There is no longer a restriction on the use of “unrealised” pre-entry capital losses.

46



CHANGE IN OWNERSHIP OF A COMPANY

Where there has been a change in ownership of a company, the use of trading losses will be blocked from the date of the change of ownership if in a period of three years either side of the change there has been a major change in the nature or conduct of the company’s trade.

(CTA 2010, s.673 and SP 10/91)

A “major change” includes a major change in:

• property dealt in

• services provided

• facilities provided

• customers

• outlets

• markets

The anti-avoidance rules also apply where the company’s trade was small or negligible immediately before the change in its ownership, and the trade undergoes a considerable revival in any period following the change in ownership. This provision is not confined to 3 years.

Similar rules apply to the carry forward of management expenses, losses from UK and overseas property businesses, non trade deficits on loan relationships and non trading losses on Intangible Fixed Assets, following a change in ownership of a company with an investment business.

(CTA 2010, s.677)

47



TRANSFER OF TRADES

When a trade is transferred, the following occurs:

• Trade in the transferor ceases (end of accounting period)

• Trade in the transferee commences, if no existing trade, new accounting period starts

• Capital allowance balancing adjustments will arise in the transferor as pools cease

• Two connected companies can jointly elect for the assets to transfer between them at TWDV under s.266 CAA 2001

• Trading losses stay with transferor – possible terminal loss claim

• Capital gains disposal of chargeable assets – possible rollover provisions may apply

where assets qualifying and used in the trade

• Stock will be transferred at the price paid unless it is transferred to a connected party in which case market value will apply

(CTA 2009, s.162)• Connected parties can elect to have stock treated as transferred at the higher of

cost and price paid, provided that the market value is greater than both cost and selling price

(CTA 2009, s.167)

TRANSFERS UNDER COMMON OWNERSHIP

Successions apply automatically for a transfer of trade without a change in ownership.

Where a trade within the charge to UK tax is transferred from one company to another, and there is at least 75% common ownership of it (at some point in the year before the transfer and at some point in the two years following the transfer) then:

• Trading losses are transferred to the new owner; and

(CTA 2010, s.944)• Capital allowance pools transfer at TWDV.

(CTA 2010, s.948)

There is a restriction on the transfer of losses where net liabilities are left behind in the transferor.

(CTA 2010, s.945)

Where there is a succession followed by a change in ownership of the transferee company, the major change in nature or conduct of trade rules apply, and losses may be restricted.

48



SALE OF ASSETS VERSUS SALE OF SHARES

When considering “buying” another company, there is a choice over how the acquisition is structured. The purchaser can either buy the shares of the target company (Co B) or buy the trade and assets from the target company.

Below is an outline of the tax implications of structuring such a transaction as firstly, a sale of shares, then as a comparison, as a sale of the trade and assets. The tax implications of both will vary depending on whether the parties involved are connected or not.

Before After

Seller →→→→ BuyerSale of B shares

100% 100%

Co B Co B

SALE OF SHARES IF UNCONNECTED BUYER AND SELLER Seller

• Gain on sale of shares?

• Consider entrepreneurs’ relief for an individual shareholder / SSE for a corporate

shareholder

Co B

• No break in CAP, keeps going as normal

• Trade losses: c/fwd of losses may be restricted by CTA 2010, s.673 (“MCINOCOT”) – SP 10/91

Buyer

• One extra related 51% group company where the buyer is a company

• Buying a company with ‘history’ (a “DIRTY” company)

– Warranty from Seller confirming no undisclosed liabilities

– Indemnity – Seller agreeing to repay any tax suffered by Buyer if there is any

49



SALE OF SHARES IF UNCONNECTED COMPANIES

Before After

Co A →→→→ Co CSale of B shares

100% 100%

Co B Co B

Co A

• Gain on sale of shares? – SSE may apply

• Possible de-grouping charge (TCGA 1992, s.179). Adjustment to gain or loss calculation for sale of Co B.

• One less related 51% group company from next CAP

Co B

• No break in CAP, keeps going as normal

• Trade losses: c/fwd of losses may be restricted by CTA 2010, s.673 (MCINOCOT) – SP

10/91

• Group relief – time apportion for period in group with Co A (up to the date “arrangements” come into force) and period in new group with Co C (from date Co C acquires shares)

• Co B may have pre-entry capital losses which cannot be used by new gains group

with Co C

• IFAs – may be degrouping charge in Co B on leaving group with Co A

• A related 51% group company of both Co A and Co C in CAP of sale

Co C

• One extra related 51% group company

• Buying a company with ‘history’

– Warranty from A confirming no undisclosed liabilities

– Indemnity – Co A agreeing to repay any tax suffered by Co C if there is any

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SALE OF SHARES IF CONNECTED (75%)

Before After

Co A →→→→→→→→→→→→→ Co ASale of B shares

100% 100%

Co B Co C Co C

100%

Co B

Co A

• No gain no loss – automatic

Co B

• No issues re arrangements – still in same group relief group

• No degrouping charges – does not leave gains group

• No degrouping charges on IFAs

Co C

• No implications – acquires Co B at no gain no loss value

TRANSFER OF TRADE AND ASSETS

Seller Buyer↑↑↑

Co B ↑Trade & assets →→→→→→ Trade & assets

TRANSFER OF TRADE & ASSETS IF UNCONNECTED BUYER AND SELLER Seller

• No implications

Co B

• Transfers L&B, goodwill, P&M, stock, debtors, creditors to buyer

• Trade ceases = end of CAP

• Trade Profits:

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– P&M = balancing adjustments using agreed price

– Income gains/ losses on IFAs using agreed price

– Losses – CTA 2010, s.37 & s.39 terminal loss relief, losses stay within Co B (no c/fwd available as Co B has ceased to trade)

• Chargeable gains on L&B and goodwill using agreed price (if bought/created pre 1

April 02) – can set trading losses against chargeable gain as part of CTA 2010, s.37 claim

• Stock sold at agreed price

Buyer

• Acquires trade & assets, therefore no history (“CLEAN” assets)

• Goodwill = IFA if purchaser is a company, new rules apply (i.e. tax relief for

amortisation of agreed price). Goodwill is capital asset if buyer is individual

• AIA on agreed price of P&M (but no FYAs as second hand assets)

• Don't get any trade losses – they remain with Co B

• No extra related 51% group company if buyer is a company

• If buyer is a person – commence a trade (opening year rules / notify HMRC)

• If buyer is a company and no other existing trade start of CAP for company / notify HMRC

