Practice to Pass

ACCA Exam Techniques Webinar: September 2018 exams

Day 04: Corporation Tax and VAT
Companies resident in the UK pay UK corporation tax on a chargeable accounting
period. (CAP)
A CAP can never exceed 12 months.

Pro forma corporation tax computation

£
Trading profits x
Interest income x
Property income x
Miscellaneous income x
Net chargeable gains x
Total profits x
Less: QCD (x)
Taxable total profits (TTP) x

Corporation tax liability = TTP x 19%

Dividend income is exempt from corporation tax.
Payment due date
Not large: 9 months and one day after the end of a CAP.
Large: 4 quarterly instalments.
I. 14th day of month 7
II. 14th day of month 10
III. 14th day of month 13
IV. 14th day of month 16

Trading profits
Key differences compared to individuals.
There are no private use adjustments.

SHALINDRI HOMER
(ACCA, ACIM, MSc, BSc – First class, CAT)
Capital allowances
The AIA of £200,000 is split between ‘related companies’. Related companies are a
group where the parent company holds at least 50% of the share capital.

Energy saving plant and machinery

100% First year allowance (FYA) is available.
If this creates a loss, the company can surrender the part of the loss relating to such an
allowance in return for 19% payment for HMRC.

Interest income (Loan relationship rules)

Any trade related interest income or expense – include under trading profit.
Any non-trade related interest income or expense – include under interest income.

Property income
Same as for individuals.
Interest on loan to buy let property is deducted as an expense under the loan
relationship rules.

Chargeable gains
When calculating the chargeable gain, an Indexation allowance needs to be deducted to
take into account inflation.
The only relief available for companies is ‘rollover relief’.
There is no AEA for companies.

Substantial shareholding exemption.

If a company disposes shares out of a substantial shareholding in another company.
Gains = exempt
Losses = not allowable
A substantial shareholding is a holding:

SHALINDRI HOMER
(ACCA, ACIM, MSc, BSc – First class, CAT)
 I. Of ≥ 10%
II. Owned for at least 12 months in the two years before the disposal.
Where shares have been owned for less than 12 months out of the previous 24
months exemption is still available where:
I. Shares disposed are in a new company, and
II. The new company received assets from another 75% group company, and
III. The assets transferred were held and used in the trade of another group
company for the 12 months before transfer.

Research and development expenditure.

Tax relief is given for qualifying revenue expenditure incurred by companies.
For SMEs
Deduct an additional 130% of qualifying expenditure for tax purposes.
If the deduction creates a loss it can be surrendered for a cash payment of 14.5%

For large companies – above the line tax credit.

11% of the qualifying R&D expenditure is:
I. Included as taxable income in TTP and is taxed at 19%, and
II. Deduct from the corporation tax liability.

Capital expenditure on R&D qualifies for 100% R&D capital allowance in the year of
purchase.

Intangible assets
Expenditure relating to intangible assets recorded in the income statement is allowed for
tax purposes.
Instead of the amounts charged in the accounts, an election can be made to write off
4% p.a for tax purposes.

Patent box relief.

Steps:

SHALINDRI HOMER
(ACCA, ACIM, MSc, BSc – First class, CAT)
 I. Determine the profits attributable to patents.
II. Net patent profit x (main rate – 10%) / main rate
III. Tax the remaining profits as normal.

Transfer pricing
AIM – ensure transactions are recorded at arm’s length prices.
Large company – buying/selling from any company – transfer pricing rules apply.
Small/medium - buying/selling from overseas company in non-qualifying territory –
transfer pricing rules apply.
Small/medium - buying/selling from UK SME or overseas company resident in a
qualifying territory – transfer pricing rules do not apply.

Corporation tax losses

Trading losses
Carry forward relief – against future trading profits
Current year and prior year – against total profits before QCD (partial claims are not
allowed)
Terminal loss – Carry back 36 months: against total profits before QCD

Capital losses
Current year + carry forward – against chargeable against only.

Property income losses

Current year + carry forward – against total profits before QCD.

Loan relationship deficits

Current period – against total profits before QCD.
Carry back – against interest income of the previous 12 months.
Carry forward – non-trading profits of future period

SHALINDRI HOMER
(ACCA, ACIM, MSc, BSc – First class, CAT)
Business vehicle – Factors to be considered prior to deciding on the business
structure.
Initial losses – sole trader structure is more preferred: individual can use the losses
against the owner’s total income.
Intention to withdraw profits – sole trader is required to pay tax on profits made and not
profits withdrawn.
Liability – corporate structure is preferred as it limits an individual’s liability.

