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					Introduction to Corporation Tax

    Jon Claypole and Andrew Tall
            Mazars LLP
Contents


• 1. What is Corporation Tax

• 2. How to complete the CT600 form

• 3. Planning to reduce Corporation tax
What is Corporation Tax


• Introduced by FA 1965 – before then companies
  paid income tax.
• Assessable on both income and capital gains
• Taxed on a company
• Based on the company’s “Accounting Period” –
  but calculated by reference to “Periods of
  Account”.
• Since 1999 taxable on a “self-assessment”
  basis
    What is Corporation tax – rates and dates

     What do we need to know?
•    Tax bands – main rate 26% and small profits rate 21%

•    Number of associated companies

•    Normal due date for payment – 9 months and 1 day after the end of
     the period of account

•    Large profits: quarterly instalment payment regime: 6 months and 14
     days into the period, then every 3 months ended 3 Months and 14
     days after the end of the period.

•    Interest on late payment is 1.5% for quarterly instalments and 3% after
     the normal due date (the same as IT).
    - Books and records


• A company must keep some records for
  Companies house – Statutory accounts, Annual
  return, Share Register, List of members, etc.

• It must also keep records for HMRC: s12B TMA 1970
•    “keep all such records as may be requisite for the purpose of enabling him to
     make and deliver a correct and complete return for the year or period”
•    “in the case of a person carrying on a trade, profession or business alone or in
     partnership or a company, the fifth anniversary of the 31st January next
     following the year of assessment or (as the case may be) the sixth anniversary
     of the end of the period”
   What is Corporation tax – who is your
                 client?

1. First step: understand who your client is, and
   what they do

   * What issues are likely to arise?
   * Do you have the skills to deal with the issues?
   * Are you willing to take on the risks?
   * What costs are you likely to face?
   * When does it all need to be done?
    What is Corporation tax – source data


2. Taking numbers from the accounts

•   Start from signed accounts
      – then nothing will change and affect your computation
      – if you only have draft accounts, make sure you are in the loop!
•   Check what accounting system is used for the
    accounts - UK GAAP, IFRS or another system.
•   Check if the accounts are correctly prepared.
    Preparing the CT return - source data

•    Key figures from the accounts:
       • GAAP profit before tax – s46 CTA 2009
       •   Fixed assets – additions and depreciation
       •   Other income – rent, dividends and interest
       •   Fixed asset investment movements
       •   Movements in the STRGL or Reserves
       •   Prior year adjustments – what and why!
       •   Share scheme charges
       •   Detailed of QUALIFIED Accounts
 What is Corporation tax – computing the
              trading profit
3. Adjusting the trading profit for statutory add-backs

      * There is no materiality in statute
      * Capital vs Revenue – depreciation is not deductible

   Common risk areas:
     * Repairs
     * Entertaining
     * Legal fees
What is Corporation tax – computing the
trading profit

• Other common adjustments to trading profits
  * Expenditure on non-business items
  * Emoluments not paid within 9 months and 1 day
  * Stock withdrawals from the business
  * Pension accruals and prepayments
       What is Corporation tax - capital
                 allowances
• The general pool attracts allowances at 20% on a
  reducing balance basis – 18% is expected from 1 April
  2012
• The general pool covers all assets except those
  specifically excluded (see next slide)
• Each group of associated companies can claim one
  Annual Investment Allowance on up to £25,000 of
  expenditure receiving 100% relief in the year of
  acquisition.
• It is not possible to ‘roll-over’ the annual investment
  allowance, but it may be possible to time expenditure to
  straddle two accounting periods.
       What is Corporation tax - capital
                 allowances

•   Integral features – there is a prescribed list
    including Air Con, Power, Water, Lifts, etc.
•   The special rate pool attracts allowances at 10% -
    8% is expected from 1 April 2012
•   Long-life assets and short-life asset elections
•   Cars – CO2 emissions, ‘old rules’ limit the capital
    allowance to £3,000 for ‘expensive cars’.
What is Corporation tax – chargeable gains

• Income and expenditure that is capital in nature is brought
  into the tax computation as chargeable gains and losses
• Unless it isn’t – for example intangible assets created after 1
  April 2002 or acquired from a third party after that date.
• No deduction can be obtained for capital expenditure until
  the asset is disposed of
• Indexation allowances may be available to inflation-adjust
  the cost.
• Some expenditure may never receive a deduction.
• March 1982 market values to identify the ‘cost’ of older
  assets are mandatory for companies.
What is Corporation tax – interest