TRANSFER OF TRADE & ASSETS IF BUYER AND SELLER CONNECTED (>50%) For example Mr Smith owns 51% of selling company Co B and buying company Co C

IN ADDITION TO THE POINTS MADE ABOVE

Mr Smith - shareholder

• No implications

Co B – Selling Company

• Trade Profits:

– P&M = sale at lower of cost or actual sales proceeds or can jointly elect to transfer at TWDV under s.266 CAA 2001

– IFA’s transferred at MV as connected persons (e.g. “new” goodwill)

– Losses – stay with Co B to use for current year/terminal loss claims

• L&B and Goodwill (if bought/ created before 1 April 2002 within Co B) – must use

open market value for sales proceeds as connected persons

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• Stock is sold at market value but seller and buyer can elect to use higher of cost and agreed price

Co C – Buying Company

• Goodwill = not IFA, remains a chargeable gain on disposal (if bought/ created before

1 April 02 within Co B)

• P&M transferred at TWDV if CAA 2001, s.266 election made, or for price paid if not

TRANSFER OF TRADE & ASSETS IF BUYER AND SELLER CONNECTED (75%) For example Mr Smith owns 75% of selling company Co B and buying company Co C

IN ADDITION TO THE POINTS MADE ABOVE

Mr Smith - Shareholder

• No implications

Co B – Selling company

• Trade Profits:

– P&M = CTA 2010, s.948 automatically transferred at TWDV

– Losses – CTA 2010, s.944 transferred with the trade (but may be restricted). No terminal loss relief available

Co C – Buying company

• P&M transferred at TWDV

• Get trade losses – losses transferred to Co C with the trade of Co B

TRANSFER OF TRADE AND ASSETS BETWEEN COMPANIES

Co A Co C↑↑↑

Co B ↑Trade & assets →→→→→→ Trade & assets

TRANSFER OF TRADE & ASSETS IF UNCONNECTED COMPANIES Co A

• No implications

Co B

• Transfers L&B, goodwill, P&M, stock, debtors, creditors to Co C

• Trade ceases = end of CAP

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• Trade Profits:

– P&M = balancing adjustments using agreed price

– Income gains/ losses on IFAs using agreed price

– Losses – CTA 2010, s.37 & s.39 terminal loss relief, losses stay within Co B (no c/fwd

available as Co B has ceased to trade)

• Chargeable gains on goodwill (if bought/created pre 1 April 02) and L&B – can set trading losses against chargeable gain as part of CTA 2010, s.37 claim

Co C

• Acquires trade & assets, therefore no history

• If no other existing trade already in Co C = start of CAP for Co C

• Goodwill = IFA, new rules apply (i.e. tax relief for amortisation of agreed price)

• AIA on agreed price of P&M (no FYAs as second hand assets)

• Don't get any trade losses – they remain with Co B

• No extra related 51% group company

TRANSFER OF TRADE & ASSETS IF CONNECTED (>50%) Co A

• No implications

Co B

• Trade Profits:

– P&M = sale at lower of cost or actual sales proceeds or can jointly elect to transfer

at TWDV under CAA 2001, s.266 .

– Losses – stay with Co B to use for current year/terminal loss claims

• Goodwill (if bought/ created before 1 April 02 within Co B) and L&B = must use open market value for sales proceeds as connected persons

Co C

• Goodwill = not IFA, remains a chargeable gain on disposal (assuming bought/

created before 1 April 02 within Co B)

• P&M transferred at TWDV if CAA 2001, s.266 election made, or for price paid if not

54



TRANSFER OF TRADE & ASSETS IF CONNECTED (75%) Co A

• No implications

Co B

• Trade Profits:

– P&M = CTA 2010, s.948 automatically transferred at TWDV

– IFAs transferred = tax neutral

– Losses – CTA 2010, s.944 transferred with the trade (but may be restricted)

• Goodwill (if bought/ created before 1 April 02 within Co B) and L&B = No gain no loss

(automatic)

Co C

• Goodwill = not IFA, remains a chargeable gain on disposal (assuming bought/created before 1 April 02 within Co B)

• P&M transferred at TWDV

• Get trade losses – losses transferred to Co C with the trade of Co B

55



CLOSE COMPANY DEFINITION

A close company is a company that is:(CTA 2010, s.439)

• resident in the UK; and

• controlled by either 5 or fewer participators; or

• any number of participator directors.

In looking at a person's shareholding we consider shares held by their associates.

For close company purposes associate includes: spouse or civil partner, parents and remoter forebears, children and remoter issue, and siblings.

(CTA 2010, s.448)

There are exceptions which include:

• registered industrial and provident societies, and building societies

• companies controlled on behalf of the crown

• companies controlled by open companies

• quoted companies with substantial public interest.

56



CLOSE COMPANY IMPLICATIONS

Where a close company makes a loan to a shareholder it is first necessary to see if it is exempt. If not, there will be a CTA 2010, s.455 charge on the company equal to 25% of the amount of the loan.

From 20 March 2013, the provisions also apply where a loan is made by a close company to a corporate partnership in which one of the partners is a participator or an associate of a participator, or to a trust of which a participator or associate is an actual or potential beneficiary.

(CTA 2010, s.455)

The amount of the loan is taken as the lower of the amount outstanding on:

• the last day of the chargeable accounting period; or

• the normal due date.

This will be payable with the CT liability for the period, unless the loan has been repaid before the tax is due.

Where the tax is payable, it can be reclaimed by the company if the loan is repaid.

The refund reduces the company's tax liability for the chargeable accounting period in which the loan is repaid. Usually the close company is small, therefore nine months and one day from the end of the accounting period in which the repayment of the loan is made.

No relief from s.455 tax is due if loans totalling £5,000 or more are repaid and borrowed again within 30 days of the repayment, or if the amount outstanding before repayment is at least £15,000 and there are arrangements or an intention at the time of the repayment to draw further loans from the company, regardless of when those further loans are actually drawn.

(CTA 2010, s.464C)

If the loan is written off, the company can reclaim the tax (as above) but the write off is not deductible. The recipient will become liable to income tax as though the loan written off was a dividend (i.e. gross up the loan waived × 100/90 and tax as dividend income in the income tax pro forma, giving a 10% notional tax credit).

If the participator or associate is an employee, the loan written off is treated as employment income for NIC purposes, and is subject to Class 1 NIC for both the employee and the company.