Close company
It is a company controlled by:
I. Any number of directors
II. Five or fewer participators
1. Implications of a close company status.
1. Provision of a benefit to shareholders.
Company – cost of providing the benefit is an allowable expense.
Individual – benefit is calculated using employment income rules.
If shareholder is only a shareholder and not a director – value of the benefit is taken as
a dividend.
2. Provision of a loan to shareholders
Company
I. There is a tax charge of 32.5%
II. No tax is payable if the loan has been repaid before 9 months and 1 day after the
end of the accounting period.
III. The tax charge is repayable when:
Loan is repaid
Loan is written off
No tax is payable by the company when:
I. Loan is less than or equal £15,000.
II. Individual is a full-time working employee
III. Individual owns 5% of the shares or less

SHALINDRI HOMER
(ACCA, ACIM, MSc, BSc – First class, CAT)
For shareholders
The only tax implication is that if the loan is written off the individual is subject to income
tax as though it was a dividend received on the date of write – off.
When the company does not charge interest at least at 2.5% there will be a taxable
benefit on the individual. (Loan benefit)

Provision of loans from shareholders to the close company

Shareholder – interest can be deducted as a relief from income tax.
Conditions:
I. Individual has a material interest (more than 5%)
II. Full-time working officer or employee involved in the management of the
company.
Close investment company (CIC)
All close companies are CIC unless their main activity is trading or letting property to
unconnected persons.
Shares of a CIC will not treated as business assets for IHT or CGT.
Tax relief will not be available to individuals if they borrow money to invest in a CIC.
Personal service company (PSC)
The purpose of the legislation is to counter the practice where individuals who are self-
employed set up companies which the client contracts with, and pays the company
instead of individuals for the services.
PSC rules
The PSC has to treat income from relevant engagements arising in the tax year as if it
were paid out as salary to employees.
Account for notional income tax and NIC.
The notional salary and NIC is allowable for calculating corporation tax profits.

Disincorporation
Transfer of a company’s trade and assets as a going concern to one or more of its
shareholders who run it as a sole trader/ partnership.
Disincorporation relief:

SHALINDRI HOMER
(ACCA, ACIM, MSc, BSc – First class, CAT)
Qualifying business assets (land & buildings, goodwill) to be transferred at reduced
value:
Goodwill – lower of TWDV or MV
Interest in land – lower of cost or MV
Purchase of own shares
Depending on how the transaction is the amount received will be treated as:
I. An income distribution - amount of distribution less cost of original shares is
taken.
II. Capital payment

Liquidation
If the payments are made to the shareholders:
Before the liquidator is appointed – taxed as dividends
After the liquidator is appointed – taxed as capital receipts

Groups and consortia

Group relief group – ≥ 75% holding directly and indirectly
Losses relating to corresponding accounting periods can be surrendered.
Current period losses only qualify.
Consortia
Where two or more companies between them own at least 75% of another company.

Capital gains group - Gains group - ≥ 75% direct holding and > 50%
Gains and losses can be transferred between group members.
Intra-group asset transfers are at no gain no loss.
Degrouping charge – arises when a group company leaves a group still owning an
asset it received in an intra-group transfer within the last 6 years.
If the company leaves the group within 3 years of the original transfer – the original
SDLT exemption is withdrawn.
Pre-entry capital losses
SHALINDRI HOMER
(ACCA, ACIM, MSc, BSc – First class, CAT)
Losses of a company incurred before they join a group is considered as realised losses.

Overseas aspects of corporation tax.

Election to exempt profits of overseas permanent establishment
No UK tax on the overseas PE.
No relief for overseas losses and no UK capital allowances for overseas assets.

Overseas branch
Extension of UK operations. All profits arising assessed on UK Company.
Can relieve overseas losses against UK profits.

Overseas subsidiary
Overseas profits not assessed in the UK if left in the overseas subsidiary.

Double taxation relief:

Lower of:
I. Overseas tax suffered
II. UK CT on overseas income
Controlled foreign companies (CFC)
It is defined as:
I. Non-UK resident company
II. Controlled by a UK resident company
III. That has artificially diverted profits from UK

UK company's share of CFC profits x 19% X

Less:
DTR if CFC was UK resident (X)
UK CT on CFC income that is taxable in UK (x)
Income tax suffered by CFC on its income (X)
CFC charge X
SHALINDRI HOMER
(ACCA, ACIM, MSc, BSc – First class, CAT)
SHALINDRI HOMER
(ACCA, ACIM, MSc, BSc – First class, CAT)