• “Interest” income and expenditure is often taxed/allowed as ‘non-trade
  loan relationships’
• The legislation is very complex and written in a particularly impenetrable
  fashion
• Generally interest paid on trading items such as a bank overdraft is a
  trading expense
• “Interest” includes much foreign exchange movements, the unwinding of
  various discounts, etc.
• Buying and selling impaired debt has extremely complex provisions that
  can lead to unexpected charges
• Waivers of loans between related parties may be non-taxable events
• Loans for an ‘unallowable purpose’ will general not give rise to a
  deduction if waived.
• Interest payments and withholding tax
What is Corporation tax – rental income


• The calculation rules for taxing/relieving profits and
  losses on ‘commercial’ rents mirrors the rules for
  trading income / expenditure.
• Technically however the activity is not a trading
  activity for most companies.
• Furnished Holiday lets have special rules
• Letting of furnished residential property may attract
  ‘wear and tear’ allowances of 10% of the net rent
What is Corporation tax – other items


• Dividends

• Overseas income

• Controlled foreign companies

• Non-resident landlord’s

• Insurance, Tonnage tax, Ring fence activity, etc
     What is Corporation tax - loans to
              shareholders

• S.455 CTA 2010 – formerly s.419 ICTA 1988
  * Where a loan is made to a participator which is
    outstanding more than 9 months and 1 day from the end
    of the period there is a 25% refundable charge
  * Keep a record of the payment – HMRC may need proof of
    payment before they refund it!
  * Remember to ask for the refund – there is no CT600 entry
  Benefit-in-kind
  * £5k de-minimis
  * HMRC approved rates of interest 4% from 6 Apr 2010
How to complete the tax return form


• iXBRL and e-filing – now and going forward

• Questions on the form

• The HMRC free software

• Manual returns
How to complete the tax return form
Completing the return – type of company


•    1. Is the company an authorised unit trust or an open-
    ended investment company?
•    2. Close investment-holding company?
•    3. Company in liquidation? [Applies to periods
    following the first year of liquidation only]
•    4. Investment trust with housing investment profits?
•    5. Insurance?
•    6. Members' club or voluntary association?
•    7. Property management company?
•    8. Charity or owned by a charity?
Completing the return – Accounts question
Planning to reduce Corporation tax


• Tax loss planning – consortiums, forming groups
• Claiming tax credits- R&D claims, film tax credits
• Maximising capital allowance claims
• Avoiding the avoidance – pension payment timing,
  emolument timing, etc.
• Dividend vs Salary comparisons for owner managers –
  cashflow, tax rates, pensions
• Claiming expenses – a company must be able to prove
  that it has incurred the expense to use it!
   Planning to reduce Corporation tax –
            trading loss relief

• Offset against current profits
     - s.37(3)(a) CTA 2010
• Carry back to previous accounting period.
     - s.37(3)(b) CTA 2010
     - Also: “terminal loss” carry back…
• Carry forward against future profits
     - s.45 CTA 2010
Planning to reduce Corporation tax – group
/ consortium relief
• Available for companies under common control
• Group relief – 75% or more common ownership
• Consortium relief – 75% or more ownership of the
  consortium vehicle by companies, each of which holds
  more than 5% of the ownership.
• Payment for group/consortium loss relief can be £1 for
  £1 without tax consequence – not just the tax saved
• Consortium relief claims are pro-rata to the ownership
  percentage and must be agreed by all parties.
 Planning to reduce Corporation tax - Tax
                 Credits

They have to be claimed
   - They are not awarded automatically
They have to be justified to HMRC
   - There are strict criteria for their award
They are available in a variety of circumstances
   Examples:      - Research and development
                  - Film production
                  - Contaminated land
Planning to reduce Corporation tax – R&D
tax Credits
• Two similar schemes, SME scheme and large company scheme.
• Both require qualifying R&D activity – activity which seeks to
  resolve scientific / technological uncertainty

• SME scheme:
• £10,000 minimum – to be abolished from 1 April 2012
• 200% deduction for expenditure increasing to 225% > 1 Apr 2012
• Recoverable credit at 14% of the grossed-up claim value – this is
  not taxable income.
• Credit is not capped at the PAYE cost > 1 April 2012
• On consumable stores including power and water, staff costs, 65%
  of some subcontracted and externally provided workers, etc.
• Must be a going concern
Close Company Definition ( CTA 2010 s439)


• Close Company if
  – Either 5 or fewer participators
  – Or any number of participators who are directors
• Either control the close company [s349(2)]
• Or possess or entitle to greater part of the
  company assets on winding up [s439(2a)]
• In determining level of ownership of
  shareholder include his/her associates
Close Company : Associates [s448]


