1

Corporation Tax

Trading Income XXX

Property Income XXX

Interest Income XXX

Capital Gains XXX

Other income XXX

Total income / Taxable Total Profits XXX

Less: Qualifying Charitable Donation (QCD) (XX)

Total Taxable Income XXX

Add: Franked Investment Income (FII) / Dividends from non-group companies XXX

Augmented Profits XXX

Corporation Tax Liability (CTL) = Total taxable profits X Rate of tax

Financial Year Rate of Tax Profit Threshold

2021 19% £1500,000

2020 19% £1500,000

2019 19% £1500,000

 2

Property Income
Same as individuals, but 3 major differences

- For companies, property income is always calculated on Accrual Basis

- Mortgage interest on both (Residential Property & Non-Residential Property) always 100%
allowed expense to be deducted from property income
- Mortgage interest from Non-Trading activity, should be deducted from Non-Trading Loan
relationship (NTRL) as if the loan taken for Non-Trading Purposes.

Trading Income
- Same as Individuals, few differences (Changes / Additions) (specially in Capital Allowances)
- No concept of drawings
- No concept of private use adjustments in trading profits with respect to (Capital Allowances,
PUA)

Interest Income
- For a company, interest income is taxable on Accrual Basis.
(In individual taxation, it is on receipt basis)

- For companies, Interest income is always received Gross amount

(However, at times, individual person receive Interest as Net Amount, for example, interest
from loan notes of unquoted company80%)

Non-Trading Loan Relationship (NTLR):

Non-Trading Interest Income XXX

L: Non-Trading Interest Expense (XX)

Surplus / (Deficit) on loan-relationship XX / (XX)

Loan Interest

Loan acquired for trading purposes Loan acquired for non-trading purposes
For example: Business asset acquired using loan For example: Non-business asset acquired using
amount loan amount
Trading expense Non-trading expense

Deducted from trading income Deducted from NTRL rules

- Loan issuance cost (transaction cost) is dealt in accordance with the treatment if interest
expense.
 3

With respect to properties, the following differences are highlighted between;

Individual Company

Property Income: Property Income:

Mortgage interest  Residential Not Allowed Always allowed, irrespective of the nature of
Mortgage interest  Non-Residential  Allowed property.

Capital Gains Tax: Capital Gains Tax:

- Capital gains tax on residential property @ All properties are treated the same
18% or 28%
- Capital gains tax on non-residential
property @ 10% or 20%

Inheritance Tax: Inheritance Tax:

- RNRB available on the disposal of Not Applicable

residential property
- No RNRB available on the disposal of non-
residential property

Question 1: (Loan Relationship)

Hutt plc will need to take out a loan to finance the purchase of Lucia Ltd. The company intends to
borrow £190,000 from BHC Bank Ltd on 1 July 2021. BHC Bank Ltd will charge Hutt plc a £1,400 loan
arrangement fee and interest at 7.25% per annum. Hutt plc only needs £130,000 of the loan to buy the
share capital of Lucia Ltd and intends to use the balance of the loan as follows: £45,000 to carry out
repairs to Hutt Tower (an investment property) and the remainder to help fund the company’s ongoing
working capital requirements.

Required: Provide an explanation of the tax treatment of the loan arrangement fee and the interest
payable on the loan of £190,000 assuming Hutt plc continues to have bank interest receivable of £2,000
and a trading loss of (£105,000) in the year ended 31 March 2022.
 4

Other Income
- Patent royalty income  is taxed on accrual basis
- Some other specifically mentioned items

Qualifying Charitable Donation (QCD)

- In individual taxation, it is termed as Gift Aid Donation (GAD)

- In company taxation, it is deducted on payment basis and there is no grossing-up concept for
companies

Capital Gains

Key Differences Between Individuals CGT Companies CGT

Tax paid Termed as “CGT” Termed as “Corporation Tax”

Annual exemption £______________ Not available

Indexation allowance Not available Available (see later)

Capital loss b/f Can be adjusted (preserving AE) First available & MPE

Gift HOR Not available

ROR / HOR Available

BADR Not available
Investors’ Relief Not available

Incorporation Relief Not Available

Reliefs
PPR exemption / Letting Relief Not Available
Insurance relief Available

EIS / SEIS Not available

Paper for share exchange Available

Substantial shareholding
-
exemption (SSE)
Matching Principle Available Available, but some d/f rules
 5

Capital Gains For A Company

Disposal proceeds xxx
Cost of Disposal
L: Cost of disposal (xx)
Net disposal proceeds xxx - Carriage outwards
- Selling commission
Purchased cost xxx - Advertisement
A: Improvements xxx - legal charges etc…
A: Indexation allowance xxx
Indexed cost (xx)

Capital gain / capital loss x/(x)

What is “Indexation Allowance”?

- It is an adjustment for inflation

- It is calculated on the basis of “Retail Price Index (RPI)” which is used to measure / monitor
inflation (Issued by HMRC on monthly basis) & given in exam.

- Indexed cost = Cost + Indexation Allowance

- Indexation Allowance = Indexation factor X Expenditure Amount

RPI (month of Earlier of) - RPI (month of expenditure)

RPI (month of expenditure)

- Earlier of;
- Disposal Month or
- 31 December 2017

 After 31 December 2017, Indexation allowance concept is discontinued

 Hence, any expenditure incurred after 31 December 2017, would not get any indexation
allowance.

- Indexation factor must be rounded off to 03 decimal places.

- No. of expenditures (cost and subsequent improvements)  No. of Indexation Allowances

- Indexation allowance can reduce the gain to “NIL” but cannot create a loss
 6

Question 2: (Capital Gains – Overview)

Greenwood Ltd disposed of an investment property on 31 December 2021 legal costs and estate agents
fees of £5,000 were incurred in relation to the disposal.
Greenwood Ltd had purchased the property originally on 21 June 1986 for £15,000 and incurred
acquisition costs of £1,500. Greenwood spent £25,000 on an extension to property on 31 May 2008.

Required:

Assuming the sale proceeds were:

(a) £105,000
(b) £45,000
(c) £53,500

Compute the indexed gain assessable on Greenwood Ltd in the chargeable accounting period to 31
March 2022
RPIs Jun’86 97.79 May’08 154.7 Dec’17 220.5 Dec’21 226.4

d) What would be change to answer if the extension on property was made on 31 May 2018, rather
than 31 May 2008?
 7

Franked Investment Income (FII)

- It is actually the dividends received from Non-Associated companies

- It is received as Gross Amount

- It is recorded on Receipt Basis.

Non-Associated company:

- Direct / Indirect shareholding is less than 50%

Associated company:

- Direct / Indirect shareholding is more than 50%

- A company is associate if it is controlled by another entity, or

- Two or more companies are associates, if they are under control of a common entity

- UK + Non-UK, both are included

- Dormant company is excluded

- Company which is joining or leaving the group

- If company sold during the year, it will still be deemed as part of the Group for this year
- If company acquired during the year, it would be counted as an associate from next year
- A company would be Associate for the year, if it is part of the group of preceding year-
end date

Question 3:

UUL Plc has the following income.