57



CLOSE COMPANY IMPLICATIONS — FURTHER ASPECTS

Certain loans are excluded from the CTA 2010, s.455 charge:

• Loans made in the ordinary course of business of the company

• The supply of goods or services in the ordinary course of the trade unless the credit period is longer than normal

• Loans of no more than £15,000 made to a full-time director or employee who is

entitled to no more than 5% of the company's assets on a winding-up.(CTA 2010, s.456)

If a close company provides a benefit to an employee/shareholder, it is taxed under the normal earnings rules. The cost of providing the benefit is deductible for the company.

If the shareholder is not an employee, the value of the benefit, as calculated under the normal benefits rules, is treated as a net dividend paid to the shareholder.

(CTA 2010, s.1064)

For the shareholder the resulting net dividend is grossed up 100/90, taxed at 10%, 32.5% or 37.5% and given a 10% tax credit.

The cost of providing the benefit is NOT deductible for the company.

The write off of a loan to a participator is always treated as a dividend.

Close Investment Holding Companies are companies whose main activity is making investments, rather than trading.

Where the company is a CIHC, it cannot use the small profits and marginal rates of tax. Instead such companies will always be taxed at the full rate of corporation tax (21%, for FY2014), regardless of the level of their profits.

This rule on CIHCs (and the status of being a CIHC for corporation tax purposes) is abolished with effect from 1 April 2015. Where a company’s accounting period straddles 1 April 2015, the rule will apply in respect of as much of its profits as arise in that period that falls before that date.

(CTA 2010, s.34)

The income from jointly held shares in close companies will be taxed according to actual ownership of each spouse.

58



ACCOUNTING FOR INCOME TAX

Where companies make certain payments they are required to deduct income tax at source as follows:

Payment Recipient Income tax treatmentInterest/royalties UK companies Paid grossPatent royalties Individuals Net of 20% taxLoan stock/debentures Individuals Net of 20% tax

Patent royalties, annual payments and interest received by companies from individuals are received net of 20% tax.

For each quarter the company is required to calculate any amounts due to HMRC. These calculations are made on the quarterly return form CT61. The due date for the return and any income tax due is 14 days after the end of the quarter.

If the tax suffered by the company exceeds the tax withheld, a refund of tax is required from HMRC for that quarter. However, HMRC will not repay more than the amount of tax that the company has already paid over so far in the accounting period.

Any excess tax suffered is carried forward to a later quarter. If it has not been fully recovered by the end of the accounting period, it is deducted from the CT liability. If the income tax suffered exceeds the CT liability for the period, any balance will be repaid by HMRC.

59



OVERSEAS MATTERS FOR COMPANIES

A UK resident company is taxed on its worldwide income.(CTA 2009, s.5(1))

A company is resident in the UK if either it is incorporated in the UK or its central management and control is located in the UK.

(CTA 2009, s.14; case law)

The place of central management and control is the location in which the highest level of control exists i.e. the team that makes the strategic decisions. An overseas situated board of directors “rubber-stamping” decisions taken by a UK holding company will not be considered as exercising management and control.

SP1/90 is a very useful summary of the rules HMRC will apply to determine the location of a company's central management and control.

Non-UK resident companies will be chargeable to UK corporation tax only if they are carrying on a trade in the UK through a permanent establishment. These companies will be subject to UK corporation tax on any trading profits, UK property income and chargeable gains which are attributable to the permanent establishment.

Credit is given in the UK for foreign tax suffered on income liable to UK corporation tax. The credit given is the lower of:

i. Foreign tax suffered; and

ii. UK liability on the income

Dividends paid by overseas companies to UK resident companies are normally exempt from UK corporation tax.

FII (used for the purposes of computing augmented profits) includes net overseas dividends received grossed up at 100/90.

A UK resident company can use either a non-resident subsidiary or a permanent establishment when trading abroad.

Where a PE is used, all profits will be taxed in the UK, losses will be available for set off in the UK and UK capital allowances will be available.

A company can elect for its overseas PEs to be exempt from UK tax.

Where a non-resident subsidiary is used, profits are not charged to UK tax but no relief is available in the UK for losses or capital allowances. In addition, the subsidiary counts as a related 51% group company.

60



TRANSFER PRICING

Under CTSA companies are required to adjust their corporation tax profit where they have undertaken transactions with associated offshore entities that have resulted in profits being moved outside the UK tax net.

(TIOPA 2010, Part 4)

The rules specifically apply where a UK tax advantage has arisen.

There is an exemption for dormant companies.

There is an exemption for small and medium sized companies.

Where one party to a transaction (the advantaged person) has been obliged to make a transfer pricing adjustment and the other party (the disadvantaged person) is also subject to UK corporation tax, the disadvantaged person may make a corresponding adjustment to its tax return.

The disadvantaged person may make a balancing payment to the advantaged person up to the value of the corresponding adjustment without either party suffering any UK tax consequences.

Transfer pricing adjustments also apply to internal management services and interest charges.

In considering whether a transfer pricing adjustment is necessary in respect of excessive interest HMRC will consider:

• Whether the loan would have been made;

• The amount for which the loan would have been made;

• The rate of interest or other terms that would have been agreed.

It is vital that companies retain sufficient information on internal prices charged in order to justify them in the event of a CTSA enquiry.

61



PURCHASE OF OWN SHARES

A purchase of own shares will be treated as an income distribution unless the conditions for capital treatment are met, or the shareholder is a company.

Under the income treatment, the receipt by the individual is treated as a dividend and taxed at either 10%, 32.5% or 37.5%, with the benefit of the tax credit.

The net dividend will be the amount received on the share buy back less the original subscription price of the shares.

In addition there is a capital gains computation on the disposal of the shares. The sale proceeds for capital gains tax purposes are the original subscription price of the shares. If the individual was the original subscriber this will result in a capital gain of nil. If the individual was not the original subscriber, a capital gain or loss may arise.

Under the capital treatment the disposal gives rise to a capital gain which is taxable on individuals at 18% or 28%, and may qualify for entrepreneurs' relief.

The capital treatment only applies where:

• Repurchase is by unquoted trading companies who are not 51% subsidiaries of a quoted company;

(CTA 2010, s.1033)• Repurchase is wholly or mainly for the benefit of the trade;

• The shares must be bought back from a UK resident vendor, who has held the shares

for at least 5 years (3 years if acquired on a death);

• The vendor must, as a result of the buy back, reduce his interest in the company by at least 25%; and

• The vendor must not be connected with the company following the buy back.

The capital treatment will also apply if the money paid is used wholly or mainly to discharge an IHT liability arising as a result of a death.

62

Tolley® Exam Training BUSINESS TAX CHAPTER 1


INCORPORATION

Incorporation is when a sole trader (or partnership) transfers a business to a limited company.

