Companies pay corporation tax rather than income tax or capital gains tax.
A company is liable to pay corporation tax on its income profits and capital gains.
1. Calculate income profits
2. Calculate chargeable gains
3. Calculate total profits; apply reliefs available against total profits
4. Calculate the tax at the appropriate rates.
Corporation tax is one of the taxes subjects to the general anti-abuse rule introduced by the finance
act 2013.
STEP 1: CALCULATE INCOME PROFITS.
A company’s income profits chargeable to corporation tax will be calculated under the rules of the
appropriate part of the CTA 2009. Part 3 trading income, part 4 property income, and part 5 and 6
loan relationships.
Trading income – necessary to calculate the trading income for an accounting period.
CHARGEABLE RECIEPTS LESS ANY DEDUCTIBLE EXPENDITURE LESS ANY CAPITAL ALLOWANCES =
TRADING PROFIT.
Chargeable receipts for a company will usually be similar to those of other businesses.
Examples of deductible expenditure:
Directors/employees’ salaries or fees and benefits in kind.
Contributions to an approved pension scheme for directors/employees.
Payment to a director/employee on termination of employment.
Interest payments on borrowings.
Capital allowances – a company may deduct capital allowances claimed on expenditure on
machinery and plant and on other qualifying assets. Available by way of writing down allowances
and the annual investment allowance and balancing charges or allowance also work similarly.
The company may be able to reduce its trading profit by claiming relief for a loss previously suffered
in the trade ad carried forward.
Income from other sources must be added.
STEP 2: CALCULATE CHARGEABLE GAINS.
A company’s gains chargeable to corporation tax will be calculated using the same broad principles
as for capital gains tax but with certain important modifications.
1. Identify a chargeable disposal.
A chargeable disposal by a company can arise on a disposal of chargeable assets by way
of either sale or gift. Same sort of assets as would be liable for capital gain.
The position for plant and machinery is complicated by the fact that capital allowances
may be available in relation to the expenditure incurred on it. If this is the case – the
, plant and machinery will not benefit from the usual capital gains exemption for wasting
assets.
In practice plant and machinery is unlikely to increase in value and so a chargeable
capital gain will not arise.
2. Calculate the gain or loss.
PROCEEDS OF DISPOSAL LESS COSTS OF DISPOSAL = NET PROCEEDS OF DISPOSAL.
NET PROCEEDS LESS OTHER ALLOWABLE EXPENDITURE = GAIN OR LOSS BEFORE
INDEXATION
GAIN OR LOSS LESS INDEXATION ALLOWANCE = GAIN OR LOSS.
If a company sells an asset at an undervalue, a decision must be made as to what figure
to use for the proceeds of disposal.
If a sale is merely a bad bargain, the actual sale price will be used.
If there is a gift element, the market value of the asset will be used.
If the company sells to a connected with a person, the sale will be deemed to take place
at market value. (connected is when the person controls the company).
If the disposal of the asset leads to a loss (ignoring indexation) that capital loss can be
deducted from the other chargeable gains made by the company in its accounting
period, but not from its income profits.
Any unused loss can be carried forward to be deducted from the first available
chargeable gains made by the company in subsequent accounting period until the loss is
absorbed.
The indexation allowance is used when calculating the gain on an asset which has been
owned for any period between 31 March 1982 and the date of disposal. The purpose is
to remove inflationary gains from the capital gains calculation to that a smaller gain is
charged to tax.
Indexation allowance is calculated by multiplying the initial and subsequent expenditure
by the indexation factor that covers the period from the date the expenditure was
incurred to the date of the disposal of the asset.
Once the allowance has been calculated it is deducted from the gain before indexation
to give the gain after indexation.
3. Apply reliefs.
The range of reliefs available to companies is smaller than that available to individuals.
Roll-over relief on the replacement of qualifying business assets – designed to
encourage companies to expand and thrive by allowing the corporation tax due on the
disposal of a qualifying asset to be effectively postponed when the consideration
obtained for the disposal is applied in acquiring another qualifying asset by way of
replacement. The principal qualifying assets for the purposes of the relief are land and
buildings but more exotic asset such as ships and space craft’s etc also qualify but the
company must use the asset in its trade.
Company shares are not qualifying assets. Good will and other intellectual property are
subject to a separate roll over relief.
The disposal and acquisition must take place within certain time limits. The replacement
asset must be acquired one year before or three years after the disposal of the original
asset, unless an extended period is allowed by HMRC.
The relief postpones the tax liability by rolling over the gain on the disposal of the
original asset into the acquisition costs of the replacement asset.
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