Business Income (trading profits) 280,000
Interest Income 20,000
Dividends from UK companies 45,000 (from a non-subsidiary)
Property Income 25,000
Qualifying charitable donations 5,000

Calculate Corporation Tax if results are for the year ended 31 March 2022?
 8

Question 4:

Flick plc holds 60% shares in Flack plc, 25% shares in Flock plc which are both UK Resident Companies.
Flick also holds 40% shares in Zack Ltd. (incorporated overseas). Flick plc has the following income for
the year ending 31 March 2022:

Business Income (trading profits) 320,000

Interest Income 30,000
Dividends from Flack plc 90,000
Dividends from Flock plc 45,000
Dividends from Zack Ltd. (gross) 25,000
Property Income 50,000

Required: Calculate Corporation Tax

Trading Income

Property Income

Interest Income

Total income / Taxable Total Profits

Less: Qualifying Charitable Donation (QCD)

Total Taxable Income

Add: Franked Investment Income (FII)

Augmented Profits
 9

Question 5: (Loan relationship rules)

B Ltd has one wholly owned UK subsidiary, F Ltd, and makes up its accounts to 31 December each year.
For the year ended 31 December 2021, it had the following results:
£
Trading profits before deducting interest and capital allowances 500,000
Capital allowances 19,900
Building society interest (BSI) received in the year 95,000
Chargeable gain on sale of office block 150,000
Interest received in the year on loan stock in C Ltd 61,400
Qualifying charitable donation 9,240
Interest payable on loan stock to D Ltd (Note 1) 100,000
Dividends received from F Ltd 50,000
Dividends received from Z Inc (Note 2) 20,000
Dividend paid 40,000

BSI Loan stock interest

Accrued income b/f £ 20,000 £ 1,000
Accrued income c/f £ 25,000 £ 3,600

Notes:
(1) The funds raised from the loan stock issued to D Ltd were used to acquire plant and machinery.
(2) B Ltd owns 5% of the ordinary share capital of Z Inc, an overseas resident trading company.

Requirement: Calculate B Ltd's corporation tax liability for the year ended 31 December 2021.

Trading Income

Capital Gains

Interest Income

Total income / Taxable Total Profits

Less: Qualifying Charitable Donation (QCD)

Total Taxable Income

Add: Franked Investment Income (FII) / Dividends from non-group companies

Augmented Profits
 10

Dividends
Paid Received

Form Non-Associate From Associate

Company Company
Have no corporation tax implications. It is simply
ignored for corporation tax calculation purposes. Do not even appear in
We record it in FII but
corporation tax pro-
do not pay tax on it
forma

Substantial Shareholding Exemption (SSE)

- SSE is available when a company disposes off the shares of other company
- Vendor company is the company who is going to sell the shares
- Vendee company is the company whose shares are being sold

Conditions for claiming SSE:

1. Both Vendor & Vendee companies must be  Trading companies

2. Vendor company shareholding should be of more than 10% in last 12 out of 72 months

If all of the above conditions are met, Gain / (Loss) arising on the disposal of shares, would be exempt
from CGT.

- SSE is not applicable on the disposal of whole substantial shareholding

- rather, SSE is applicable on the disposal of shares from substantial shareholding

Example:
Company A ------------18% s/holding on 1.1.19-----------------> Company B

Company A  30 Jun 2020  10% shares sold

Company A  31 Mar 2021  03% shares sold
Company A  31 Dec 2021  05% shares sold

Required: Which disposal qualifies for SSE?

For this example, assume the 2nd condition as, holding duration condition is last 12 out of 24 months.
 11

Question 6: (Substantial Shareholding exemption)

Particle Ltd has owned 100% of the shares in four companies Baryon Ltd, Kaon Ltd, Hadron Ltd and
Electron Ltd since 1 December 2005. Particle Ltd has been offered £650,000 for the whole of the
company’s share capital in Kaon Ltd. Particle Ltd has taxable total profits of £400,000 each year.

Required: Explain the corporation tax implications of selling the shares in Kaon Ltd and compute the
after-tax sales proceeds as a result of selling Kaon Ltd on 31 January 2022
 12

Enhanced Capital Allowance (ECA))

For a two-year period from 1 April 2021 to 31 March 2023, companies can benefit from enhanced
capital allowances when they purchase new plant and machinery:

 For expenditure which would fall into the main pool, there is a 130% super deduction. This means
that for every £100 of expenditure, a first year allowance of £130 is available.
 For expenditure which would fall into the special rate pool, there is a 50% first year allowance.

For expenditure falling into the main pool, the 130% super deduction should be claimed rather than the
100% annual investment allowance. However, for expenditure falling into the special rate pool, the
100% annual investment allowance should be claimed in preference to the 50% first year allowance.

Enhanced capital allowances are not available to sole traders or partnerships. Only expenditure on new
plant and machinery qualifies, not expenditure on second-hand assets. Motor cars do not qualify.

Question 7:

Hance Ltd has an accounting reference date of 31 March each year. On 1 April 2021, the tax written
down value of plant and machinery in the company’s main pool and special rate pool is £0.

During the year ended 31 March 2022, Hance Ltd purchased new equipment for £1,650,000, of which
£350,000 is main pool expenditure and £1,300,000 is special rate pool expenditure.

Hance Ltd’s capital allowance claim for the year ended 31 March 2022 will be?
;
 13

Intangible Fixed Asset (IFA)

1. Intellectual property (Patents / Copyrights / Software)

2. Goodwill / Customer related intangibles

The main difference between above two categories of intangibles is that the

- Row 1 intangibles have limited useful life (amortization), whereas

- Row 2 intangibles are generally having unlimited life

(no amortization, however, they are tested for impairment at each reporting date)

1. Intellectual Property
(Limited useful life)
(1B) Non-Trading Nature Intellectual
(1A) Trading Nature Intellectual Property
Property

Means, it is supporting in core business activity Means, it’s not supporting in core business activity

For example: For example:

A medicine formula (patent) of a pharmaceutical A medicine formula (patent) given to anyone else,
company. not used by company.

Company is manufacturing medicines using this The income received here in form of patent royalty
formula. would be the non-trading income.

The income received would be the trading

income.

(1B) Non – Trading Nature Intellectual Property

During life, Any
(Debits / Expenses); or
(Credits / Income)
Will be netted of with each other & if after netted of
Net Debit (Net Expense) Any Credit (Net Income)
Deducted from total profits, along with QCD Added to total profits / total income
 14

(1A) Trading Nature Intellectual Property

During life
when they are Amortized (Debits);
2 Methods
Default Treatment Alternate Treatment
Follow accounting treatment 4% SLM Amortization Methodology
- Deduct 4% SLM Amortization
No adjustment required
- Add back accounting expense
Irrevocable election needs to be claim within 2
years from end of accounting period, in which
intangible assets was acquired.

Planning Aspect:
If life of intangible is > than 25 years, then it is beneficial to go for 4% SLM (Alternate Treatment), rather
than default method.

1 / Useful life = Depreciation % 

(1A) Disposal of Trading Nature Intellectual Property

Under Default Treatment Under Alternate Treatment (4% SLM)
- G / (L) calculated under accounting rules,
would be deducted, or added to profits
No adjustment required, means any G / (L) would
be calculated as per the accounting rules
- Calculate G / (L) under tax rules and treat
accordingly

Any G / (L) on disposal,

will be included in Trading Income.

2. Goodwill / Customer related intangibles

- Throughout their life, no debit (expense) for tax purposes

- At disposal time;
- Gain would be added to trading income
- Loss would be deducted from income / profits (Same as net debit of non-trading
intellectual property (1B)
 15

Question 8: (Intangibles)
On 1 December 2022 Rom plc purchased the trade & assets of another company in the same business
sector. They paid £2million that included £35,000 for patent with ten-year life remaining. Goodwill is
valued at £200,000.