INCOME TAX The incorporation of a business brings about a cessation of trade for income tax purposes. The closing year rules and overlap relief need to be considered.

On cessation of the trade, where consideration is paid for the plant and machinery the disposal value is the lower of:

• cost; and

• actual consideration.

(CAA 2001, ss 61, 62)

Where the plant and machinery is transferred to the company for no consideration, the disposal value is the lower of:

• market value at the date of the transfer; and

• cost.

(CAA 2001, s.265)

This will give rise to balancing allowances or balancing charges.

A joint election can be made for the plant and machinery to be transferred at TWDV to avoid a balancing charge on cessation.

(CAA 2001, s.266)

No annual investment allowance or first year allowances are available to the company as the assets are acquired from a connected person.

(CAA 2001, s.217)

On cessation stock is deemed to be sold to the company for its MV.(ITTOIA 2005, s.177)

However, where stock is transferred between connected persons, the two parties may elect for the stock to be treated as transferred for the higher of:

• acquisition value; or

• the amount the stock was actually sold for.

This election is only possible where both the acquisition value and actual selling price are less than the market value of the stock.

(ITTOIA 2005, s.178)

If the sole trader has trading losses in the final year of trade (prior to incorporation), the options for utilising the loss are:

• ITA 2007, S.64 – against net income of either the current or previous tax year;

63



• ITA 2007, S.71 – against gains (after a s.64 claim)

• ITA 2007, SS.89-90 – against trading profits of the final tax year and the previous 3 tax years (LIFO basis).

• ITA 2007, S.86 – against salary or dividends from the company.

CAPITAL GAINS The transfer of business assets to a company is a disposal at market value for CGT.

Gains can be wholly or partly deferred by incorporation relief. Incorporation relief defers the gain by rolling it over against the base cost of the individual's shares in the company. To obtain the relief all assets of the sole trader (except cash) must be transferred to the company.

(TCGA 1992, s.162)

Any gains remaining after incorporation relief on land and buildings will be eligible for entrepreneurs' relief. Gains qualifying for entrepreneurs' relief are taxed at 10% regardless of the level of taxable income, up to a lifetime limit of £10m of relevant gains.

(TCGA 1992 s.169H)

Entrepreneurs' relief is not available for gains on goodwill where the incorporation takes place on or after 3 December 2014.

(TCGA 1992 s.169LA)

The trader may consider a gift relief claim if he doesn't transfer all of his business assets to the company. Gift relief rolls the gains against the base cost of the asset in the hands of the company (not against the base cost of the taxpayer's shares).

(TCGA 1992, s.165)

NIC Incorporation will change the taxpayer's status for NIC purposes. The taxpayer will pay Class 1 primary NIC on salary (rather than Class 2 and Class 4 on profits). The company will also be liable for secondary Class 1 NICs although the employment allowance is available to reduce the company’s secondary Class 1 NIC bill. Liability to NICs can be avoided by the company paying dividends rather than salary.

VAT No VAT needs to be charged on the transfer of a business to a company, as the incorporation will be a transfer of a going concern (TOGC).

The sole trader must de-register his business within 30 days by sending form VAT 7. The new company should then register for VAT. The new company can elect to use the sole trader's old VAT registration number.

CORPORATION TAX The company will pay corporation tax on its profits.

The new company is likely to be a close company, so CTA 2010, s.455 will apply if a shareholder borrows money from the company.

64



For incorporations on or after 3 December 2014, the company will no longer receive tax relief for the amortisation of post April 2002 goodwill.

(CTA 2009, s.849B-D)

LEGAL AND COMPLIANCE ISSUES Many sole traders incorporate their business to take advantage of “limited liability”. There is however a greater compliance burden upon a company.

EXTRACTION OF FUNDS Funds can be extracted from the company in various ways. The main methods are:

Salary/ bonus Income tax at 20%/40%/45%, Class 1 primary & secondary NIC, corporation tax relief on salary & Class 1 secondary NIC

Dividends Income tax at effective rates of 0%/25%/30.56%, no NIC but no corporation tax relief for dividends paid

Rent Income tax at 20%/40%/45%, no NIC, corporation tax relief for rent expense incurred on accruals basis

Interest Income tax at 0%/20%/40%/45%, no NIC, corporation tax relief for interest expense incurred on accruals basis (provided not paid ‘late’)

Pension contributions

No income tax (provided not above annual allowance) nor NIC, corporation tax relief for contributions on paid basis

65



INCORPORATION SUMMARY

Mr A Shareholder & director

Transfer businessMr ASole trader

→→→ A Ltd

INCOME TAX • Trade ceases

• Closing year rules

• Balancing adjustments on plant & machinery

• Can elect to transfer P&M to company at tax written down value.

(CAA 2001, s.266)• Stock transferred at market value unless elect higher of cost & price paid

(ITTOIA 2005, s.177-8)• If trading losses incurred can claim:

– Terminal loss relief.

(ITA 2007, s.89)– To carry losses forward against salary and dividends received from company

(ITA 2007, s.86)– ITA 2007, s.64 against net income

– ITA 2007, s.71 against gains (after a s.64 claim)

NATIONAL INSURANCE • Stop paying class 2 and class 4 NIC

• Individual becomes an employee of the company paying class 1 primary NIC on

earnings

• The company is an employer and pays:

– Class 1 secondary NIC on earnings, and

– Class 1A NIC on non-cash benefits

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CAPITAL GAINS TAX • Sole trader disposes of chargeable assets:

– land & buildings & goodwill

• Incorporation relief may be available to defer the gains against the base cost of the

shares in the company. (TCGA 1992, s.162)

• Entrepreneurs' relief may be available on land and buildings on first £10 million of gains.

(TCGA 1992 s.169H)• Can claim gift relief

(TCGA 1992, s.165)

VAT • Sole trader must deregister for VAT & company must register for VAT

• If transfer of going concern (TOGC) rules are met the transfer of the business is outside

the scope of VAT

• TOGC rules:

– Company must carry on same trade

– Business is a going concern

– No significant break in trading

– Company becomes VAT registered

CORPORATION TAX • Company must notify of chargeability to tax ≤ 3 months of the start of the 1st

accounting period

• Salary, class 1 secondary and class 1A NIC are allowable expenses

• Dividends paid are NOT allowable expenses

• The company is likely to be a close company

67



DISINCORPORATION RELIEF

Disincorporation relief is available for disincorporations taking place between 1 April 2013 and 31 March 2018.

