• Introduced FA65
• Corporation tax rates must be passed annually by Parliament - otherwise no authority for government to collect it.
• Until FA97, tax charge was passed in that years finance act.
• FA98 impsed charge for both 98 and 99.
• Tax charged in respect of accounting periods, which usually coincide with the 12 month period for which most companies prepare accounts known as financial statements.

• Profits determined primarily from financial statements drawn to a 'period of account'
• Subject to restrictions, a company may adopt whatever length of period of account it considers appropriate
• Cannot exceed 12 months
• Where it exceeds, the first 12 months is the first accounting period and the balance is the second accounting period.
• Tax accounting period will never exceed the length of a period of account except following a winding up, it'll be 12 months.

• Date company becomes assessed for corporation tax, or
• Date company becomes UK resident
• Date company starts to trade
• Date after the end of the previous tax accounting period

A tax accounting period ends on the earliest occurence of:

• 12 months after it starts
• Date to which the accounts are drawn up
• Cessation of trade
• Company ceases its UK residency status
• Ceases to have a charge to corporation tax
• wind up (liquidation) commences

An accounting period always ends when the company ceases to trade, even if the company continues to have a source of income.

• Companies, associations resident in UK, tax is paid on worldwide profits
• Non-UK residents, which trade in UK through permanent establishment also face corporation tax
• Companies resident elsewhere normally pay tax only on their profits arising from trading profits through or from a UK branch or agency
• Corporation tax is a direct tax borne by the proprietor
• Self assessment introduced for accounting periods ending on or after 1 July 1999
• Previously no tax due unless HMRC raised an assessment for tax on that company.

Self Assessment

• Companies assess themselves for tax and take full responsibility for that assessment
• Two issues with the introduction:
  • retaining appropriate documentation to support their tax return
  • 'large' companies need to make instalment payments
• Retain records of:
  • receipts and expenses
  • all sales and purchases made in the course of trade
  • accounts, books, contracts, deeds, vouchers
• includes self assessment of tax liabilities, i.e. tax on loans to s/h, arising from anti-avoidance rules
• Tax return needs to be with HMRC within 12 months of the end of the accounting period

• 6 years
• if company receives a notice requiring it to deliver a return before the end of the six year period, the records must be preserved until the later of:
  • The completion of the enquiry
  • the date when HMRC no longer have power to enquire into the return, i.e. the anniversary of the filing date unless the return is filed late

Error, Lateness, Failure to Submit

Tax Due

• Error
  • penalties linked to the amount of tax due
• Lateness
  • Fixed penalty:  £100 - £1000
  • Additional tax-linked charge if return is more than 6 months late
    • Based on amount of tax unpaid and increased if delay continues
  • Interest charged
• Failure to Submit
  • Penalties
  • HMRC may also a determination of tax payable which cannot be appealed

• Something is taxed only if there is a specific provison bringing it within the charge to tax
• Profits arise from several sources
• Different rules apply to income and expenditure on each source, so profits have to be calculated separately according to surce and totalled at the end.
• 2 tax schedules remaining, A and D which set out possible sources of a company's income

• Schedule A:  UK land
• Schedule D:  Income not falling within any other schedule or elswhere in the tax legislation
• Schedule D Case I
  • UK Trade
• Schedule D Case II
  • Profession or vocation
• Schedule D Case III
  • Interest-type income
  • Gains/losses from loans, derivatives, financial instruments and government securities
• Schedule D Case IV
  • Foreign securities
• Schedule D Case V
  • possessions outside the UK
• Schedule D Case VI
  • Not falling within Schedule A or any other Case of Schedule D or within ITEPA

• Unlikely that Schedule D Case I profit will be the accounting profit of a business because various adjustments must be made to the accounts profit before tax is assessed.
• Expenses not deductible under SDCI must be excluded (added back).
  • i.e. expenses of a capital nature
  • Gift aid added back and deducted as a charge on income
• Income not assessable under SDCI must be excluded (deducted), i.e capital profits or income assessable under another case
• Income not shown in accounts but assessable under SDCI must be included (added back)
  • e.g. revenue items credited directly to reserves and not recorded in P&L
• Expenditure not charged, but deductible under SDCI must be included (deducted), i.e. capital allowances and expenditure not charged through profit and loss account

• Distinctin between capital and revenue is fundamental to the tax system
• Capital Expenditure is not an allowable expense for SDCI
• Most common capital expenditure item is depreciation - must always be added back
• Asset expected life less than one year, classed as revenue
• E.g. computer software with an expected useful life of less than two years will be treated as revenue expenditure
• Legal fees that are an expense relating to acquisition of a capital item will be disallowable in computing the taxable profits
• Arguable distinctions is between repairs (revenue expenditure) and improvements (capital expenditure)

• Expenses are not allowed in computing SDCI profits unles they are incurred 'wholly and exclusively for the purposes of the company's trade'
• Any duality of purpose will disqualify the entire expense

Some expenses, which in principle would not be allowable, may be allowed where there is a statutory override, e.g for the salary of an eployee seconded to a charity.

Schedule D Case III

Rules relating to 'loan relationships'

• Trading related interest income or expense is taxable or deductible on the accounts basis as part of the  SDCI computation.  No difference if the interest is 'annual' or 'short, capital or revenue.
• Non trading income and expenses are aggregated to determine whether there is net income or net expense
• Net non trading interest income is taxable under SDCIII.  Interest income is taxable on the accruals basis and not when received.
• Net non trading interest expense is deductible as a 'non trading deficit', regardless of whether the advance is capable of exceeding a year.