The patent is capitalised and will be written off on a straight-line basis over 10 years on a month-by-
month basis. The goodwill is capitalised but not amortised. The acquisition is expected to significantly
increase Rom’s profitability. The company prepares its accounts to 31 March annually.
(A) What relief is available to Rom plc for its intangible assets?

Rom plc decides to sell the business that it bought on 1 December 2022. The consideration includes
£38,000 for the patent and £250,000 for the goodwill. The sale is made on 1 April 2025.
(B) State the effect for tax purposes of the disposal of the intangible assets.

(C) What would be change to answer (b), if goodwill sold for £115,000?
 16

Patent Box
If a company develops its own patent to be use in trading activities, is it good for the economy or not?

If yes, it means company is involved in research & development. Hence, bringing continuous
improvement in the product

- Then tax authority incentivize/promote the companies for using its own patents for trading
purpose

- The profits which a company earned from patented activity would be effectively taxed at 10%

- It is only applicable for large companies, not for SMEs

Patent box deduction formula: Net patent profit x (MR – 10%)/MR

Where MR = main rate of corporation tax

Question 9: (Patent Box)

Theta plc’s has profits attributable to patents of £500,000 (after all relevant deductions have been
made), and other trading profits of £1,000,000.

Calculate Theta plc’s corporation tax payable for the year ended 31 March 2022, assuming an election
has been made for the patent box rules to apply.
 17

Question 10: (Patent Box)

For the year ended 31 March 2022, Blu Ltd has taxable profits of £1,800,000, of which the net patent
profit is £220,000 after all relevant deductions.

Calculate Blu Ltd corporation tax payable for the year ended 31 March 2022, assuming an election has
been made for the patent box rules to apply.

Research & Development (R&D)

- By definition, it is same as accounting definition

- Investing in research & development; is it good for the economy or not?

If yes, it means company is trying to bring the innovation in product, increasing efficiency, reducing
costs, improving processes, etc.

- Then tax authority incentivize/promote by giving certain relief on the costs incurred on R&D

For tax purposes  Eligible Expenditure:

- Staff cost – relating to R&D (e.g., salaries, employer pension contribution, class 1 employer NIC
(benefits should not be included)
- Software & consumable items (fuel, power etc)
- Sub-contract work (agency cost)  small portion of whole R&D
- General overheads should not be included in eligible R&D expenditures
- Assets / expenses should not be considered  which not wholly & exclusively incurred for R&D
- Assets / expenses should only be considered which wholly & exclusively incurred for R&D

Sub-contract work (agency cost)  Not outsourced

If conducted by company itself, then max 65% of the expenditure qualifies for eligible R&D expenditure
 18

Question 11: (Eligible Expenditure)

Dax plc is manufacturing audio visual equipment. Dax plc is a small enterprise for the purposes of R&D.
The company has recently decided to investigate the market for a radically new type of classroom
projection equipment and has spent the following amounts in the year ended 31 March 2022 on the
project:
£
Market research 8,000
Staff directly involved in researching the project 20,000
Administrative support for the R&D department 5,000
Heat and light in the R&D department 9,000
New software (to be used only by R&D) 4,000
An agency for temporary R&D staff 10,000

Advise the company of any tax relief available in respect of its expenditure.
 19

How the available relief on eligible expenditure of R&D works:

First thing to check whether the company is SME or a Large company:

SME Company Large Company

Define in question Define in question

Step 1:
- 230% of expenditure can be deducted

(Example: 10k expenditure incurred but - Claim a tax credit @13% of cost incurred
you can deduct 23k while calculating tax - This receipt is a taxable receipt for CT
adjusted trading profits) purposes

(Effectively, additional 130% of actual

expenditure you deducted)
Step 2: Example:
- After deducting 230% of expenditure, Large company incurs R&D of 100,000

if trading income is still calculated as +ve Trading income (Before R&D) = 1,000,000
figure, that’s ok, we can deduct exp in full L: R&D =; (100,000)
Adjusted Trading Income = 900,000
If trading income is calculated as -ve figure Tax credit @ (13% of 100000) = 13,000

Then; Total Income = 913,000

Option 1: (Surrender Option) CTL = @ 19% X 913,000 = 173,470

Surrender the loss to get repayment
@14.5%
Effectively:
Means, forfeit the loss, and get refund
@14.5% from HMRC Income @ 13%
Tax @ 19% (2.47%)
Surrendable loss is the Lower of: Net Benefit 10.53%

- 230% of R&D expenditure

- Trading loss, after current year claim
;
Option 2:
Adjust the loss normally (c/y, c/b, c/f)
 20

Question 12:

P Ltd is a small company. In the year to 31 December 2021, it has the following results:

Trading profit (before taking into account R&D expenditure) £162,500

Qualifying / Eligible R&D expenditure £270,000
Bank interest receivable £5,000
Chargeable gain £70,000

Requirement: Compute the R&D tax credit that P Ltd may claim.
 21

Question 13: (R&D expenditure)

Rolly Ltd is a small company. It spends £20,000 on qualifying research and development expenditure in
the year ended 31 March 2022.

Rolly Ltd has a trading loss of £50,000 (before adjusting for the expenditure on research and
development).

In the year to 31 March 2022 the company has realised a chargeable gain of £10,000.

Evaluate the amount of the R&D tax credit and the amount of trading loss available to carry forward.
 22

Question 14: ((R&D) Small and Large co)

(1) Curzon plc is a large company for the purposes of R&D expenditure and pays corporation tax in
installments. In the year ended 31 March 2022 they have spent £60,000 on qualifying R&D
expenditure.

(2) Gul Ltd is a small sized company for the purposes of R&D expenditure. In the year ended 31
December 2021 they spent £8,500 on qualifying R&D expenditure.

Advise the companies of any tax relief available in respect of their expenditure.
 24

Accounting Period (AP)

- Accounting period is a period for which company prepares its accounts

- Usually, it is of 12 months, but can be more or less than 12 months.

Chargeable Accounting Period (CAP)

- No concept of Basis period / current year basis for companies

- Chargeable accounting period is a period for which a company calculates its corporation tax

- Usually, it can be of 12 months or less than 12 months

- Chargeable accounting period can never be of more than 12 months

- It means, *when the company is preparing accounts for more than 12 months’ time period, this
would be termed as “Long Period of Accounts”, and

*Why the company would be preparing more than 12 months accounts?

Answer is that when a company would like to change its accounting end date, then the company might
be in need of preparing more than 12 months accounts.

For Example:

- A company’s accounting year runs from 1 July to 30 June each year. Recently it prepared
accounts for the year for 1 July 2019 to 30 June 2020.