(FA 2013, s.58(1)(c))

A claim may be made where the following conditions are met:

• The business is transferred as a going concern;

• The business is transferred with all of its assets (except cash);

• The total market value of qualifying assets transferred does not exceed £100,000;

• The business is transferred to shareholders who are individuals;

• Each of the transferees held shares in the company throughout the 12 months ending with the date of transfer.

(FA 2013, s.59)

“Qualifying assets” are goodwill and property not held as trading stock only.

A claim for relief must be made jointly by the company and all of the transferee shareholders, within two years of the date of transfer.

(FA 2013, s.60)

Where a claim has been made, qualifying assets are deemed to be transferred for the lower of cost and market value.

(TCGA 1992, s.162B)

Valuation of post-2002 goodwill depends on its treatment in the company’s accounts:

Post FA 2002

Shown in accounts

Not shown in accounts

Written down Not written down

Lower of TWDV & MV

Lower of cost & MV

Nil

Stock is transferred at market value, unless an election is made for the transfer to take place at the higher of cost or actual consideration.

(ITT0IA 2005, s.177, 178)

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Plant and machinery is transferred at:

• the lower of the cost and actual consideration where consideration is received for the transfer, and

• the lower of cost and market value where no consideration is received.

(CAA 2001, ss.61, 62, 265)

Balancing adjustments will arise unless an election is made for the transfer to take place at tax written down value.

(CAA 2001, s.266)

There is no relief available for any income tax charges on the transferee – eg, distribution treatment where transfer is below market value or cash is transferred.

Losses cannot be carried forward. S.86 ITA 2007 losses brought forward on incorporation will be lost.

69



LIMITED LIABILITY PARTNERSHIPS

An LLP is similar in legal form to a company but is treated like a partnership for tax purposes.

LEGAL IMPLICATIONS An incorporation document must be submitted by the initial subscribers. This shows name and address of LLP, members and designated members.

The rights and duties of members will be covered by an agreement. The members are agents of the LLP and bind the LLP. Each member's interest must be separately analysed.

The accounts and audit rules are similar to those of limited companies.

TAX IMPLICATIONS The profits of a trading LLP are subject to income tax on the individual members according to their share.

Loss Relief Restrictions

A member's liability for the losses of an LLP is limited. ‘Sideways loss relief’ claims under s.64 or s.72 ITA 2007 and s.71 ITA 2007 and s.261B TCGA 1992 are restricted to each member's ‘contribution’ to the LLP.

(ITA 2007, ss.107–108)

A member's contribution means the capital introduced into the LLP and any further amounts payable if the LLP is wound up.

This restriction applies to ‘cumulative’ sideways loss relief, not per tax year.

The maximum sideways loss relief claims which can be made by a non-active member of an LLP in any tax year is the lower of:

• £25,000; or

• ‘Unrelieved’ contribution

The definition of contribution for a non-active LLP member in the first four tax years of trade only differs to that used for active LLP members. For a non-active LLP member claiming relief for a loss in any of the first four tax years of trade, their ‘contribution’ for loss relief purposes only includes the capital introduced plus amounts which have actually been contributed on a winding up of the LLP.

There is no restriction on the amount of loss that a member can carry forward under ITA 2007, s.83.

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‘Disguised Employment’ Within LLPs

Where a member of an LLP meets 3 conditions set out in the legislation the member is treated for tax and NIC purposes as being employed by the LLP. This is often referred to as ‘disguised employment’.

(ITTOIA 2005, ss.863A-G)

The three conditions are:

Condition A Disguised Salary

The member performs services personally for the LLP and it is reasonable to expect ≥ 80% paid by the LLP to the individual is ‘disguised salary’.

(ITTOIA 2005, s.863B)

‘Disguised salary’ is any amount which is

– fixed; or

– variable but without reference to the overall profits/losses of the LLP; or

– not, in practice, affected by the overall amount of the profits or losses of the LLP.

Condition B No significant influence The member does not have significant influence over the affairs of the LLP.

(ITTOIA 2005, s.863C)

Condition C No significant investment

The member’s contribution to the LLP is < 25% of the total amounts of disguised salary which it is reasonable to expect will be paid to the member in the tax year concerned.

(ITTOIA 2005, s.863D)

Capital Gains Tax

Each member is treated as owning a share of each asset for CGT purposes.

Transfer of a Partnership to an LLP

If a partnership is transferred to an LLP and the same trade is carried on by the LLP, this will not be a cessation of trade. This is in contrast to incorporation into a new company which is a cessation of trade.

71



MIXED PARTNERSHIPS

A mixed partnership is a partnership which consists of both partners who are individuals and partners who are non individuals such as companies. Corporate partners are often included as members of an LLP.

Corporate partners can be used to reduce the overall tax liability of the partnership.

The taxable trading profits of partners who are individuals are calculated using income tax rules.

The taxable trading profits of partners who are companies are calculated using corporation tax rules.

The annual investment allowance is not available when calculating the profits of mixed partnerships.

Profit Allocations To Corporate Partners

Anti avoidance rules exist for mixed partnerships where the following conditions are met:

• a corporate partner has a share of the partnership’s profit,

• the corporate partner’s share is excessive ie it exceeds an ‘appropriate notional profit’,

• an individual partner has the power to enjoy all or part of the corporate partner’s

share, and

• it is reasonable to assume that the effect of the profit sharing arrangement is to reduce both the individual’s profit share and the aggregate tax payable of the partnership.

Where the provisions apply the individual’s profit share is increased by the amount of the company’s profit share that is attributable to the individual’s power to enjoy it, capped at the amount of the excess profit.

The excess profit is the amount by which the company’s profit share exceeds the appropriate notional profit, being return on capital calculated at a commercial rate of interest plus arm’s length consideration for any services which the company provides to the partnership, less any amount actually received.

If any services provided involve other members of the partnership, then the value of these services is not included in arriving at the notional profit.

(ITTOIA 2005, s.850C-E)

Loss Allocations in Mixed Partnerships

Further anti avoidance rules prevent losses being allocated to individual partners rather than to corporate partners in a mixed partnership so that the individual can obtain more generous loss relief.

If the loss relief arises to individuals as a result of ‘relevant tax avoidance arrangements’ then relief for the losses are lost.

(ITA 2007, s.116A(3))

72



Transfer of Income Streams Through Partnerships

These anti avoidance rules are designed to counter ‘tax attribute’ schemes involving the transfer of income streams and assets through or by partnerships to channel profits between unconnected parties in ways that reduce tax.

Where these rules apply the consideration given for the income stream (or asset) is charged to tax as if it were income of the transferor.

Where the transfer is for ‘substantially less than market value’ the charge is based on the deemed market value of the disposal rather than the actual consideration received.

