In this chapter, we look at how to calculate the corporation tax payable on
taxable total profits.
Then we look at the administration of corporation tax, including payment of
corporation tax in instalments.
In the next chapter, we will consider the rules for winding up companies and
for companies purchasing their own shares.
|4||Corporation tax liabilities in situations involving further overseas and group aspects and in relation to special types of company, and the application of additional exemptions and reliefs|
|(a)||The contents of the Paper F6 study guide, for corporation tax, under headings:||2|
|||E4 The comprehensive computation of corporation tax liability|
|6||Value added tax, tax administration and the UK tax system:|
|(b)||The contents of the Paper F6 study guide for the UK tax system and its administration under headings:|
|||A3 The systems for self assessment and the making of returns|
|||A4 The time limits for the submission of information, claims and payment of tax, including payments on account|
|||A5 The procedures relating to compliance checks, appeals and disputes|
|||A6 Penalties for non-compliance|
Although you are unlikely simply to be asked to calculate the corporation tax payable for an accounting period you may have to be able to work out tax savings or additional tax costs when giving advice about using losses, new projects, etc. You must know the rules regarding administration as the company’s obligations could form a part of any question.
This chapter revises the computation of corporation tax payable that you will have studied previously. The rules for administration are also revision. The examination team has identified essential underpinning knowledge from the F6 syllabus which is particularly important that you revise as part of your P6 studies. In this chapter, the relevant topic is:
|E4||The comprehensive computation of corporation tax liability|
|(a)||Compute the corporation tax liability||2|
The major change in Financial Year 2015 from Financial Year 2014 concerns the introduction of a single rate of corporation tax.
1 Charge to corporation tax
1.1 Financial years
Tax rates are set for financial years.
The rates of corporation tax are fixed for financial years.
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 2016 is the Financial Year 2015 (FY 2015). This should not be confused with a tax year, which runs from 6 April to the following 5 April.
1.2 Computing the corporation tax liability
|There is a single rate of corporation tax which is applied to a company’s taxable total profits to compute the corporation tax liability.|
For Financial Year 2015, there is a single rate of corporation tax ( which may be called the main rate) which is 20%. This rate is applied to the company’s taxable total profits to compute the corporation tax liability.
A Ltd had taxable total profits of £1,142,000 in the year to 31 March 2016. Compute A Ltd’s corporation tax liability.
1.3 Accounting period in more than one financial year
An accounting period may fall within more than one financial year. If the rates for corporation tax are the same in both financial years, tax can be computed for the accounting period as if it fell within one financial year.
However, if the rates for corporation tax are different in the financial years, taxable total profits are time apportioned between the financial years.
|There were multiple rates of corporation tax for previous Financial Years which depended on the level of profits made by the company, the lowest rate in FY2014 being 20%. These rates are not examinable in P6(UK). If a question is set involving either an accounting period spanning 1 April 2015 or an accounting period ending prior to 1 April 2015, then the company’s level of profits will be such that only a corporation tax rate of 20% will be applicable.|
Exam focus point
2 Returns, records, compliance checks, assessments and claims
2.1 Notification to HMRC
FAST FORWARD A company must notify HMRC within three months of starting to trade.
A company must notify HMRC of the beginning of its first accounting period (ie usually when it starts to trade) and the beginning of any subsequent period that does not immediately follow the end of a previous accounting period. The notice must be in the prescribed form and submitted within three months of the relevant date.
A company which is chargeable to tax for an accounting period and has not received a notice to file a tax return must give notice of chargeability within 12 months of the end of the accounting period. The common penalty regime for failing to notify applies (see earlier in this Text).
2.2 Returns 12/14
Corporation tax returns must usually be filed within twelve months of the end of an accounting period.
A company’s tax return must be filed electronically and must include a self assessment of any tax payable. Limited companies are also required to file electronically a copy of their accounts. The filing of accounts must be done in inLine eXtensible Business Reporting Language (iXBRL).
iXBRL is a standard for reporting business information in an electronic form which uses tags which can be read by computers. HMRC supplies software which can be used by small companies with simple accounts. This software automatically produces accounts and tax computations in the correct format. Other companies can use:
(a) other software that automatically produces iXBRL accounts and computations; or (b) a tagging service which will apply the appropriate tags to accounts and computations; or (c) software that enables the appropriate tags to be added to accounts and computations.
The tags used are contained in dictionaries known as taxonomies, with different taxonomies for different purposes. The tagging of tax computations is based on the corporation tax computational taxonomy, which includes over 1,200 relevant tags.