- Instead of 30 June, company now wishes to change its accounting end date to 31 December

- It has 2 options for deciding 31 December as year-end date

1. Prepare accounts from 1 July 2020 ------------------------------ 31 December 2020

1 January 2021 -------------------------31 December 2021

2. Prepare accounts from 1 July 2020 ------------------------------ 31 December 2021

You can see in No. 2, the long period of accounts is arising

 25

Long Period of Accounts:

- For Corporation Tax purposes, we will break that long period into

- First 12 months
- Remaining months

First 12 Months Remaining Months

Trading profits (12 m) XXX Trading profits (__ m) XXX

Capital allowances (12 m) (XX) Capital allowances (__ m) (XX)

Tax adjusted profits (12 m) XXX Tax adjusted profits (__ m) XXX

Interest Income XXX Interest Income XXX

Property Income XXX Property Income XXX

Chargeable Gains XXX Chargeable Gains XXX

Total Income XXX Total Income XXX

L: QCD (XX) L: QCD (XX)

Taxable Income XXX Taxable Income XXX

A: FII XXX A: FII XXX

Augmented Profits XXX Augmented Profits XXX

 26

Question 15: (Long Period of Account)

Earth plc holds 30% shares in Neptune plc, 65% shares in Saturn plc, and 70% shares in Pluto plc. Earth
plc has the following income for the 18 months ending on 31 March 2022:

Trading profits (adjusted, before capital allowances) 1180,000

Dividends from Neptune plc (amount received on 31.12.20) 45,000
Dividends from Saturn plc (amount received on 31.12.21) 90,000

Opening balance of Plant & Machinery pool was 80,000 on 1st October 2020. A car was purchased on
21.4.21 for the CEO at a cost of £24,000. The car has CO2 emission of 120 g/km and is 70% used in
business. A piece of equipment was purchased on 15 May 2021 at a cost of £264,000. A computer was
purchased on 31st December 2021 for £185,000.

Earth plc owns office premises, which was leased for a period of 20 years to Elixir plc at annual value of
£48,000 starting from 1.12.20. Premium on lease received was £45,000.

Required: Calculate Corporation Tax

First __________Months Remaining __________Months

(1 Oct______TO 30 Sep______) (1 Oct______TO 31Mar______)

Trading profits Trading profits

Capital allowances Capital allowances

Tax adjusted profits Tax adjusted profits

Property Income Property Income

Total Income Total Income

L: QCD L: QCD

Taxable Income Taxable Income

A: FII A: FII

Augmented Profits Augmented Profits

 27

Question 14 Working:
 28

Company with Investment Business

- Company with investment business is a company whose core operating activity is to invest in
loan notes and shares to earn interest income and dividend income

- If any expense pertains to any head of income, would be deducted accordingly, but

- any of the expense, does not pertain to particular head of income, then such expenses are called
as General Management Expenses (GME). For example, Staff / Admin / CEO / CFO salaries, etc.

£ £

Trading Income (Would not be having trading income) -

Property Income (Yes, it can be) XXX

Interest Income XXX

Capital Gains (Yes, it can be) XXX

Other income (Yes, it can be) XXX

Total income XXX

Less: General Management Expenses (GME)  Note 1 (XX)

Less: Qualifying Charitable Donation (QCD) (XX)

Taxable Income XXX

Add: Franked Investment Income (FII) XXX

Augmented Profits XXX

Notes:

1. General Management Expenses (GME) are the expenses which do not fall under any specific
head of income. So, they can be deducted from Total Income before QCD.

2. Excess Management Expenses would be c/forwarded against future total income

 29

Question 15: (Company with Investment Business)

The principal income of Beta Ltd is derived from investments in other UK companies. It also derives
income from rented properties and debenture interest. Beta Ltd's results for the eight months ended 31
March 2022 show the following:

Dividends received from other UK companies £972,000

Rental income £59,400
Rental expenses £16,400
Debenture interest received £60,000

Beta Ltd incurs management expenses of £102,500 in the period. In addition, it has excess expenses of
management of £23,100 as at 1 August 2021.

Requirement:
Calculate the corporation tax payable by Beta Ltd for the eight months ended 31 March 2022.

Trading Income

Property Income

Interest Income

Capital Gains

Other income

Total income

Less: General Management Expenses

Less: Qualifying Charitable Donation

Taxable Income

Add: Franked Investment Income (FII)

Augmented Profits
 30

Company Winding-Up

Going Concern Company Special Resolution Passed To Wind-

After Resolution
(Before Resolution) up the Company

Call GM / EGM If company distributes any

If company have distributed
profits to shareholders after
any profits to shareholders
Once the approval got for winding resolution
before resolution
up the company: (at time of winding up)

Then,
Ceased Trading
&
Current C.A.P will end
&
From next day, new C.A.P start which
will end on every 12 months (as
normal) & the company would be
It would be termed as considered as Dormant company
It would be termed as Capital
Dividend Distribution (as &
Gains
normal) Liquidator Appointed
&
(the company would still be preparing
its accounts and would also be filing
its tax returns till the time its name is
cut off from SEC register)
&
(It will be fully winded up once its
name is cut off from SEC register)

Scenario:
- A company is having a building and wishes to dispose it
- Two options for disposal
1. Dispose it before resolution and appointment of liquidator
2. Dispose it after resolution and then liquidator will dispose it

Few important points:

- If company dispose it before resolution and appointment of liquidator, any gains when
distributed to shareholders, would be treated as Dividend Distribution

- If asset being disposed of after resolution and appointment of liquidator, any gains then
distributed to shareholders, would be treated as Capital Distribution
 31

From shareholder perspective:

What is beneficial for a shareholder, option 1 or option 2?

Dividend is better?
Capital gain is better?

It depends upon whether the shareholder is a ‘Corporate Shareholder’ or ‘Individual Shareholder’.

Dividend Capital Gain

- Exempt from Tax - Exempt, if SSE conditions

are satisfied
Corporate Shareholder - If Non-Associate
company, then part of - Otherwise, taxable at
F.I.I 19%

- CGT at 10% 0r 20%,

- Exemption of 2,000
dependent upon status
Individual Shareholder
- IT @ 7.5%, 32.5% or
- Or 10%, if BADR or I.R
38.1%
conditions met

Tax Planning (For Individual Shareholder):

If asset disposed before resolution and any distribution will be the dividend distribution and individual
shareholder has to pay tax IT at 7.5%, 32.5% or 38.1%.

To avoid higher rates of dividend income, of you delayed and asset being disposed of after the
resolution and then any distribution will be the capital distribution and individual shareholder has to pay
CGT at 10% 0r 20%, dependent upon status of taxpayer Or 10%, if BADR or I.R conditions met.

Such conversion of dividend income into capital gains is termed as Dividend Stripping.
 32

Self-Assessment – Companies

Filing Tax Return:

- Tax return must be submitted with In 12 months after the end of chargeable accounting period.

E.g., 1 Jan 2021 ------------------- 31 Dec 2021 

- The software used for filing tax return in UK is

iXBRL abbreviated as “inline extensible Business Reporting Language”

Late Filing Penalties: (Non-Cumulative)

- After due date £100

- More than 3 months late £200

- More than 6 months late 10% of the tax due

- More than 12 months late 20% of the tax due

Any company consecutively submitting third year return late or onward, then 1st penalty amount would
be £500 instead £100, and 2nd penalty £1,000 instead of £200. Rest will remain same @10% and 20%.

Record Keeping:

- Companies must keep records until 06 years from the end of the C.A.P

- or 05 years from standard return filing date

- All business records and accounts, including contracts and receipts, must be kept or information
showing that the company has prepared a complete and correct tax returns.

- Penalty of up to £3,000/year

Interest on late or overpaid tax:

Interest charged on late/underpaid tax is 2.60% Interest received on early/overpaid tax is 0.5%

Allowable expense Taxable income

Non-Trading Loan Relationship

Because it is from the non-trading activity, that is why, it is to be taken to NTRL.

