INTRODUCTION TO CORPORATION TAX Learning objectives: 1.

Define the terms period of account, accounting period, and financial year 2. Explain the rules for determining when an accounting period starts and ends 3. Identify the correct accounting period for corporation tax from information supplied 4. Define the rules for residency for a company and determine a companys residence using those rules 5. Identify the different taxable profits for a company and the basis of assessment 6. Explain the implications of receiving franked investment income 7. Compute the corporation tax liability for a single company

Financial year A financial year runs from 1 April to the following 31 March and is identified by the calendar year in which it begins. For example, the year ended 31 March 2011 is the Financial year 2010 (FY 2010). This should not be confused with a tax year, which runs from 6 April to the following 5 April.

Define the terms period of account, accounting period, and financial year Period of account This is any period for which a company prepares accounts. It is usually 12 months in length, but may be shorter or longer. Accounting period This is the period for which a charge to corporation tax is made. It can never be longer than 12 months.

Explain the rules for determining when an accounting period starts and ends An accounting period starts when a company starts to trade, or otherwise becomes liable to corporation tax, or immediately after the previous accounting period finishes. An accounting period finishes on the earliest of: 1. 12 months after its start 2. the end of the company's period of account 3. the commencement of the company's winding up If a company has a period of account exceeding 12 months (a long period), it is split into two accounting periods: the first 12 months and the remainder.

Identify the correct accounting period for corporation tax from information supplied

Exercise on residency of a company 1. UTC Ltd is incorporated in the UK. The directors hold monthly board meetings overseas where major policy decisions are made. 2. ABC Ltd is incorporated overseas. The directors hold frequent board meetings in the UK, which is where the directors are based. 3. XYZ Ltd is incorporated overseas. The directors hold weekly meetings overseas, but have quarterly meetings in the UK because this is where the non-executive directors are based State which of the companies will be treated as UK resident

Define the rules for residency for a company and determine a companys residence using those rules Residence of companies A company incorporated in the UK is resident in the UK. A company incorporated abroad is resident in the UK if its central management and control are exercised here. Central management and control are usually treated as exercised where the board of directors meet.

Identify the different taxable profits for a company and the basis of assessment Taxable total profits Taxable total profits comprises the company's income and chargeable gains (total profits) less some losses and gift aid donations. It does not include dividends received from other UK resident companies.

A company's taxable total profits are arrived at by aggregating its various sources of income and its chargeable gains and then deducting losses and gift aid donations. Tax adjusted trading profits X Investment income X Foreign income X Miscellaneous income X Property business profits X Chargeable gains X Total profits X LESS: Losses deductible from total profits (X) LESS: Gift aid donations (X) Taxable total profits for an accounting period X

NOTE An examination question requiring adjustment to profit will direct you to start the adjustment with the profit before taxation of X and deal with all the items listed indicating with a zero (0) any items which do not require adjustment. Marks will not be given for relevant items unless this approach is used. Therefore students who attempt to rewrite the income statement will be penalised.

Tax adjusted trading profit The trading income of companies is derived from the profit before taxation figure in the income statement, just as for individuals, adjusted as follows.
Profit before taxation ADD: Expenditure not allowed for taxation purposes LESS: Income not taxable as trading income Expenditure not charged but allowed Capital allowances Taxable Total Profits (TTP) (X) (X) (X) (X) X X X X

Exercise UTC Ltd has the following income and outgoings for the year ending 31 March 2012. Tax adjusted trading profit 1,456,500 Property business profit 25,000 Interest receivable 10,000 Chargeable gains 35,000 Dividends from UK companies 14,400 Gift Aid donation (10,000) Compute the taxable total profits for the year ending 31 March 2012

Corporation tax rates The rate of corporation tax is determined by: 1. The financial year 2. Augmented profits of the company The financial year (FY) The tax rate is fixed based on the financial year A financial year starts on 1 April to the following 31 March and is identified by the year in which it begins The following rates apply for FY 2011:
Augmented profits 300,000 0 1,500,000

Marginal relief For companies with augmented profits between 300,000 and 1,500,000, their TTP are taxed as follows: TPP @ main rate LESS: Marginal relief Standard fraction x (U A) x N/A Corporation tax liability X (X) X

Rate

20%

26%

U = Augmented profits upper limit (1,500,000) A = Augmented profits N = Taxable total profits Standard Fraction = Given in the tax tables (3/200 for FY2011)

Augmented profits Taxable total profits (TTP) PLUS: Franked investment income (FII) Augmented profits (A) X X X

Explain the implications of receiving franked investment income Franked investment income (FII) Dividends received from UK and overseas companies have an impact on the rate of corporation tax that is applicable. Dividends received plus the associated 10% tax credit are known as Franked Investment Income FII = dividends received x (100/90) FII is added to the TTP in order to arrive at the augmented profits figure FII is only used to determine the tax rate to be used. The corporataion tax will be calculated based on the TTP. Dividends received from a 51% group company are excluded from FII

Tax rates for FY 2011 1. If A < 300,000, tax rate = 20% 2. If A > 1,500,000, tax rate = 26% 3. If A is between 300,000 and 1,500,000, special marginal relief applies

Compute the corporation tax liability for a single company Example UTC Ltds taxable total profits for the y/e 31 March 2012 are: Trading profit 260,000 Property business profit 40,000 300,000 LESS: Gift Aid donation (10,000) TTP 290,000 Required Calculate the companys corporation tax liability if: 1. No dividends are received 2. 9,000 of dividends are received 3. 45,000 of dividends are received

Exercise Baku Ltd had taxable profits of 100,000 and franked investment income of 20,000 for the year ended 31 December 2010. Required 1. Calculate Baku Ltds corporation tax liability for the year ended 31 December 2010. 2. Calculate the liability assuming the year ended on 31 December 2011.

Exercise UTC Ltd has the following results for the 9 months ending on 31 December 2011: Tax adjusted trading profit Chargeable gain Dividends from UK companies 1,100,000 60,000 45,000

Required Calculate the companys corporation tax liability for the 9 months ending 31 December 2011.