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LAWS08130 Corporation Tax summary guide
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Corporation Tax 1.1. Corporation Tax – Introduction to Corporation Tax 1.2. Corporation Tax – Meaning of a Company 1.3. Corporation Tax – Charge to Tax 1.4. Corporation Tax – Accounting Period 1.5. Corporation Tax – Deductions and Distributions in Computation of Corporation Tax
Corporation Tax Note – Most of the corporation tax questions in an exam require the application of income tax principles. In practice, most lawyers will need specialist advice on corporation tax matters 3.1 Corporation Tax – Introduction to Corporation Tax Corporation tax is conceptually problematic because companies do not really exist in many senses. Corporations cannot bear a tax in the sense that they cannot be affected by tax. Corporation tax is always shifted to another person, although companies are legally liable for the tax. Somewhere, a human person will suffer from the imposition of corporation tax: o 1. The consumer – if corporation tax increases, prices may be increased to maintain the post- tax profits. Corporate consumers may again shift the tax burden to ultimately human consumers. o 2. Shareholders – in competitive markets, prices may not be able to be reduced. Shareholders will therefore suffer from reduced profits and reduced dividends as well as the reduced capital value of their shares. o 3. Employees – in order to maintain profits after a rise in corporation tax, it may be necessary to reduce the wages of employees. Which category of persons suffers is dependent on the circumstances. What is the rationale for corporation tax? o Failure to tax companies, a great deal of money will circulate without being taxed. o Corporation tax is in some respect a pre-payment of the profits of the company prior to distribution to prevent evasion and avoidance. o Corporation tax is profitable – it provides around 10% of the tax revenue of the United Kingdom o Corporation tax is very common – it is a relatively modern tax, being in existence only from the early 1960s. Corporation tax can pose issues of double taxation – e.g. dividends are taxed both in the hands of companies as profits as well as in the hands of the individual as income. Every system struggles with the relationship between corporate and personal income. o However, wages are a deductible effect in the hands of the company. o Similarly, interest can be deducted under certain conditions An alternate means of collection is the ‘ integrated system’ which ignores the company and taxes the shareholders. A company with three shareholders holding an equal share of a company with a profit of £3 million will tax each shareholder for £1 million each. The United Kingdom began its system of corporation tax with the ‘classical system’. This system accepts the problem of double taxation, taxing the company on corporate profits and subsequently taxing dividends in the hands of the shareholders. o This problem gave rise to a significant distortion in that it discouraged the distribution of profits to shareholders. Under the imputation system the company paid corporation tax on its profits. When the profits are distributed, the shareholder is given a tax credit reflecting the corporation tax paid. The shareholder can use that corporate tax credit to reduce the shareholder’s personal tax on the dividends. o This system was in force in the United Kingdom until 1999 o The problem with this system was the continuing use of a classical system in international contexts.
o 4 equal instalments starting in month 7 in the accounting period other companies: o 9 months after the end of the accounting period Interest will be charged on underpaid tax, and paid on overpaid tax. Companies are required to file their self assessment return by the end of 12 months after the end of the accounting period. Interest will be charged on underpaid tax, and paid on overpaid tax. Companies are required to file their self assessment return by the end of 12 months after the end of the accounting period. 3.5 Corporation Tax – Deductions and Distributions in Computation of Corporation Tax In relation to income tax , Corporation Tax is computed in accordance with income tax principles on generally accepted accounting practice ( CTA 2009 s 46), “wholly and exclusively” test for expenses (CTA 2009 s 54). No entitlement to “individual'” reliefs eg personal allowances. Capital gains tax on companies is computed in accordance with Capital Gains Tax principles but again there is no entitlement to individuals' reliefs e.g. the annual exemption, and companies receive “indexation allowance”. o A notable exemption to these rules is the: disposal of “substantial shareholding” in other trading company: TCGA Sched 7AC. Thus where A buys B and B profits with an increase in share value and pays tax thereupon, A’s paying tax again for the gain of the company is in essence a double taxation of B’s profits. A substantial shareholding means 10%. This can be a double edged sword in that the acquirer is not able to claim loss relief. Deductions from Corporation Tax liability can come in a number of forms: o 1. Capital Allowances 1a. Treated as trading expenses in arriving at profit/loss of the company. CAA 2001 s 247 et seq. o 2. Losses 2a. Trading Losses (CTA 2010) may be set off Against all profits (including capital gains) of the accounting period s 37(3)(a) Against all profits of the year prior to the accounting period in which the loss was sustained s37(3)(b), providing trade was at that time carried on s37(6) Against trading income of same trade in subsequent periods, earliest income reduced first s 45. Losses of the final accounting period (on termination) may be set against all profits of the three years prior to the final accounting period s 39 2b. Losses from letting property – May be set off against all profits for the period of loss, then carried forward against all future profits provided the property business is still carried on: CTA 2010 s 62 (cf individual’s property income loss relief) 2c. General restrictions on loss set off:
The trade must be carried on for a “commercial purpose” CTA 2010 s 44 Sale of tax loss companies: restriction on carry forward if change of ownership AND major change of trade within 3 years: CTA 2010 s 673, 674 2d. Capital Losses TCGA 1992 s 8 Capital losses are set off first against gains of same accounting period then against future gains. They cannot be set off against income profits. This differs therefore from property losses and trading losses. o 3. Loan relationships – very broadly, instead of interest paid and received by a company being treated separately as a deduction or as taxable income, the difference between them is treated as income (where the receipts are greater than the outgoings) or an expense (where it is the other way round.) This a huge generalisation but is all you need to know! o 4. Qualifying donations to charity CTA 2010 ss 189, 190 - the gross gift is deducted from corporate profits Distribution is extensively defined in CTA s 2010 s 1000 et seq The effect of making a distribution (most common eg is a dividend): Distributions are made out of profits, and are not a deduction in making profits (contrast interest). They are made out of profits which have borne corporate tax. No tax is collected by the company when distributions are made (contrast interest). o Payments of dividends are not treated a deductible expense o The effect of making a distribution is: By an individual The individual is treated as having received the distribution + tax credit, and is taxed under ITTOIA Part 4 Ch 3, and given a non-repayable tax credit of 10% of the gross distribution –ITTOIA ss 397 and 398. As the dividend is not repayable, it is not possible to claim a rebate thereupon (because it is only notional). Contrast this with interest tax credits. The gross amount of dividend is taxed as the highest slice of income, but at special rates: 10% (not 20%), 32.5% (not 40%) or 42.5% (not 45%): ITTOIA s 1A and 1B. This reflects corporation tax. By another UK company The general idea is that distributions passing through a company should bear no further tax, so most dividends received by a UK company are not included in its profits chargeable to tax (CTA 2009 part 9A). (You can assume that such dividends are exempt.) The reason for this can be illustrated as follows: A (Subsidia ry) B (Parent of A) C (Parent of B) Traded company
Note – SRS (Insert video) SAVINGS INCOME falling in the small window between the personal allowance and £2880 thereabove is subject to the 10% SRS band. This does not apply to non-savings income.