For individuals, these have no IT implications.
 33

Payment of Tax:

If Company is a Small Company:

It will pay tax in 09 months and day from end of each C.A.P

Example: 1 Jan 2021 ------------------- 31 Dec 2021 

If Company is a Large Company:

- It will compulsorily pay tax in installments with respect to start of C.A.P
- Installment amount is based Estimated CTL in current year

Quarterly installments:
Est. CTL ÷ 4 = Installment Amount

1st 14th day of 7th month

2nd 14th day of 10th month
3rd 14th day of 13th month
4th 14th day of 16th month (Balancing Payment)

What is Large Company:

- A large company is one whose “Augmented Profits > Threshold amount of 1,500,000”

- Threshold amount can be reduced due to:

- The months of Chargeable accounting period, and

- It may be reduced due to total number of associated companies and parent in a group.
 34

Losses of A Company

Trading Income (XXX)

Property Income (XXX)

Interest Income (Deficit on Loan Relationship) (XXX)

Chargeable Gains (XXX)

Other Income XXX

Total Income XXX

Less: b/f loss adjustment (XX)

Less: Qualifying Charitable Donation (QCD) (XX)

Taxable Income XXX

Add: Franked Investment Income (FII) XXX

Augmented Profits XXX

Capital Loss:
Step 1:Current year capital loss Adjust Against current year other capital gains

If remaining loss

Step 2: Carry forward Adjust Against future first available capital gains (MPE)

Property Loss:
Step 1: Current year property loss Adjust Against current year other property income

Step 2: Adjust Against current year total income (MPE)

If remaining loss Adjust Against future total income (upto any amount)
 35

Interest Loss (Deficit on Loan Relationship):

Option 1: C/f against future total income (up to any amount)

Option 2: Adjust against current year total income (up to any amount)

Option 3: C/b max 12 months against Interest Income (up to any amount)

Excess Management Expenses:

Step 1: Adjust against current year total income (MPE)

Step 2: C/f against future total income (up to any amount)

Trading Loss:
Option 1: C/f against future total income (Before QCD, upto any amount)

Option 2: Adjust against current year total income (MPE)

If remaining loss, then option 1

Option 3: Adjust against current year total income (MPE)

If remaining loss C/b max 12 months against total income (MPE)

If remaining loss the Option 1

Differences b/w Individuals & Companies  Trading Loss Adjustments

- In company situation, cannot directly go back

- No extended c/y or c/b option for company
- No losses cap concept for company
- Opening year loss relief not available for a company
- Terminal loss relief is available for a company

Factors  which option to opt for losses adjustments?

- Try not to waste QCD

- Liquidity position / Behavioral aspect
- Try to avoid the status of large company  so that the installments can be avoided
- Carry forward should generally be the last option as the future is uncertain
- Losses to be adjusted ASAP
 36

Too many losses in current year, Which loss to prefer? Adjustment Priority

Interest Income (Deficit on Loan Relationship) (XXX) 1st

Property Income (XXX) 2nd

Excess Management Expenses (XXX) 2nd

Trading Income (XXX) 3rd

Terminal Loss

Loss arose in last 12 months of Trade

Trading Terminal Loss Deficit on Loan Relationship

C/b 36 months on a LIFO basis C/b 36 months on a LIFO basis

Against Against

Total Income Interest Income

 37

Question 16:

Year Ending 31.03.18 31.03.19 31.03.20 31.03.21 31.03.22

Business Income (90,000) 120,000 (75,000) (200,000) 80,000

Interest Income 15,000 5,000 - 5,000 5,000
Property Income 30,000 (25,000) 10,000 40,000 45,000
Capital Gains 20,000 10,000 15,000 20,000 10,000
Dividends – Non-Sub 15,000 - 25,000 25,000 -
QCD (5,000) (5,000) (5,000) (7,500) (3,000)

Solution:

Year Ending 3131.03.18 31.03.19 31.03.20 31.03.21 31.03.22

Business Income 120,000 80,000

Interest Income 15,000 5,000 - 5,000 5,000
Property Income 30,000 10,000 40,000 45,000
Capital Gains 20,000 10,000 15,000 20,000 10,000

Total

Losses

QCD (5,000) (5,000) (5,000) (7,500) (3,000)

Taxable

A: FII

Augmented
 38

Question 17:
Y/E 31.03.19 P/E 30.09.19 Y/E 30.9.20 P/E 31.03.21 Y/E 31.03.22

Business Income 120,000 (152,000) 680,000 90,000 (170,000)

Interest Income - 5,000 5,000 5,000 5,000
Property Income 7,000 10,000 12,000 10,000 15,000
Capital Gains 15,000 - 5,000 - 10,000
QCD (5,000) (7,500) (3,000) (3,000) (7,000)

Solution:

Y/E 31.03.19 P/E 30.09.19 Y/E 30.9.20 P/E 31.03.21 Y/E 31.03.22

Business Income 120,000 680,000 90,000

Interest Income - 5,000 5,000 5,000 5,000
Property Income 7,000 10,000 12,000 10,000 15,000
Capital Gains 15,000 - 5,000 - 10,000

Total

Losses

QCD (5,000) (7,500) (3,000) (3,000) (7,000)

Taxable
 39

Group Loss Group

Definition:
- Direct / Indirect shareholding is more than 75%
- UK Company + Non-UK Company  Both included

Implications:

- Trading loss of current year - These things can be adjusted

- Interest deficit (unrelieved)*
within the group
- Property loss (unrelieved)*
- Excess management expenses (unrelieved)* - Up to any amount
- B/f trading loss (unrelieved)* - Against total income
- QCD (unrelieved)* - In any direction

*What is unrelieved loss:

Unrelieved loss is a remaining loss after adjusting it with company’s own total income

Notes:
- Capital loss is ignored as it cannot be adjusted in group loss group. Is has a separate treatment
under Capital Gains Group (see later).

- Losses can only be adjusted with UK resident companies only

- Once company can be member of more than one group losses group at same time

- Only current period losses can be adjusted in group according to corresponding / same period
(means, no c/f or c/b option in group)

- Losses can only be adjusted for the period, for which the company is part of group
(for group losses purposes, company leaves the group when arrangement to sell the company is
established)

What is Surrender Company?

Surrender company is a company, who has the loss &wants to adjust/give its loss to other companies in
group loss group.

What is Claimant Company?

Claimant company is a company to whom the loss is to be adjusted.

 40

Question 18:

Q Ltd owns 100% of the share capital of a number of profitable UK resident companies. All companies
prepare accounts to 31 March.

QLtd’s results for the year ended 31 March 2022 are as follows: £

Trading loss (150,000)

Interest income 1,600
Property business loss (18,000)
QCD (4,000)
Capital loss (15,000)

In addition, Q Ltd has unrelieved trading losses brought forward at 1 April 2021 of £50,000.

What is the maximum amount of loss that Q Ltd can surrender to its 100% subsidiaries, using group
relief, for the year to 31 March 2022?
 41

Question 19:

Earth plc owns 80% shareholding in Jupiter Limited, 90% shareholding in Saturn Limited, and 85%
shareholding in Neptune Limited. The results for the year ended 31.3.22 are:
Earth plc: 200,000 Profit
Jupiter Limited: 220,000 Loss
Saturn Limited: 60,000 Profit
Neptune Limited: 500,000 Profit

Question 20:

Neptune plc has 40% shareholding in Mars plc, 80% shareholding in Earth Limited, and 90% shareholding
in Mercury Limited. Earth Limited owns 75% shares of Jupiter Limited, while Mercury Limited owns 90%
shares of Saturn Limited.

