corporation tax

• Corporation tax financial year

  Runs from 1 April to 31 March (may differ from company's financial year)
• Corporation tax rates


  • Companies with taxable profits up to £50,000 - 19% (standard small profits rate)
  • Companies with taxable profits over £250,000 - 25% (main rate)
  • Companies with taxable profits above £50,000 but not exceeding £250,000 - Marginal rate (between 19% and 25%)
• Steps in a corporation tax calculation

  1. Calculate income profits

  2. Calculate chargeable gains

  3. Calculate total profits and apply any available reliefs against total profits

  4. Calculate tax at the appropriate rates
• Income profits


  Most common type is trading profit
• Dividends paid to shareholders and a company's payments to shareholders for shares bought back by the company are not deductible expenditure when calculating a company's trading profits
• Steps to calculate chargeable gains

  1. Identify a chargeable disposal

  2. Calculate the gain (or loss)

  3. Apply reliefs

  4. Aggregate remaining gains or losses
• Chargeable assets


  Land, buildings, shares in other companies (but not part of the company's income stream)
• Indexation allowance


  Removes inflationary gains from the corporation tax calculation
• Rollover relief on the replacement of qualifying business assets


  Allows companies to postpone the payment of corporation tax following the disposal of a qualifying asset, when the consideration received is used to acquire another qualifying asset
• Rollover relief does not apply to goodwill and other intellectual property, which are subject to a separate rollover relief
• The company must acquire the replacement asset within one year before or within three years after it disposes of the original asset, unless HMRC allows an extended period
• Effect of rollover relief

  The gain is notionally deducted from the acquisition cost of the replacement asset, giving a lower acquisition cost to use in the corporation tax calculation when the replacement asset is sold
• Rollover relief


  This gives a lower acquisition cost to use in the corporation tax calculation when the replacement asset is sold. When the replacement asset is sold, it will be deemed to have a lower acquisition cost than it actually had. This will mean that the difference between the initial acquisition cost of the replacement asset and its sale price will be greater, and more corporation tax will be paid overall, to account for the gain on the original asset.
• If only part of the consideration received on the disposal of the original asset is used to purchase the new asset

  There will be restrictions on the availability of rollover relief
• Rollover relief on the replacement of qualifying business assets

  • Newton Limited buys a new factory for £200,000, then sells a factory it has owned for several years for £175,000 and made a gain of £40,000. If Newton Limited claims rollover relief, it will not pay corporation tax on the gain and the replacement factory will be treated as having been acquired for £160,000 (acquisition cost less the rolled over gain of £40,000).
• Without rollover relief


  The gain would only be £35,000 (proceeds of disposal of £235,000 less actual, not adjusted, acquisition cost of £200,000)
• The gain from this sale could again be rolled over if the qualifying conditions were met
• Step 3: Calculate total profits and apply any available reliefs against total profits

  Add together the company's income profits and capital gains to get total profits. Certain trading loss reliefs and qualifying donations to charity are deducted from total profits.
• Step 4: Calculate the tax

  Apply the appropriate tax rate to the taxable profit to calculate tax payable.
• If the company's accounting period is different from the corporation tax financial year, and the corporation tax rate changes, the company will have to pay tax at one rate on a proportion of its profits and at the new rate on the rest of its profits for the financial year.
• Capital allowances


  Deductions available for the purchase of second-hand machinery and the existing pool of plant and machinery
• The company qualifies for AIA (not full expensing because the plant and machinery was not brand new)
• No reliefs available against the chargeable gains on the disposal of the premises
• If the taxable profits were £103,034 instead of £1,030,344, the tax due would be £9,500 on the first £50,000 at 19% and £14,054.01 on the remaining £53,034 at 26.5%, totalling £23,554.01
• Carry-across/carry-back relief for trading losses

  Companies may carry across their trading loss for an accounting period and set it against total profits for the same accounting period (carry-across relief). If there are still losses remaining, they can be carried back and set against total profits from the accounting period(s) falling in the 12 months prior to the accounting period of the loss (carry-back relief).
• Terminal carry-back relief for trading losses


  When a company ceases to trade, it can carry back any trading losses and set them against the company's total profits from any accounting period(s) falling in the three years before the start of that final 12 months, taking later periods first.
• Carry-forward relief for trading losses


  A company may carry forward its trading loss for an accounting period and set it against subsequent profits in the next accounting period. The maximum amount that can be claimed is £5 million, plus 50% of remaining total profits after deduction of the allowance.
• Claims for carry-across, carry-back or terminal carry-back relief must be made within two years from the end of the accounting period in which the loss was incurred.
• A claim for carry-forward relief must usually be made within two years of the end of the accounting period in which the company will apply the losses to reduce total profits.
• Intangible fixed assets (goodwill and intellectual property)

  Receipts from transactions in intangible fixed assets are treated as income receipts for the purposes of the company's corporation tax calculation. Expenditure on intangible fixed assets is generally deductible when calculating the company's income profits. Profits from the disposal of intangible fixed assets can be rolled over into the acquisition of replacement intangible fixed assets, deferring the corporation tax.
• Close company


  A company either controlled by five or fewer participators, or controlled by participators (any number of them) who are directors or shadow directors. A participator is a person who owns shares in the company, or has the right to acquire shares in the company.
• Loan from close company to participator or associate

  The company must pay to HMRC an amount of money equivalent to 33.75% of the loan, which is refundable if the loan is repaid or written off. No tax is payable if the loan is made in the ordinary course of a money-lending business, or if the loan is no more than £15,000 and the borrower works full-time for the company and owns no more than 5% of the company's ordinary shares.
• Close company


  A company where 5 or fewer participators (shareholders) own more than 50% of the shares in the company or have more than half of the voting power in the company, or have the right to acquire more than half of the shares in the company
• When a close company loans money to a participator or their associate

  1. The company must pay to HMRC an amount of money equivalent to 33.75% of the loan

  2. Payment will be refunded to the company if and when the participator/associate repays the loan or if the loan is written off
• Exceptions where no tax is payable on a loan from a close company to a participator or associate

  • The loan is made in the ordinary course of a money-lending business, for example, a bank loan by a bank to a shareholder
  • The loan (added to any other such loan made to the same person) is no more than £15,000 and the borrower works full-time for the company and owns no more than 5% of the company's ordinary shares
• The borrower does not have to pay any tax in relation to the loan, unless the company writes off the debt
• The reason for these provisions is to prevent tax avoidance
• Shareholders of a close company who take out a loan to purchase shares in the company or to lend money to the close company may be able to claim income tax relief on the interest payable on the loan
• Group relief


  Allows a company to transfer certain losses and expenses to another company within the same qualifying group, which the transferee can then use to reduce its taxable profit
• What is a group for the purposes of group relief?

  • One company must be the 75% subsidiary of the other, or both companies must be 75% subsidiaries of a third company
  • The holding company must own, directly or indirectly, 75% or more of the subsidiary's ordinary shares