BPT Ch 2

• Corporation tax


  Tax payable by UK resident companies on their 'Taxable Total Profits' for the 'accounting period'
• UK CT


  • Payable by UK resident companies
  • Companies assessed on their 'Taxable Total Profits' (TTP) for the 'accounting period' (AP)
  • TTP brings together the company's income and gains from all sources
  • If AP is more than 12 months, needs to be split into two APs - first 12 months and balance
• Corporation tax computation


  1. Trading income

  2. Property income

  3. Non-trading loan relationships

  4. Company distributions

  5. Chargeable gains

  6. Less: Qualifying charitable donations

  7. Taxable Total Profits
• Dividends received


  • Vast majority are exempt from UK corporation tax
  • Dividends received by small companies are exempt if received from UK or a company resident in a country with which the UK has a double tax treaty with.
  • Dividend is not part of a scheme that has obtaining of a UK tax advantage as one of its main purposes
• Small company


  Fewer than 50 employees and either annual turnover ≤ €10m or balance sheet total ≤ €10m
• Corporation tax rate


  • From FY2017 to FY2022 the standard rate was 19%
  • In FY2023 the rate depends on the company's 'augmented profits':
  • ≤ £50,000 taxed at 19%
  • >£50,000 but <£250,000 taxed at 25% less marginal relief
  • ≥£250,000 taxed at 25%
• Calculation of corporation tax

  Marginal relief formula: (U - A) x (N/A) x SF

  Where: U = Upper limit, A = Augmented profits, N = Taxable total profits, SF = Standard fraction for marginal relief
• Tax strategies are set out by political parties that are voted for by the UK public as part of a democracy
• Effective rate of 26.5% can be used to calculate tax for companies on profits between £50,000 and £250,000 when no dividends are received
• When accounting period straddles 1 April 2023, profits need to be time apportioned to reflect the different tax rates
• Payment of corporation tax

  Small companies pay 9 months and 1 day after end of AP

  Large and very large companies pay through quarterly instalments
• R&D relief

  SME's - Extra 86% deduction against trading income (130% before 1 April 2023)

  
  

  Large - Tax credit of 20% (13% before 1 April 2023)

  
  

  Look at when R&D was incurred to know what rates
• R&D tax credit for SME'S

  Conditions:

  
  

  (1) Company is a SME

  (2) Company entitled to extra deduction in the year

  (3) After extra deduction, there is a trading loss
• Steps

  
  

  (1) Calculate surrendering losses - lower of :

  • Trading loss
  • 186% x R&D Expenses (230% if before 1st April 2023)

  (2) Tax credit = 10% x Surrendering loss

  
  

  14.5% if R&D expenditure is intensive - R&D Expenditure is >40% of total expenditure

  
  

  or

  
  

  For R&D incurred before 1st April 2023

  
  

  Tax credit caps - OBT
• RDEC


  Research and Development Expenditure Credit

  
  

  Above the line tax credit - OBT
• Goodwill


  Treated as a trading asset if purchased/created on/after 1 April 2002
• Amortisation


  Allowable on goodwill acquired before 3 December 2014
• No deduction is available for goodwill created on incorporation on/after 3 December 2014 or purchased from 8 July 2015
• Goodwill purchased from an unrelated party on/after 1 April 2019


  A deduction is available, calculated at a fixed rate of 6.5% of qualifying costs (costs of purchasing the goodwill) but qualifying costs for relief are capped at six times the value of qualifying intellectual property (IP) assets purchased with the goodwill
• Qualifying IP assets


  • Patents
  • Copyrights
  • Registered designs
• Any amortisation claimed in the accounts for the goodwill will be a disallowed expense and must be added back
• If the asset sold is goodwill on which no deductions were available, the profit will be calculated as sales proceeds less cost

  
  

  Deduction : Proceeds - TWDV
• If this gives rise to a loss, this will be treated as a non-trade debit rather than a trading loss
• Intangibles Rollover Relief (ROR)


  1. If a new intangible is acquired within 12 months before or up to 36 months after disposal of the original IFA, part of the taxable profit on disposal may be deferred

  
  

  Maximum deferral:

  Lower of :

  • Proceeds
  • Amount reinvested

  Less: Cost of original intangible asset

  
  

  = Amount deferred

  
  

  2. The amount deferred is deducted from the cost of the new intangible
• A company with investment business is any company whose business consists wholly or partly of making investments
• Substantial Shareholding Exemption (SSE)

  The gain or loss on disposal of shares is automatically exempt if the investing company owns at least 10% of the ordinary share capital for a continuous 12 month period during the last 6 years, and the investee company is a trading company (or a holding company of a trading group)
• When members of a group hold shares in the same company, the holdings of group members may be added together to determine if the 10% requirement has been met

  
  

  Group = >50% holding
• First year allowances


  • 130% for main pool plant and machinery (super deduction) for purchases made between 1 April 2021 to 31 March 2023
  • 50% for special rate pool assets for purchases made between 1 April 2021 to 31 March 2023
  • 100% full expensing for main pool items for purchases made from 1 April 2023 onwards
  • 50% for special rate pool items for purchases made from 1 April 2023 onwards
  • FYA not available on cars
• If the accounting period straddles 1 April 2023 and the asset on which the super deduction could be claimed was purchased before this date, the super deduction rate of 130% is calculated on a time apportioned basis
• Super deduction


  No longer available for main pool items
• Full expensing


  100% first year allowance, not subject to a cap
• First year allowances for special rate pool items

  Remain at 50%
• Calculating super deduction rate for accounting period straddling 1 April 2023

  100% + 30% × (number of months before 1 April 2023 / 12)
• Tenrec Ltd


  Started trading on 1 January 2023, purchased electrical system for £120,000 and plant/machinery for £300,000
• Calculating first year allowances for Tenrec Ltd in year ended 31 December 2023

  1. Electrical system: 50% of £120,000 = £60,000

  2. Plant/machinery: 100% + (30% × 3/12) = 107.5% of £300,000 = £322,500
• When purchasing assets where AIA and first year allowances are both available, it is usually beneficial to claim the maximum AIA first on special rate pool items
• Shrew Ltd


  Purchased air conditioning system for £1,100,000 on 1 February 2024, no other purchases
• Calculating maximum capital allowances for Shrew Ltd in year ended 31 December 2024

  Claim £1,000,000 AIA, then £100,000 at 50% FYA = £50,000. Remaining £50,000 allocated to special rate pool at 6% WDA = £3,000 p.a. from year ended 31 December 2025.
• Balancing adjustment on disposal of assets with enhanced first year allowances

  Sales proceeds × 1.3 if accounting period ended before 1 April 2023, sales proceeds if accounting period starts on or after 1 April 2023. Hybrid charge calculated if period straddles 1 April 2023.
• Mole Ltd


  Purchased plant for £1,400,000 on 1 June 2021, sold for £800,000 in October 2023