The results for the year ending 31.03.22 are:

Neptune plc: 380,000 Loss

Earth Limited: 175,000 Profit
Mars plc: 200,000 Profit
Mercury Limited: 600,000 Profit
Jupiter Limited: 350,000 Profit
Saturn Limited: 55,000 Profit

Required: Set off losses in the group companies.

 42

Question 21:(Corresponding periods)

S Ltd trading loss for the year to 30 September 2021 (150,000)

H Ltd makes taxable total profits:

For the year to 31 Dec 2020 200,000

For the year to 31 Dec 2021 100,000

What group relief can H Ltd claim from S Ltd?

 43

Capital Gains Group

Definition:

- Direct shareholding  75 % above

- Indirect shareholding  50 % above
- UK Company + Non-UK Company  Both included
- Only for UK companies in the capital gains group and once company can be member of one CGG
at one time

Implications:

1. Asset transfer / sale between CGG  always at no gain no loss

2. Capital gains / capital losses can be transferred to CGG companies, in any direction, upto any
amount, against the capital gains of the CGG companies.

3. Group Rollover Relief is also available

The above implications are for the time when company is part of group (for CGG purposes, company will
leave the group when the control is transferred (not @ the time of arrangement of selling the company
is established)

Groups w.r.t Company Winding Up

- Group Losses Group no longer exist, when resolution to windup the company is passed

- However, Capital Gains Group still exist. It exist till the company name is in SEC register

Pre – Entry Capital Losses

It is a capital loss which exist in the acquiring company at the time of acquisition

- Cannot be adjusted in the Capital Gain Group

- They can only be adjusted with the asset:

- Sold before joining the group, or

- Owned when joining the group & sold later
- bought after joining the group from 3rd parties (non-group companies) & used in own
trade & then sold

It means, we are completely protecting it from adjusting it to group as its pre-entry capital loss.
 44

De – Grouping Charge

- Within CGG, any asset is transferred at NGNL (No Gain No Loss)

- Within 6 years of transfer of such asset, if company leaves the group, then

- At time of leaving the group, De-grouping charge is applicable if the asset is still owned by the
other group company

How De – Grouping Charge is Calculated?

- It is calculated as if the asset was transferred to other group company @ M.V that time
(instead of NGNL), and the amount of Gain calculated at that time.

- Gain amount is referred as De-grouping charge.

Who will pay De – Grouping Charge?

It is applicable on Vender company (Parent company)

Consideration received (D.P) XXX

A: De-grouping charge XXX

Total consideration XXX

L: Indexed cost of shares (XX)

Gain XXX  Exempt, if SSE conditions are met

 45

Question 22: (De – Grouping Charge)

In May 2021, Top Ltd, a trading company, sold the whole of the share capital of Bottom Ltd, a 100%
subsidiary, to Take plc for £600,000. Bottom Ltd is an investment company and had been owned by Top
Ltd since July 1992 when Top Ltd acquired the entire share capital for £50,000. The indexation allowance
on the sale is £45,978.
Included in Bottom Ltd’s assets is a warehouse acquired by Side Ltd in January 1994 for £96,000. Side
Ltd is also a 100% subsidiary of Top Ltd. The warehouse was transferred by Side Ltd to Bottom Ltd in
August 2015 for £100,000. Its market value at the date of transfer was £310,000. The indexation
allowance on a sale in August 2015 would have been £45,024.

a) What is the effect of Bottom Ltd leaving the group? Compute Top Ltd's corporation tax for the year
ended 31 March 2022 if it has trading income of £2,000,000.

b) How would your answer be different if Bottom Ltd was a trading company?
 46

Consortium Relief

Definition:

- When two or more (UK or Overseas) companies, own at least 75% of another company
- Each company must own at least 5%, but less than 75%
- The investor company is termed as  Consortium Member (CM)
- The investee company is termed as  Consortium Company (CC)
- If consortium setup exist  Then losses (same as defined in group losses) 
can be set off, upto any amount against total
income
- Corresponding period concept applicable
- Losses can only be adjusted with UK companies only (Overseas loss setting off not allowed)
- Maximum consortium relief:
Lower of:
- The results of Consortium Member (CM), or
- The CM % entitled to the results of consortium company

Example 1:

A B
Ltd. Ltd.

C
Ltd.

Example 2:

A B C Indivi
Ltd. Ltd. Ltd. duals

Z
Ltd.
 47

Example 3: Consortium Company Loss

A B
Ltd. Ltd.

C
Ltd.

A B

Max consortium relief is Lower of:

- The results of CM
- The CM% entitled to the results
of CC

Example 4: Consortium Company  Loss

A B
Ltd. Ltd.

C
Ltd.

Max consortium relief is Lower of:

- The results of CM

- The CM% entitled to the results of CC

 48

Question 23: (Consortium Relief)

C Ltd is owned 60% by A Ltd, 30% by B Ltd and 10% by an overseas company X Inc. Results for the year
ended 31 March 2022 are as follows.

A Ltd B Ltd C Ltd

£ £ £
Trading profit/(loss) 200,000 75,000 (50,000)
Property income 0 0 12,000

No dividends are paid or received by C Ltd. Each company has no other associates.

Compute the corporation tax liabilities of all three companies, assuming that all possible consortium
relief claims are made but that C Ltd does not claim current period loss relief.

A B X

A B C
Trading

Property

Total

Loss – Consortium Relief

Taxable

CT @ 19%

A B

Max consortium relief is Lower of:

- The results of CM
- The CM% entitled to the results of CC
 49

Consortium company loss = 50,000

Consortium relief A =

Consortium relief B =

Un-used loss =

- It can be c/fwd against future total income (up to any amount)

- It cannot be c/back, as companies can only c/back post current year claim

- C Ltd don’t want to adjust with c/year

Overseas Aspects

UK Resident Company:

- Is a company which is incorporated in UK, or

- Which is controlled from UK

If a company is UK Resident company, then has to pay tax UK Corporation Tax

Double Taxation:

- If tax treaty exists  mentioned in question

- If tax treaty do not exist  Double Tax Relief (DTR) Available

DTR is the lower of:

- UK Tax

- Foreign Tax
 50

Overseas Subsidiary (OS) Overseas Branch (OB)

(Separate Legal Entity) (Part of one entity)

Due to OS, No. of Associates increased No impact on No. of Associates

Dividend paid by OS As OB is a part of entity, hence any P/(L) would be

- Not part of CT calculation taken
- Losses cannot be transferred b/w - have to pay CT on OB profits
overseas group companies - would get relief on OB losses
OB profits are taxed in both UK & overseas
OS has to pay tax in overseas only, as it a
Because,
separate legal entity and registered in overseas
- It is operating overseas
country
- Part of UK company
How to have OS:
How to have OB:
- Purchase the s/capital of any existing
- By acquiring trade & assets or
company
- By Permanent Establishment (PE)
- Incorporate an entity & become s/holder

Question 24: (Overseas Aspects)

Gong Ltd is a UK resident company with an overseas branch. The results of Gong Ltd for the year ended
31 March 2022 are as follows:
Total UK Branch
Trading profits £400,000 £270,000 £130,000

Overseas corporation tax of £26,000 was paid in respect of the overseas branch’s trading profit.

The corporation tax liability of Gong Ltd for the year ended 31 March 2022 will be?

