TAXATION

Lecture 702/03/2015

LEARNING OUTCOME 3Be able to calculate corporation tax liabilities for companies

1.Calculate chargeable profits

2.Calculate tax liabilities and due payment dates

3.To explain how income tax deductions are dealt with

CORPORATION TAX Corporation tax is a tax levied on the profits made by limited companies, associations, clubs, societies and co-operatives

Tax on dividend income ( taxed differently)

Tax on investments and doing business

Tax on capital gains

Chargeable ProfitCompanies pay tax on their trading profits and any other incomeTrading profits arise from a companys trading activitiesChargeable profit is the profit that would be taxed after all deductions and adjustments have been madeThe calculation for trading profit for a company is similar to a sole trader or partnership with few differences

Chargeable ProfitChargeable profits include trading income, chargeable gains, bank interests, loan interest, property income etc

Trading income consists of trading profits for a period as adjusted for tax purposes

Chargeable ProfitWhen calculating a companys income any private expense is treated as a cost to the company however, if the expense was for an employee they will be liable to income tax as a benefit in kind

Gift aid donations are disallowed when calculating trading income but are treated as qualifying charitable donations and deducted when calculating chargeable profits

Adjusted profitThe following items need to be taken into consideration:Private expenditure: Private expenditure is allowed expenses for a company. The director or employee that benefits from the expenditure is taxed as employment incomeThe private expenditure to an employee or director is called benefit in kind ( Remember tax form P11D)

Adjusted profitInterest: Expense that has been incurred for a non-trading loan must be added back. A relief is given for this expense. E.g. of non-trading loan is the interest on a loan used to buy a rental property or shares in another companyDividend paid : Is an appropriation of profit to shareholders and are not an allowable expense for a company

Adjusted profitDividend received: Do not normally form part of a companys trading income but may affect the rate of corporation tax paid. They are exempt from taxCapital allowance normally calculated for the chargeable accounting period. The computation can never be for more than 12 monthsInterest receivable: UK interest is received gross by companies

Adjusted profitCapital gains: Companies pay tax on capital gains and companies are allowed additional indexation allowance Qualifying charitable donations: cash donations, gifts of shares to a charity and gifts of land and buildings to a charityNon-trading profits: tax on UK and overseas income e.g. Bank interest received

Adjusted profitDepreciation is not an allowable expense for tax purposes

Rental Income: Rental income is taxed as UK property business

Miscellaneous income: tax on an item that we can not find a category for e.g. dividends from non-UK companies

ExampleWhich of the following would pay corporation tax:a. London Borough of Lewishamb. Seaford golf clubc. Cancer research UKd. Premier foods PLCe. Online Academics Ltdf. The Green party

SolutionAnswer : b, d, e, fSeaford Golf club is a members club and liable to corporation taxPremier foods PLC is a public limited company and liable to corporation taxOnline Academics limited as a registered limited company is liable to corporation taxThe green party is an unincorporated political association and is liable to corporation tax

Corporation tax rate

ProfitsRates2011201220132014300,000 or lessSmall profits rate20%20%20%20%

Above 300,000Main rate26%24%23%21%

Payment datesFile annual accounts with Companies House 9 months after your companys financial year ends

Pay Corporation Tax 9 months and 1 day after your companys financial year ends

File a Company Tax Return 12 months after your companys financial year ends

Payment datesIf you dont meet the above deadlines, your company may be charged interest or penalty

If your companys profit is more than 1.5 million, you can pay your corporation tax in instalments before the deadline

ExerciseABC Ventures Ltd financial data as at year ending 31 March 2013 Sales 1890,000Cost of sales 1179,000Rental income 50,000Bank interest received 8,000Motor expenses 164,000Wages and salaries 220,000Sundry expenses 40,000Dividend received (10% taxable) 50,000Dividend paid 20,000Interest paid 100,000

Calculate chargeable profit and tax liability for ABC Ventures Ltd

Solution

Sales1890,000Cost of sales1179,000Gross profit711,000Less Expenses:Motor Expenses164,000Wages & Salaries220,000Sundry Expenses40,000Interest Paid100,000524,000Profit before tax187,000Add Non-trading IncomeRental Income50,000Bank Interest Received8,000Profit Chargeable to Corporation Tax (PCTCT)245,000

Tax LiabilitiesTo determine the rate of tax to be applied, add dividend income received (Grossed up) to PCTCT = Augmented profit

Dividend income received (Grossed up)=100/90 x 50,000 =55,555

Augmented income= 245,000+55,000= 300,000

Tax liabilityThe augmented income falls within the threshold of small profit rate of 300,000 or less.

The tax year was 2012/2013 and the rate of corporation tax was 20%

Tax liability : Apply the tax rate to PCTCT

Tax liability 245,000 X 20% = 49,000ABC Ventures Ltd corporation tax for the year ending 2012/2013 is 49,000The payment date for ABC Ventures Ltd corporation tax would be 9 months and 1 day after the end of the financial year 1 January 2014

Dealing with Income tax deductionsThe employee pays income tax at source through the company i.e. PAYE systemThe self employed pays their tax after completing their self assessment form The self employed pays tax on their profit by 31 January and in other cases by July for large profits online

Dealing with Income tax deductionsCorporations collect the taxes of their employees on behalf of HMRC and pays to HMRCCorporations pay their tax on profits to HMRC on lineCorporations can pay their taxes in instalmentsCorporations send their annual returns to HMRC

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