• relieved against other income of the same period
• surrendered to a qualifying group member
• carried back and set off against any profit of the previous 12 months
• carried forward to set against future non trading profits.

• Calculated in same way as those of individuals except taper relief does not apply
• Indexation allowance - can reduce gain to nil but not create a loss
• No Capital Gains Tax, just Corporation Tax
• No annual exemption
• Are the aggregate of:
  • Chargeable gains for the chargeable accounting period less
  • allowable losses of the same chargeable accounting period and any losses brought forward from a previous chargeable accounting period.
• Capital losses can't be set against any other profit
• Exemptions:
  • cars
  • tangible moveable property sold for £6,000 or less
  • gilts and qualifying corporate bonds (QCB's)

• Trading Companies
  • Profit before tax as shown in the accounts is adjusted to arrive at the SDCI profit.
  • Other income and chargeable gains are then put back in.
  • Charges on income such as charitable deeds of covenant are then subtracted to arrive at profits chargeable to corporation tax.
• Investment Companies
  • Wholly or mainly of the making of investments and the principal part of income is derived from this activity
  • No trade therefore no SDCI profits
  • Income such as Schedule A and chargeable gains are extracted from the accounts and inserted directly into the tax computation.
  • Relief may be obtained for:
    • expenses deductible within a schedule or cases:
      • chrges on income and interest
      • expenses deductible by statute

• Fixed for the financial year ending 31 March

• Notes
  • authorised unti trusts and OEIC's are taxed at a special rate of income tax - 2007/08 20%
  • Small companies rate rise aims to deter individuals from incorporating themselves as small companies in order to avoid paying basic rate income tax of 22%

• Company is close if it is under the control of five or fewer shareholders or the directors
• 'associate' includes close relations and business partners
• If quoted on exchange, it can escape being classified as close if 35% or more of the voting rights are held by shareholders otherwise independent of the company.
• Only UK resident companies can be classified as close.

• Definition of 'distribution' modified:  to include the cost of providing benefits for s/h and associates
• Loan made to s/h is treated as if it were a distribution, with a charge of 25% being payable (S419)
• When the loan or part of it is repaid or written off, a corresponding repayment of S419 is made.
• If company deems loan as no longer repayable, it's treated as a distribution.
• If loan carries interest at rate below the official rate of interest, a benefit in kind would arise

• Special class of close company recognised by HMRC
• Cocern that such companies could be used by individuals to benefit from the small companies rate of corporation tax on their investment income
• Defined as 'any close company except one existing wholly or mainly for certain purposes, including trading and investment in land which is not let to connected parties.
• Profits chargeable to full rate regardless of size.

• Imputation System
  • Company had to pay ACT every time it paid a dividend
  • Imputed to be paid with basic rate income tax deducted, so basic rate tax payer would have no further tax to pay
  • Pension scheme could reclaim tax
  • ACT could be offset against a company's 'mainstream' corporation tax subject to limits
  • Since 1997, pension schemes cannot reclaim this tax
  • Companies pay not tax on dividends received

• Small/Medium Companies
  • Wihtin 9 months and one day of end of accounting period
• Large Companies
  • quarterly instalments, 7th, 10th, 13th and 16th months after a 12 months accounting period starts
  • Company not regarded as large if:
    • tax liability does not exceed £10,000
    • Not a large company in preceding period and profits in the period do not exceed £10m divided by one plus the number of associated companies
  • amount of each instalment is calculated according to the formula:
    • 3*CT/N

• Losses
  • offset against other profits, carried back, carried forward
• Profits
  • Limiting the number of subsidiary and asociate companies
  • Loans rather than shares to finance expansion plans
  • Reinvest proceeds of any asset sale and use 'rollover relief' to reduce capital gains
  • Use benefits in kind, rather than extra salary, as a method of taking money out of the company.
• Expenses
  • Direct expenses deductible in the calculation of taxable income and taxable chargeable gains.
  • expenses of management
  • Donations made to charity
• Double Taxation
  • Dividend income:  only dealers suffer tax
  • foreign tax:  expense or credit relief
• Deductions for qualifying revenue expenditure on R&D
• Cost of intangible assets acquired after 31 March 2002 at the rate of depreciation in the accounts or 4% a year, whichever is the greater.
• Group Relief
• Capital Allowances

• Investment Income
• Capital Gains
• Stock Lending/Underwriting
  • Fee is tax exempt
• Property
  • Rental and capital gains
  • also from being a member of a property investment LLP
• Futures and Options
• Overseas Investments
  • depends on country and nature of investment
• Pension Business
• General Use Policies
• AVC's
• Buy Out Policies
• Open Market Option Annuity Contracts
• Exempt Unauthorised Unit Trusts
• Pension Fund Pooling Scheme

• Lending shares, at a fee, to a third party to ensure they can complete on a deal in the same shares
• Legal transfer of shares
• Borrower can deal with them as he wishes
• 'lent' to jobbers who transfer to their clients and give scheme a contractual right to similar replacement securities
• IMA must set out clearly if lending if allowed
• 'Manufactured' dividends or interest

• be in name of and held by trustees or administrator
• contract to provide scheme  benefits rather than just the means to secure those benefits, i.e. not an investment medium
• Include procision for payment of annuities
• Overriding provision of correspondence