Solution:
 51

Question 25: (Overseas Aspects)

Zing Ltd is a UK resident company with two overseas branches. The results ofZing Ltd for the year ended
31 March 2022 are as follows:
Total UK First Branch Second Branch
Trading profits £180,000 £8,000 £92,000 £80,000

During the year ended 31 March 2022 Zing Ltd paid gift aid donations of £20,000.
Overseas corporation tax of £9,200 was paid in respect of the first overseas branch’s trading profit, and
overseas corporation tax of £24,000 was paid in respect of the profits of the second branch.

The corporation tax liability of Zing Ltd for the year ended 31 March 2022 will be?
 52

Election To Exempt Branch (Permanent Establishment (PE)):

- Election is irrevocable

- Election should be made before start of accounting period

- Cherry picking option is not allowed – i.e., if an election is made for a branch, it would be
applicable on all branches

- After the election, NO UK TAX on profits of branch & NO LOSS would be allowed (Means, no UK
Tax implication on branch results)

Question 26: (Election to exempt PE)

Brown Ltd is a UK resident company with two overseas PEs. It prepares accounts to 31 March each year.
In the year to 31 March 2022, Brown Ltd made a UK trading profit of £210,000, the first overseas PE
made a trading profit of £40,000 (overseas tax payable £6,000), and the second overseas PE made a
trading loss of £25,000. Compute the UK corporation tax payable for the year to 31 March 2022 by
Brown Ltd if:

(1) No election has been made to exempt the (2) An election was made prior to 1 April 2020 to
profits and losses of the overseas PEs exempt the profits and losses of the overseas PEs

Trading (UK) Trading (UK)

Trading (OB-1) Trading (OB-1)

Trading (OB-2) Trading (OB-2)

Total Trading Total Trading

CT @ 19% CT @ 19%

L: DTR L: DTR

CT Payable CT Payable
 53

Anti – Avoidance Legislations  Thin Capitalization

What is Thin Capitalization:

- S is the 100% subsidiary of P

- S wants the capital to continue operations
- S can ask P to make some investment either in the form of s/capital of give me some loan capital
- P company would not probably willing to invest in the form of share capital
- why? Because on investing in the form of s/capital is not a tax-deductible expense
- P ask S to take out the loan
- resultingly Interest Expense can be deducted from profits
- Hence, profits will go down and tax liability would then decrease accordingly

- As S now going to have loan but let say, bank is not willing to give loan to S (anyxyz reason)
- In such situation, P intervenes and guaranteed to bank that incase S is not able to repay its loan
- P will repay the loan then
- Bank agrees to give the loan to S, based on the guarantee provided by P

Under The Concept of Thin Capitalization:

- Excessive loan interest is disallowed for tax purposes

- Excessive Loan Interest:

The loan interest above the normal banking arrangement, i.e., the loan which S cannot get
without guarantee of P

Normal Banking Arrangement:

Loan up to the normal credit standards set by the banks, e.g., if company meets the condition of

Interest Cover (minimum) = 3:1

Gearing (maximum) = 1:1
Short & long-term liquidity ratios  benchmark
 54

Anti – Avoidance Legislations  Transfer Pricing

Consumers
Make sales to the overseas consumers in X country (Tax rate 5%)
P Co. in Overseas
X country

S.P 120
Cost (100)
Profit 20

CT @ 19% 3.80

P Planning:

- Rather than selling the goods directly to the consumers of X country, incorporate a company ix X
country with the name, S co.

- Then would be selling the goods to S at a lower S.P

P Co. S Co.

S.P 105 S.P 120

Cost (100) Cost (100)
Profit 5 Profit 15

CT @ 19% 0.95 CT @ 5% 0.75

Total CT = 1.70 (0.95 + 0.75)

Tax Saved = 2.10 (3.80 – 1.70)

In future, any remittances from S to P, would be the dividend distribution and it will exempt.

That is the reason, Taxation Authorities wants Transfer Pricing Legislation.

Means, within the group (specially with overseas), all transactions should be recorded @ arms length
price (at fair value / market value).
 55

Anti – Avoidance Legislations Controlled Foreign Company (CFC):

All 4 conditions should meet for considering a company as CFC:

- Any company which is overseas resident

- Controlled from UK (Shareholder can be a UK Co or an individual person)

- Tax rate of overseas country is less than

- 75% of UK CT rate

19% X 75% = 14.25% or lower

- Profits are artificially diverted from UK

If a company is CFC, what are the implications?

- Then a CFC charge is applicable

- This charge is only applicable on UK COMPANIES

(i.e., this charge is not applicable on individuals having s/holding of 25% or above in CFC)

- Losses cannot be adjusted to/from CFC.

How CFC Charge is Calculated:

Share of profits of UK company diverted from UK X UK tax rate = XXX

L: DTR – Foreign tax (always) = (XX)

Net CFC charge = XXX

 56

Question 27: (CFCs)

Bohemia Limited is resident for tax purposes in Atlantis. It is owned as follows: %

Maurice Feischner (Atlantis resident Managing Director) 25%

Ace Ltd (UK resident) 25%
Beta Ltd (UK resident) 10%
Cahill Ltd (UK resident) 10%
Michael Brown (UK resident) 30%
100%

Bohemia Ltd has chargeable taxable profits of £875,000 in the year to 31 March 2022, 75% of which has
been artificially diverted from the UK and are chargeable under the CFC legislation. The tax rate in the
Atlantis on these profits is 11.5%. The UK tax rate would have been 19%.
Is Bohemia Limited a controlled foreign company?

In the question, how much profits would Ace Ltd be taxed on if Bohemia Ltd is a CFC?
 57

Question 28: (Calculation of CFC Tax)

Tonetti Ltd, a UK company, has taxable profits of £200,000 in the year to 31 March 2022.

It owns 95% of an overseas subsidiary resident in the country of Alanna, where the tax rate is 2%. The
subsidiary falls within the definition of a CFC.

The overseas subsidiary has profits of £500,000 for the year ended 31 March 2022, 80% of which have
been artificially diverted from the UK and are chargeable under the CFC legislation.

Show the effect of the CFC on the corporation tax payable by Tonetti Ltd for the year ended 31 March
2022.
 58

Exemption from CFC Charge:

If any one of the following condition is met, then there would be no CFC charge.

1. Exempt Period:

First 12 months of CFC is exempt, provided

- CFC in next period, and
- Any other exemption is also applied

2. Excluded Territories:

Some of the territories are excluded from CFC charge, mostly the countries, who have tax treaty with
UK.

3. Low Profits:

- The company has total taxable profits less than 500,000 or less, and
- of which, non-trading income is 50,000 or less

4. Low Profits Margin:

Profit is less than 10% of the operating expenditure (net profit margin  less than 10%)

5. Tax Rate Exemption:

Tax rate is more than 75% of UK tax rate

 59

Question 29: (CFC exemptions)

Alpha Ltd, a UK resident company, has four wholly owned overseas subsidiaries.

Explain which of the following subsidiaries are likely to give rise to a CFC charge for Alpha.

1) Beta Ltd – a company which is resident in the country of Ruritania. Beta Ltd manufactures
handbags. It has profits of around £1 million per year and its sole customer is Alpha Ltd. Its
operations used to be carried on by Alpha but were transferred to Ruritania in order to benefit
from tax savings due to the fact that the country levies a flat 12% rate of corporation tax on all
foreign investment.

2) Gamma Ltd – a company which is resident in Fantopia where it manufactures buckles and belts.
The company has annual profits of around £350,000 with up to 10% of this figure being profits
from investment activities. The rate of corporation tax in Fantopia is 5%.

