W7 - Corporation Tax, Close Companies & VAT

How to calculate TTP

Add total income profits + total chargeable gains together

What figure do you apply the appropriate rate of corporation tax to?

TTP = total taxable profits

TTP Calculation - how to calculate total income profits?

1. Add together all £ the company has received in as income

2. Deduct any deductible expenditure

3. Deduct any capital allowances

4. Deduct any trading losses

=the total income profits

TTP Calculation - total income profits.

Examples of income profits

• rent from properties

• Interests on savings account

• Incomes from goods sold/ services supplied

TTP Calculation - total income profits.

What are ‘deductible expenditure’ reqs to be able to deduct these? They must be … x3

1. Incurred wholly and exclusively for the purposes of the trade

2. Not be prohibited by statute, and

3. Be of an income nature

TTP Calculation - total income profits.

Deduct capital allowances?

• Need to have …

Worked this summer out separately (re equipment purchased)

TTP Calculation - How to calculate chargeable gains?

(If the company has disposed of an asset)

1. Sale proceeds/ how much sold an asset for

2. Deduct any allowable expenditures

3. Deduct any indexation allowance if applicable

4. Deduct any left over trading losses

5. Deduct any capital losses

= total chargeable gains

TTP Calculation - Chargeable Gains

What are deductible allowable expenditures? X3

1. Costs incurred with buying an asset

2. Costs incurred with selling an asset

3. Subsequent expenditure to enhance the value of an asset/ defend title of the asset

TTP Calculation - Chargeable Gains

Is annual exemption relevant here?

NO!! - no annual exemption for companies!

TTP Calculation - Chargeable Gains

What does indexation relate to/ about?

This allows for inflation, may be applicable - will be given figure if so

Capital Allowances

AIA

£1,000,000 can be deducted from purchase of equipment, if made in the tax year your are doing the calculation for.

Capital Allowances

Then, if equipment cost was over £1m, and deducted AIA already what could you then do?

Once you do this = leaves you with the … figure for that year

What can you do the following year(s)?

Apply/ deduct 14% of the cost in excess of the £1m (=main rate allowance)

= leaves you with the tax written down value of that year.

Deduct 14% of the value again (on a reducing balance basis)

When doing corporation tax calculation, what if there is an unrelated capital expense re improvement of a factory for example? And the only chargeable gain you have is the sale proceeds from sale of unrelated land?

Cannot deduct this £15k figure! This is expenditure!/ an expense, not a capital loss! And it is not related to the asset

So ignore

Would only deduct later i.e. if factory sold.

What do you do with dividend income?

Ignore this! Do not include in your calculations

Rate of corporation tax payable/ charged on the TTP?

25%

How could a company use tax relief to reduce TTP figure pay corporation tax on?

Rollover relief (if applicable)

How does rollover relief work?

Where a co disposes of a qualifying asset and buys another one → tax is deferred/ postponed until the replacement asset is sold with no new qualifying replacement asset bought.

(Subject to conditions)

Rollover relief - conditions

• assets must both be qualifying assets (but dont have to be the same)

• Buy the other asset w/in 12 months before or 3 years after the sale of the old asset.

Rollover relief - what are qualifying assets?

So what would you do if sell land for capital gain of £151,800, and bought some machinery for £1,950,000

• for current financial year

• For a future financial year if machinery sold then

Remove chargeable gains in respect of the land completely for that tax year TTP calculation (so just use total income profits for TTP to calculate tax payable on)

Then when later sold - base cost of machinery in future = reduced by gain of sale of land so would be £1,798,200 instead.

Where can trading losses be deducted from?

• income profits

• (Also against chargeable gains if some left over)

What is this - i.e. a company spends more in a year than it receives from things it has sold.

A trading loss

What is this - i.e. a company sells land for less than they paid for it

A capital loss

Trading loss - where must these first be set off against?

In the same accounting year

Trading loss - after you have set these off from the same accounting year, where can any unused trading loss be set off against?

• + what is the condition here?

Any income profits/ chargeable gains of the previous accounting year

Provided -the company was carrying on the same trade in both years.

Trading loss - where is the final place you can offset any remaining trading loss from?

Against any future ones/ later years

Capital losses - what can you set these off against?

Chargeable gains

NOT angaisnt income profits!!

Capital losses - Where must you first set these off against?

The same year in which they arise

Capital losses - When can you next set them off against, if already set off against the current year and some loss remains unused?

Any later accounting years

What is the total cap on trading losses/ capital losses (which you can use at 100%??)

What about for annything above this?

£5 million

Can use at 50%

Close companies - what are they?

1. , OR

2. 
   

Companies in the control of:

1. 5 or fewer participators (SHs), OR

2. Any no. Participators, who are also Directors.

Close companies - what is control broadly?

50%+ of the voting rights in the company

Close companies - what is ‘participators’ broadly?

SHs

Close companies - first thing to work out?

How many SH own more than 50%+ of the voting rights??

(I.e. is it 5 or fewer?? - YES? → then it is a close company)

Close companies - who pays tax on the loan?

What is the rate of this tax?

The company

It is the income rate which applies to dividends for higher rate tax payers

Close companies - what happens re tax if the loan is repaid, (so it is a proper loan)?

The company will get a refund for the tax.

Close companies - what happens if the loan is written off/ waived (so the SH has the money)?

The SH will pay income tax,

And the company will get their tax back.