(ITA 2007, s.809AAZA)

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Tolley® Exam Training PERSONAL INCOME TAX CHAPTER 5


TERMINATION PAYMENTS

TAX TREATMENT OF TERMINATION PAYMENTS

Taxed as Normal Earnings Taxed under s.401 ITEPA 2003(i.e. part of normal net taxable earnings in non savings column) if:

(i.e. not taxed as earnings but top slice in separate column after dividends) if:

Reward for services past/present/future

Payment is not contractual and is voluntary = “Compensation for loss of office”, otherwise known as an “ex gratia payment”

Statutory Redundancy Pay.

• Payment is contractual

• Payment is not contractual but a reasonable expectation that it will be received

• Garden leave (paid to stay

at home – employment ends at end of gardening leave)

• Restrictive covenant (i.e.

giving up your right to do something)

• PILONS where contractual

Payment is fully exempt from tax if:

• On death/ injury/

disability of employee

• Into registered

pension scheme

• In respect of an employee who has substantial overseas service (s.413 ITEPA 2003)

• relates to provision of outplacement counselling or a retraining course

OR First £30,000 exemptA proportion of the rest is exempt if there has been insubstantial overseas service

Total amount received is taxed as part of net taxable earnings in the tax year the payment is received.

Rest taxed top slice 20/40/45%

NICABLE NOT NICABLE NOT NICABLE

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TERMINATION PAYMENTS

A termination payment is fully taxable if it is:

• A reward for services performed

• Contractual

• Expected

A termination payment is fully exempt if it is:

• On death/injury/disability (s.406 ITEPA 2003)

• A payment into a registered pension scheme (s.408 ITEPA 2003)

• In respect of an employment where foreign service is substantial (s.413 ITEPA 2003)

“Ex-gratia” termination payments such as compensation for loss of office and redundancy payments are only taxable to the extent they exceed £30,000.

(s.403(1) ITEPA 2003)

Payments made directly by employers to employees on retirement are likely to be treated as fully taxable with no £30,000 exemption, as payments from an Employer Financed Retirement Benefit Scheme (EFRBS)

Contractual PILONS and payments for garden leave are fully taxable. PILONS made in return for breaching a contract will be taxable to the extent they exceed £30,000.

There are three substantial foreign service tests. If the foreign service is substantial the whole payment is exempt.

(s.413 ITEPA 2003)

Foreign service is substantial if:

i. Foreign service exceeds three quarters of total service; or

ii. Total service exceeds 10 years and the whole of the last 10 years was spent outside the UK; or

iii. Total service exceeds 20 years, of which at least 50% is foreign service and foreign

service makes up at least 10 of the last 20 years.

If it is not substantial foreign service then only the proportion relating to foreign service is tax free. This reduction for foreign service is given AFTER the £30,000 exemption.

(s.414 ITEPA 2003)

The £30,000 exemption applies to payments/benefits received in earlier tax years before later years .

(s.404(4) & (5) ITEPA 2003)

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Taxable amounts are taxed as the highest part of income.

NIC only applies to contractual termination payments.

Provided certain conditions are met payments in respect of the following are exempt benefits:

• payment of the employee's legal costs in relation to a dispute on termination

(s.413A ITEPA 2003)• outplacement counselling and related travel costs

(s.310 ITEPA 2003)• retraining courses

(s.311 ITEPA 2003)

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EMPLOYED OR SELF EMPLOYED?

The question of whether a worker is employed or self-employed is determined by HMRC practice and case law.

Responsibility for determining the correct status rests with the business which engages the services of the worker.

In cases of doubt an engager can either ask the local HMRC Status Inspector for an opinion or use the Employment Status Indicator (ESI) tool on the HMRC website.

It is important to determine correctly the status of a worker because the tax and NIC treatment of employees and the self-employed are different. The key differences are:

Employees Self EmployedEmployment income Trading incomeClass 1 NIC (expensive) Class 2 and 4 NIC (cheaper)PAYE Self assessmentTough expenses test Easier expenses testOccupational pension Personal pensionNo VAT requirements VAT registrationEmployment law protection Less legal protection

The factors to be taken into account in determining whether a worker is employed or self employed include:

• Mutuality of obligation

• Right of control

• Provision of own equipment

• Right of substitution and engagement of helpers

• Financial risk

• Opportunity to profit

• Degree of integration into the organisation

• Right to terminate the contract

• The number of paymasters

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PERSONAL SERVICE COMPANIES

The personal service company rules are designed to prevent individuals inserting a company between themselves and a client to enable gross payments to be made to the company which are then extracted by way of dividends, saving income tax and NIC.

If, but for the existence of the intermediary company the individual would be an employee of the client, the rules essentially ensure income from the client is taxed as salary for the worker.

Income from relevant engagements that exceeds actual salary paid out and various other deductions, is deemed to be a salary received on 5 April. The deemed salary payment is calculated as follows:

£Income from relevant engagements XLess: 5% automatic deduction (X)

XLess: Expenses paid by employer allowable as deductions from earnings if paid by an employee (X)Less: Employer pension contributions (X)Less: Employers NIC on workers pay (X)Less: Actual salaries and benefits paid (X)Gross deemed payment XLess: Employers NIC on gross payment (H × 13.8/113/8) (X)Net deemed payment(deemed paid on last day of tax year ie 5 April)

X

The steps of this computation are set out in s.54 ITEPA 2003.

PAYE income tax and NIC will therefore be due on this deemed salary by 19 April (22nd where payment made electronically).

HMRC will accept an estimate with any outstanding amounts due by following 31 January. However, interest will be charged on any tax and NIC paid late.

The deemed payment and the related employer Class 1 NIC can be deducted in arriving at the profits chargeable to corporation tax of the intermediary for the period in which the deemed payment was treated as made.

(s.163 ITTOIA 2005 and s.139 CTA 2009)

The intermediary company can make a claim to avoid double taxation, so that to the extent dividends can be matched with the deemed salary, they will not be taxable.

(s.58 ITEPA 2003)

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Tolley® Exam Training CAPITAL GAINS TAX CHAPTER 8


CONNECTED PERSONS

Connected persons include:

• spouse;

• relatives (ancestors, descendants, brothers and sisters);

• relatives of your spouse;

• spouses of your relatives;

• a company you control;

• the trustees of a trust you set up;

• your fellow business partners and their relatives.(TCGA 1992, s.286)

The proceeds used for calculating gains or losses on disposals to connected persons must be market value, actual proceeds are ignored.

(TCGA 1992, s.18)

Losses on disposals to connected persons can only be used against future gains on disposals to that same person.