3) Delta Ltd – a company which is resident in Farland. Delta Ltd holds the group’s property
portfolio and receives rental income of approximately £900,000 per year. It pays corporation tax
at the rate of 16% in Farland.

4) Epsilon Ltd which is resident in Pontasia where there is a rate of corporation tax of 6.5%. Alpha’s
publishing activities were moved into Epsilon Ltd several years ago in order to save the group
tax. It makes annual profits in the region of £1 million on revenue of £15 million.
 60

Anti – Avoidance Legislations Close Company

- Close company is a company which is

- controlled by 5 or less shareholders or

- All shareholders are directors

- Close company concept not applicable for quoted companies

- Shareholders should not be a Corporate shareholder

Generally, and legally, shareholders are not allowed to take the company things/asset, but since this
company is a close company with only few shareholders. So, practically speaking, it is very difficult for
the management to say ‘NO’ to shareholders. To deal with these situations, HMRC introduced some
Special Rules as discussed in Situation A & Situation B as follows:

Situation A:
Shareholder take the company’s asset for their personal use on temporary or permanent basis

Type of Shareholder:

1. Can only be shareholder

2. Can be shareholder + employee/director

Situation A1  Benefits provide to shareholder (only shareholder)

For Company: The cost of providing such benefit to the shareholder is Disallowed Expense

For Shareholder: Benefits calculated in accordance with the employment income rules

Benefits calculated (under employment income rules) would be taxed as

Dividend Income (& all dividend income tax rules are applicable)

Situation A2  Benefits provide to shareholder (shareholder + employee)

For Company: The cost of providing such benefit to the shareholder, which is also an
employee, is Disallowed Expense

For Shareholder Benefits calculated in accordance with the employment income rules
+ employee Benefits calculated under employment income rules, would be taxed
Considering it employment income
 61

Situation B:
Shareholder take out the loan from company for their personal use

In this situation, ignore the employment status of shareholder with company

Implications For
Company Shareholder
At time of Acquiring Loan
Company has to pay 32.5% of the loan amount to No tax implications for shareholder at time of
HMRC as well taking loan
(as a security deposit alongwith CT liability)
At time of Loan Repayment (Complete or Partial)
Company will get refund from HMRC @ 32.5% of No tax implications
the loan repaid amount
Loan Write-off (Complete or Partial)
Company will get refund from HMRC @ 32.5% of Treated as Dividend Income
the loan written off - Exempt 2,000
- Tax at 7.5%, 32.5% or 38.1%

The above discussed rules are not applicable if all of the following 3 conditions are satisfied:

1. The principal loan amount is less than 15,000 and

2. The individual is full time employee and
3. Owns less than 5% shareholding

Upon meeting of all 3 conditions, no need to pay amount of 32.5% of loan to HMRC.

Loan Benefit:

- Shareholder can be charged a lower interest as compared to official rate of interest

- If shareholder is only shareholder (not employee)

Then the amount of loan benefit calculated would be taxed as per the rules of Dividend Income

- If shareholder is (shareholder + employee)

Then the amount of loan benefit calculated would be taxed as per the rules of Employment
Income and Class 1A NIC would also be applicable
 62

Anti – Avoidance Legislations IR – 35 – Personal Service Company (PSC)

Let say,

- There is a Company S which has an employee, whose name is Mr. X

- Company S has to pay Employer’s Class 1 NIC and Class 1A NIC
- Company S has to operate PAYE System as well

- Mr. A has to pay I.T & Class 1 Employee NIC

At times, there is a lot of tax cost involved in this employment arrangement

Now, there is an alternate arrangement to this employment arrangement

Alternate Arrangement:
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Objectives & Consequences of PSC:

- The objective of IR – 35 (PSC) is that the whole income received from Co. A, would be
considered/treated as Employment Income for tax purposes, rather than dividend oe any other
source of income.

- Being treated as Employment Income  NICs applicable as well

Means, no concept of any other income

The IR35 provisions apply where:

(a) An individual ('the worker') performs, or has an obligation to perform, services for 'a client', and
(b) Theperformance of those services is referable to arrangements involving a third party (eg the
personal service company), rather than referable to a contract between the client and the
worker, and
(c) if the services were to be performed by the worker under a contract between himself and the
client, they would be regarded as employed by the client.

In relation to the last condition, the usual tests of whether an individual is employed or self-employed
are used.

For Mr. X & Co. X

Amount received in the tax year XX

Less: Statutory deduction (5% of amount received) (X)

NICs paid by employer (X)
Pension contributions by employer (X)
Salary paid by employer (X)

Deemed salary including employer’s NICS YY

(Deemed Gross Cash Earnings Available in Co)

Less: Employer’s NICs (YY * 13.8/133.8) (X)

Ignore any dividends paid by PSC NIL
Deemed Salary ZZ
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Question 30:

Brenda is the sole employee of Brenda Ltd. She also holds 99% of Brenda Ltd’s shares. Brenda Ltd hires
out Brenda on short term engagements. Brenda works from home and the assignments are classed as
relevant engagements for the purpose of the IR35 provisions.
In 2021/22 the total received by Brenda Ltd is £40,000. Brenda draws a salary of £9,000 pa. Tax and NIC
are paid as required. Brenda Ltd pays £4,000 into Brenda’s personal pension plan. It also pays £1,500 for
Brenda to travel from home to work. Brenda received a dividend of £15,000 from Brenda Ltd during the
year.

Required: Calculate the deemed payment for 2021/22.

Solution:

Amount received in the tax year

Less: Statutory deduction (5% of amount received)

Less: NICs paid by employer

Less: Pension contributions by employer

Less: Salary paid by employer

Deemed salary including employer’s NICS

(Deemed Gross Cash Earnings Available in Co)

Less: Employer’s NICs (_________* 13.8/133.8)

Ignore any dividends paid by PSC

Deemed Salary
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Question 31:Exam Question December 2013 (Extract)

Horner:
– Horner owns all of the shares of Otmar Ltd.
– All of the income of Otmar Ltd is subject to the personal service company (IR 35) rules.
– Budgeted figures for Otmar Ltd for the year ending 5 April 2022 are set out below. Where applicable,
these amounts are stated exclusive of value added tax (VAT).
£
Income in respect of relevant engagements carried out by Horner 85,000
Costs of administering the company 3,900
Horner’s annual salary 50,000
Dividend paid to Horner 15,000
Contributions paid into an occupational pension scheme in respect of Horner 2,000

(A) Outline the circumstances in which the personal service company (IR 35) rules apply. (3 marks)

The IR35 provisions apply where:

(a) An individual ('the worker') performs, or has an obligation to perform, services for 'a client', and
(b) The performance of those services is referable to arrangements involving a third party (eg the
personal service company), rather than referable to a contract between the client and the
worker, and
(c) if the services were to be performed by the worker under a contract between himself and the
client, they would be regarded as employed by the client.

In relation to the last condition, the usual tests of whether an individual is employed or self-employed
are used.

(B) Calculate the deemed employment income of Horner for the year ending 5 April 2022. (4 marks)

Amount received in the tax year

Less: Statutory deduction (5% of amount received)

Less: NICs paid by employer

Less: Pension contributions by employer

Less: Salary paid by employer

Deemed salary including employer’s NICS
(Deemed Gross Cash Earnings Available in Co)
Less: Employer’s NICs (_________* 13.8/133.8)

Ignore any dividends paid by PSC

Deemed Salary