•   Spouse/Civil Partner
•   Parent or remote forebear
•   Child or remote issue
•   Brother or sister
•   Business Partners
•   Trustees of any settlement whereby P or
    relative of P is a settlor …
Close Company: Control ( s450)


• A person is treated as having control if he/she
  exercise/able to exercise/entitled to acquire
  control over the company affairs.
• This include:
  – Majority of share capital
  – Majority of voting power
  – Entitlement to greater part of distribution ( disregard
    loan creditor)
  – Rights to greater part of company assets on winding
    up or other circumstances
Close Company: Tax Implications


• The close company rules is to prevent
  shareholders and directors of close company to
  utilise company asset for their own benefit.
• Close Company Legislation regulates:
  – Loans to participators
  – Benefits provided to participators
  – Close investment company tax rates
Close Company: Loan to Participators
               (s455)

• S455 charge applies if a company makes a loan
  to a participator or his/her associate
• Amount charge is 25% of the amount of the
  loan or advance
• Tax is payable 9 month and 1 day after end of
  CAP or added to QIP for larger close
  companies
     What is Corporation tax - loans to
              shareholders
• S.455 CTA 2010 – formerly s.419 ICTA 1988
  * Where a loan is made to a participator which is
    outstanding more than 9 months and 1 day from the
    end of the period there is a 25% refundable charge
  * Keep a record of the payment – HMRC may need
    proof of payment before they refund it!
  * Remember to ask for the refund – there is no CT600
    entry
  Benefit-in-kind
  * £5k de-minimis
  * HMRC approved rates of interest 4% from 6 Apr 2010
Distribution to Shareholders


• Distribution has to follow rules (Part 23
  Companies Act 2006), form and process.
• Cannot just make a journal entry ( e.g to clear
  shareholder overdrawn loan account)
• Need to have distributable reserves.
• Usually require an ordinary resolution except if
  otherwise stated in the Articles of the company.
• Need appropriate board minutes
Duties of Directors under CA 2006

 •   Duty to promote the success of the company [172]
 •   Duty to exercise reasonable care, skill and diligence [174]
 •   Duty to avoid conflict of interest ( in particular exploitation of any
     property, information or opportunity) [175]
 •   Duty not to accept benefits from third parties ( ‘No bribe’ rule) [176]


     Directors must have regards to the interest of creditors ( HMRC is
                               a creditor)
        All decisions are taken in accordance with CA 2006 ( proper
                         procedures make it easier)
      Obligations to keep proper books and records, prepare and file
       accounts, tax returns and other administrative requirements
     Directors must satisfy themselves that the company has available
             distributable reserve before proposing a dividend
Permanent Establishment

• A company will only be subject to UK corporation tax if
  carrying a trade in UK through a permanent
  establishment ( ‘PE’) [CTA 2009 S 19,21)

• A Company will have a PE in 2 situations [CTA 2010
  s1141]:
  a) it has a fixed place of business through which the
  business is wholly or partly carried on or
  b) an agent habitually carries on business activities as
  authorised for and on behalf of the company

• PE definition is adopted from OECD model treaty
Permanent Establishment: Exception



•   A company will not be regarded as having a PE if it carries
    on its business through an independent agent acting in the
    ordinary course of their business or if the activities are of a
    preparatory or auxiliary nature. [CT2010 s1142)

• Note: Double Tax Treaty take precedence over UK domestic
  law.
HMRC enquiry & information powers


• Non-statutory requests
  –   Bulk information powers
  –   Large compliance centre calls regarding ‘errors’
  –   Business records checks
  –   Information request letters
• Statutory powers
  – Formal enquiry powers
  – Inspections
  – COP8, COP9, SCI and SOCA.
HMRC penalties

• The more serious the reason for the document being
  incorrect, the higher the penalty can be. We will charge a
  penalty if the inaccuracy:
   – is careless – you failed to take reasonable care
   – is deliberate – you knowingly sent us an incorrect document
   – is deliberate and concealed – you intentionally sent us an incorrect
     document and tried to conceal the inaccuracy
• You will have to pay the tax and any interest due, as well as
  the penalty.
• We can substantially reduce a penalty, especially if you
  make an unprompted disclosure. Unprompted means that
  when you tell us about the inaccuracy you have no reason
  to believe we have discovered or are about to discover it.
• Reasonable care – no penalty

• Careless: 0% – 30%, but at least 15% if prompted

• Deliberate: 20% – 70%, but at least 35% if prompted

• Deliberate and concealed: 30% – 100%; but at least 50%
  if prompted

				
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