(TCGA 1992, s.18(3))

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Tolley® Exam Training VALUE ADDED TAX CHAPTER 9


BAD DEBT RELIEF

Bad debt relief is available to traders where the following conditions are met:(s.36 VATA 1994 and SI 1995/2518 Reg 165-172)

– Goods or services were actually supplied.

– VAT must have been accounted for and the output VAT paid over to HMRC on the supply.

– The whole or part of the consideration was written off in the trader's accounts as a

bad debt. This is simply an entry in the Bad Debts Account.

– Six months must have elapsed since the later of the date of supply and the due date of the invoice. A claim can be made on the return in which that six month point falls.

– The claim must be made within 4 years and 6 months from the later of the date of

supply and the due date for payment.

– In addition, the value of the supply must be equal to or less than its open market value.

There is no requirement to notify the debtor that a claim for bad debt relief has been made.

The debtor has an automatic obligation to repay input tax to HMRC where debts are over six months overdue.

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THE ANNUAL ACCOUNTING AND CASH ACCOUNTING SCHEMES

ANNUAL ACCOUNTING

Annual Accounting allows small and medium sized businesses to pay VAT on an annual basis. There is one annual return to be made two months after the VAT year end. The normal 7 day extension does not apply to traders on Annual Accounting.

(SI 1995/2518, Reg. 49)

During the year:

– 90% of the estimated VAT liability is paid by direct debit on the last day of months 4, 5, 6, 7, 8, 9, 10, 11 and 12

– As an alternative, the trader may choose to make three payments of 25% in months 4,

7 and 10

– When the VAT return is submitted the balance of VAT actually due is paid at the same time.

The Annual Accounting Scheme is only available to traders with taxable supplies not exceeding £1.35 million per annum. Traders must leave the scheme when turnover exceeds £1.6 million per annum.

CASH ACCOUNTING

The Cash Accounting Scheme allows traders to dispense with the normal tax point rules to decide which VAT return to account for input tax and output tax on.

(SI 1995/2518, Reg. 56)

Instead movements through the cash book – i.e. input tax received and output tax paid – determine which VAT return items are accounted for on. The major advantage of the Cash Accounting Scheme is the benefit of automatic bad debt relief.

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THE FLAT-RATE SCHEME

The Flat-Rate Scheme is available for small businesses.(VATA 1994, s. 24B and SI 1995/2518, Reg 55A-V)

A trader can join the scheme if there are reasonable grounds to believe that taxable turnover in the next year will be £150,000 or less.

Once in the scheme, the trader must leave the scheme if total tax inclusive turnover exceeds £230,000 unless the rise is due to a one-off transaction and income is likely to drop below £191,500 in the following year. That test is done on every anniversary date of joining the scheme.

HMRC have estimated the percentage of VAT due compared to the VAT inclusive turnover for different types of businesses.

Once a trader has established which category he falls into, the relevant percentage is applied to tax inclusive turnover to arrive at the amount of VAT due.

A 1% reduction applies to newly registered businesses using the flat-rate scheme for its first 12 month period (or part of the 12 months left).

Generally input tax is not deductible under the Flat-Rate Scheme although an exception is made in following 2 situations:

– purchases of a capital asset with a VAT inclusive value of £2,000 or more.

– pre-registration input tax with the same rules applying to flat rate traders as they do to

normal traders.

Some traders will be ineligible to join the flat-rate scheme.

A trader will also be required to leave the scheme if he anticipates his income will exceed £230,000 in the next 30 days.

HMRC Notice 733 provides useful guidance.

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SUMMARY OF ANNUAL, CASH ACCOUNTING AND FLAT-RATE SCHEMES

VAT Schemes Annual Accounting Scheme(SI 1995/2518 Regs 49–55)

Cash Accounting Scheme(SI 1995/2518 Regs 56–65)

Flat-Rate Scheme(SI 1995/2518 Regs 55A-55V)

Main workings

• 1 VAT return is completed each year

• VAT is paid by direct

debit between months 4-12 of VAT year

• Each instalment is

10% of VAT estimate

• Balancing payment and VAT return due 2 months after end of VAT year

• Output VAT is accounted for on the date the cash is received from the customer

• Input VAT is

accounted for when the cash is paid to the supplier

• VAT is charged on invoices at the standard rate as normal

• VAT paid over to

HMRC is a flat % × VAT inclusive turnover

• VAT inclusive

turnover includes turnover of SR, ZR & exempt supplies & capital assets

• Input VAT can

only be recovered on capital assets costing ≥ £2,000 (inc VAT) & pre-registration

Advantages • Less administration

• VAT penalties less

likely

• Cash flow is more certain

• Easier to identify the tax point for transactions

• Helps cash flow

• Automatic bad

debt relief

• Quarterly returns are much simpler to complete

• Less likely to make

errors on return

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Conditions for joining

• Turnover of taxable supplies in next 12 months ≤ £1,350,000

• Not a member of

a VAT group registration

• Turnover of taxable supplies in next 12 months ≤ £1,350,000

• All VAT returns

up to date & VAT paid

• Must not have

been convicted of VAT offence in past year

• Taxable turnover in next year ≤ £150,000 (exc VAT & capital assets)

• In previous 12

months must not have been convicted of a VAT offence/ penalty for dishonesty

Conditions for leaving

• Annual turnover of taxable supplies is/ is expected to be > £1.6 million

• Becomes

insolvent/ ceases to trade

• Turnover in previous 12 months > £1.6 million

• Total tax inclusive turnover > £230,000 (performed each anniversary of joining scheme)

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Tolley® Exam Training ACCOUNTING CHAPTER 12


TAX IN COMPANY FINANCIAL STATEMENTS

The rates of tax used in this chapter for VAT, Income Tax and Corporation Tax are for illustration purposes only. They are assumed rates of tax and do not necessarily bear any relation to the actual tax rates currently in force.

A company acts as a collector of taxes for both VAT and income tax. We will assume that the standard rate of VAT is 20% throughout this chapter.

VAT

VAT on outputs: Dr Debtors (Gross amount - 120%)Cr VAT account (VAT - 20%)Cr Sales (Net amount - 100%)

VAT on inputs: Dr Purchases / expenses (Net amount – 100%)Dr VAT account (VAT – 20%)Cr Creditors (Gross amount – 120%)

The VAT control account is a balance sheet T account. It keeps track of amounts which are owed to HMRC on sales made and amounts which are recoverable from HMRC on purchases of goods for resale, purchases of fixed assets and expenses.

