Corporation Tax Explained- Part 1.

UK resident companies are liable to corporation tax on their taxable total profits, no matter where in the world those profits arise. Companies which are not UK residents are within the charge to UK corporation tax only if they trade in the UK through a permanent establishment or carry on a trade of dealing in UK land. Relevant legislation can be found mainly in the corporation tax act 2009, the corporation tax act 2010 and the taxation of chargeable gains act 1992, as amended by subsequent
finance acts.

  A. A company’s taxable profits include both its income and its chargeable gains. The term “chargeable gains” is normally used in preference to “capital gains”.
  B. The main source of income for most companies is likely to be income from trading. The company may also have other sources of income. These could include bank interest, loan interest, property income or certain other forms of income .
  C. In general terms, the company’s income is computed in a broadly similar way to that of an individual. The main differences between the assessment of a company income and an individual’s income and explained in further detail.

For corporation tax purposes, the word “company” is taken to mean any corporate body or unincorporated association, excluding partnerships, local authorities and local authority associations. As well as a limited companies, this definition includes clubs and societies, which are liable to corporation tax on their income from non-members. Organisations that are generally exempt from cooperation tax (subject to various conditions and limits) include registered charities and registered pension schemes.

Accounting periods

Corporation tax is charged in respect of accounting periods and it is very important to
distinguish between accounting periods and periods of accounts. An accounting period is the period for which corporation tax is charged at. A period of account is the period for which the company prepare for a set of accounts. Accounting periods and periods of
accounts are often the same thing but this is not always the case. An accounting period
begins when;
  A. The company comes within the charge to corporation tax, or
  B. When the previous accounting period ends, so long as the company remains within the
charge to corporation tax.

An accounting period ends on the earliest occurrence of any of a number of events. The main events
which cause the end of an accounting period are:
  A. The expiration of 12 months from the beginning of the accounting period
  B. The end of a period of account.
  C. The company starting or ceasing to trade
  D. The company ceasing to be within the charge to corporation tax
  E. The company beginning, or ceasing to be UK resident
  F. The company entering administration or ceasing to be in administration.
These rules have the following general consequences;

  A. The length of an accounting period can never exceed 12 months.
  B. If a set of accounts covers a period of 12 months or less, the period of accounts forms a single accounting period and a corporation tax assessment is raised for this period.
  C. If a set of accounts covers a period of more than 12 months’, the period covered by the accounts is broken down into two or more accounting periods, each giving rise to a separate corporation tax assessment. The first accounting period consists of the first 12 months of the period of account. The second accounting period consists of the next 12 months and so forth. If the period covered by the accounts is not an exact multiple of 12 months, the final accounting period will be of less than 12 months’ duration.

Important Notes:
  A. The company cannot be an employee and sole cannot have employment income.
  B. There is no corporation tax equivalent of the personal allowances which are available to individuals who pay income tax.
  C. Corporation tax act 2010 all uses the term taxable total profits to refer to a company’s profits which are chargeable to corporation tax. The terms chargeable profits or profits chargeable to corporation tax are also sometimes used.

Trading income

The company’s trading income for an accounting period consists of its trading profits for that period,as adjusted for tax purposes. The starting point for the calculation is the company’s pre-tax profit
for the relevant period of account. This figure is then adjusted by excluding non-trading income and adding back disallowed expenses. The adjusted trading profit of a period of account lasting for more than 12 months is apportioned between the accounting periods of which it is composed. Capital allowances claimed for each accounting period are then deducted. This process is very similar to the equivalent processor which applies to self-employed individuals; however the following important points should be applied:

  A. When calculating the companies trading income, there is no need to disallow the private proportion of expenses. This is because the company does not have a private existence. Any private use by employees is treated simply as a cost of employing staff who may then be liable to income tax as a benefit in kind. A similar argument applies if the company provides an employee with any goods or services.
  B. For a company, appropriations of profit which have disallowed consists principally of
dividends payable to shareholders and transfers to reserves accounts.
  C. The company’s gift aid donations are disallowed when computing trading income but are then treated as qualifying charitable donations and are deducted when calculating the companies taxable total profits.
  D. Legal and other fees payable by a company in connection with the raising of loan finance are dealt with under the loan relationship regime.
  E. Losses caused by the dishonesty of a director and disallowed.
  F. The accounts drawn up in accordance with either UK GAAP or International Financial
reporting standards or otherwise known as IFRS are generally valid for corporation tax
purposes.
  G. Unlike individuals, companies are entitled to a special tax relief in relation to their research and development expenditure. Furthermore, a special corporation tax regime applies to a company’s income and expenditure in relation to intangible assets.

Corporation tax assessments are raised for accounting periods (not tax years) and so there is no need for any basis period rules. The basis period rules which apply to individuals are completely irrelevant to companies. In particular, there are no special rules on commencement or cessation of trade or on a change of accounting date.

Capital allowances

A company’s capital allowances are computed in much the same way as those of a self employed individual. The only significant distinction are as follows;
  A. Each accounting period ranks as a chargeable period when computing capital allowances for a company and so there is one capital allowances computation per accounting period. Since an accounting period cannot exceed 12 months in length, there will never be any need to scale or writing down allowances, but these are scaled down for accounting periods of less than 12 months.
  B. Changes to the capital allowances system that take effect for income tax purposes as from 6 th of April normally take effects for corporation tax purposes as from 1 st of April. For example, the fall in the emission threshold for main pool motor cars that takes effect from the 1 st of April and not the 6 th of April.
  C. The company may claim only one AIA, regardless of the number of businesses which it carries on. A group of companies (i.e. a parent and its subsidiaries) may claim only one AIA for the entire group. This AIA may then be shared between the members of the group in any way that the group sees fit.
  D. 100% FYA’s are available to trading companies which invest in plant and machinery used in designated areas within enterprise zones. To qualify for this FYA, the expenditure must be incurred within eight years of the date of designation.
  E. When calculating the company’s plant and machinery capital allowances, there will be no need to make any private use restrictions. Any private use of assets by employees is treated as part of the cost of employing staff and capital allowances are available in full in relation to sort assets of all the employees concerned may then be liable to income tax as a benefit in kind.

This article was written by Hammersmith Chartered Accountants and may not be copied or reproduced without express prior permission. Article written on 7 th September 2019.

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