VAT Control Account (BS Debtor/ Creditor)Dr Bank X Balance b/d X– payment of VAT to HMRC – amount owed to HMRC

Dr VAT on purchases/expenses*

X Cr VAT on sales made X

Balance c/d X _X X

Balance b/d X- amount owed to HMRC

*VAT is not recoverable on the purchase of cars with any private use or client entertaining expenses.

The VAT control account may have a balance b/d on the debit side. This means that HMRC owes VAT back to the business (i.e. it is a VAT debtor).

Amounts on sales and purchase invoices are stated inclusive of VAT. The VAT element is calculated as VAT rate / (100 + VAT rate) x the VAT inclusive amount.

Alternatively the VAT fraction may be used instead.

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Income Tax

The income tax control account works in the same way as the VAT control account. It records income tax which is owed to HMRC on payments made to individuals net of basic rate income tax and income tax suffered on receipts from individuals.

We will assume that the basic rate of income tax is 20% throughout this chapter.

Patent royalties – paid / received net of basic rate income tax

Debenture interest – paid to individuals by companies net of basic rate income tax

Interest/Royalty payments Dr Interest /royalty expense (Gross — 100%)Cr Bank (Net — 80%)Cr Income tax account (Income tax — 20%)

Royalty receipts Dr Bank (Net — 80%)Dr Income tax account (Income tax — 20%)Cr Interest/royalty income (Gross — 100%)

Income Tax Control Account (BS Debtor/ Creditor)

Dr Bank X Balance b/d X- payment of income tax owed -amount owed to HMRC

Dr Income tax suffered on X Cr Income tax deducted on Xreceipts received net payments made net

Balance c/d X _X X

Balance b/d X- amount owed to HMRC

The income tax owed to HMRC must be paid over within 14 days of the end of the quarter. Quarter dates are 31 March, 30 June, 30 September and 31 December.

If the balance on the income tax control account is a debtor balance (an amount owed to the company) it can be set off against the corporation tax creditor.

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Corporation tax

The corporation tax charge is an estimate which is accrued for at the end of the accounting period. It is typically paid over to HMRC 9 months and 1 day after the end of the accounting period.

i) Put opening corporation tax provision into corporation tax creditor ledger

ii) Dr CT creditor ) with payment of last year's taxCr Bank )

Theniii) Put through any under/over provision adjustment

Dr CT charge ) under provisionCr CT creditor )

Dr CT creditor ) over provisionCr CT charge )

An easy method of accounting for an under/ over provision is to balance off the corporation tax creditor ledger and take the balancing figure to the corporation tax charge ledger.

iv) Post this year's estimate of corporation tax on profits for the period.

Dr CT chargeCr CT creditor

v) Balance off the CT charge ledger to the P&L a/c. Balance off the CT creditor ledger to give a new balance b/d.

CT creditor is also referred to as the ‘CT provision’ or ‘CT liability’.CT charge is also referred to as the ‘CT expense’.

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Deferred tax

Deferred tax is an accounting adjustment only.

Deferred tax is provided on timing differences (i.e. items that appear in the P&L a/c in one period and in the tax computation in another). Deferred tax is used to try and match income and expenditure with a related element of tax in the P&L a/c for the year.

Exam technique

Step 1: Identify the expenses that have been allowed for corporation tax purposes, for instance capital allowances.

Step 2: Deduct the equivalent expense that has been deducted in the profit and loss account, for instance depreciation expense. This will give you the timing difference which will either be a positive or a negative figure.

Step 3: Apply the relevant corporation tax rate to the timing difference from step 2 – this is the movement in the deferred tax provision. A positive number is an increase in the deferred tax provision whereas a negative number is a decrease in the deferred tax provision.

Double entries:

An increase in the deferred tax provision is:

Dr Deferred tax charge (P&L - ↑ expense)Cr Deferred tax provision (B/S - ↑ liability)

A decrease in the deferred tax provision is:

Dr Deferred tax provision (B/S - ↓ liability)Cr Deferred tax charge (P&L - ↓ expense)

DT provision is also referred to as the ‘DT creditor’.DT charge is also referred to as the ‘DT expense’.

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Alternative method

Whilst not strictly ‘technically correct’ this method is easier to apply and will work provided there are no permanent differences between the corporation tax calculation and the profit before tax such as disallowed expenses for tax purposes.

Step 1: Calculate the corporation tax charge for the accounting period as normal.

Step 2: Using the same tax rate, calculate the expected tax charge on the profit before tax figure in the accounts.

Step 3: The movement in the deferred tax provision is the difference between these two figures (balancing figure):

£

Step 1 Corporation tax charge X

Step 3 Deferred tax charge (balancing figure) X/(X)

Step 2 Expected tax charge on profit before tax X

A ‘positive’ balancing figure is an increase in the deferred tax provision:

Dr Deferred tax charge (P&L - ↑ expense)Cr Deferred tax provision (B/S - ↑ liability)

A ‘negative’ balancing figure is a decrease in the deferred tax provision:

Dr Deferred tax provision (B/S - ↓ liability)Cr Deferred tax charge (P&L - ↓ expense)

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Deferred tax reconciliations

A ‘deferred tax reconciliation’ is a note to the P&L a/c in a set of company accounts which explains why the corporation tax charge in the P&L does not equal the expected tax charge. Remember the expected tax charge is the profit before tax in the P&L multiplied by the relevant corporation tax rate.

Exam technique for performing a deferred tax reconciliation

Step 1

Start with the profit before tax and perform all the usual tax adjustments to arrive at the trading profit. The company will probably have no other income or gains so the trading profit will probably equal taxable total profits (TTP). Calculate the corporation tax charge (i.e. CT liability) for the accounting period as normal.

Step 2

Set up your reconciliation working, starting with the corporation tax charge (i.e. CT liability) at the top of the working. Referring back to your adjustments to profit working from step 1:

• Any adjustments which were added back to the profit before tax figure in step 1 must

be multiplied by the relevant tax rate and deducted from the corporation tax charge in the reconciliation.

• Any adjustments which were deducted from the profit before tax figure in step 1 must

be multiplied by the relevant tax rate and added to the corporation tax charge in the reconciliation.

A slighter better way to show this reconciliation is to put these adjustments under sub-headings to show that the adjustments are either ‘timing differences’ or ‘permanent differences’.

Step 3

Add up the reconciliation to give the ‘expected tax charge’. The expected tax charge can also be calculated by taking the profit before tax figure from the P&L and multiplying it by the relevant tax rate.

Tutorial note The net effect of the timing differences in step 2 will equal the movement in the deferred tax provision.

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