An obligation to file a return arises only when the company receives a notice requiring a return. A return is required for each accounting period ending during or at the end of the period specified in the notice requiring a return. A company also has to file a return for certain other periods which are not accounting periods (eg for a period when the company is dormant).
A company that does not receive a notice requiring a return must, if it is chargeable to tax, notify HMRC within twelve months of the end of the accounting period. Failure to do so results in a maximum penalty equal to the tax unpaid twelve months after the end of the accounting period. Tax for this purpose includes corporation tax and notional tax on loans to participators of close companies (see later in this Text).
A notice to file a return may also require other information, accounts and reports. For a UK resident company the requirement to deliver accounts normally extends only to the accounts required under the Companies Act.
A return is due on or before the filing date. This is the later of:
- 12 months after the end of the period to which the return relates
- if the relevant period of account is not more than 18 months long, 12 months from the end of the period of account
- if the relevant period of account is more than 18 months long, 30 months from the start of the period of account, and
- three months from the date on which the notice requiring the return was made.
The relevant period of account is that in which the accounting period to which the return relates ends.
A Ltd prepares accounts for the eighteen months to 30 June 2015. A notice requiring a return for the period ended 30 June 2015 was issued to A Ltd on 1 September 2015. State the periods for which A Ltd must file a tax return and the filing dates.
The company must file a return for the two accounting periods ending in the period specified in the notice requiring a return. The first accounting period is the twelve months to 31 December 2014 and the second is the six months to 30 June 2015. The filing date is twelve months after the end of the relevant period of account, 30 June 2016.
One of the competencies you require to fulfil Performance Objective 16 Tax compliance and verification of the PER is to explain tax filing and payment requirements and the consequences of non-compliance to clients. You can apply the knowledge you obtain from this section of the text to help to demonstrate this competence.
There is a £100 penalty for a failure to submit a return on time, rising to £200 if the delay exceeds three months. These penalties become £500 and £1,000 respectively when a return was late (or never submitted) for each of the preceding two accounting periods.
An additional tax geared penalty is applied if a return is more than six months late. The penalty is 10% of the tax unpaid six months after the return was due if the total delay is up to 12 months, and 20% of that tax if the return is over 12 months late.
The common penalty regime for making errors in tax returns discussed earlier in this Text in relation to individuals also applies to companies.
HMRC may amend a return to correct obvious errors, or anything else that an officer has reason to believe is incorrect in the light of information available, within nine months of the day the return was filed, or if the correction is to an amended return, within nine months of the filing of an amendment. The company may amend its return so as to reject the correction. If the time limit for amendments has expired, the company may reject the correction by giving notice within three months.
Companies must keep records until the latest of:
- six years from the end of the accounting period
- the date any compliance checks are completed
- the date after which compliance checks may not be commenced.
All business records and accounts, including contracts and receipts, must be kept, or information showing that the company has prepared a complete and correct tax return.
If a return is demanded more than six years after the end of the accounting period, any records which the company still has must be kept until the later of the end of any compliance check and the expiry of the right to start a compliance check.
Failure to keep records can lead to a penalty of up to £3,000 for each accounting period affected. However, this penalty does not apply when the only records which have not been kept are ones which could only have been needed for the purposes of claims, elections or notices not included in the return.
2.4 Compliance checks 6/12
A compliance check enquiry into a return, claim or election can be started by an officer of HMRC within a limited period.
2.4.1 Starting a compliance check enquiry
HM Revenue and Customs may decide to conduct a compliance check enquiry on a return, claim or election that has been submitted by a company, in the same way as for individuals.
The officer of HM Revenue and Customs must give written notice of his intention to conduct a compliance check enquiry. The notice must be given by the later of:
- The first anniversary of the due filing date (most group companies) or the actual filing date
(other companies), if the return was delivered on or before the due filing date, or
- The quarter day following the first anniversary of the actual filing date, if the return is filed after the due filing date. The quarter days are 31 January, 30 April, 31 July and 31 October.
If the company amends the return after the due filing date, the compliance check enquiry ‘window’ extends to the quarter day following the first anniversary of the date the amendment was filed. Where the compliance check enquiry was not started within the limit which would have applied had no amendment been filed, the enquiry is restricted to matters contained in the amendment.
2.4.2 Conduct of compliance check enquiry
The procedure for the conduct of compliance check enquiries relating to individuals, discussed earlier in this Text, also applies to companies.
The rules about determinations relating to individuals, discussed earlier in this Text, also applies to companies.
2.6 Discovery assessments
The rules about discovery assessments relating to individuals, discussed earlier in this Text, also applies to companies.
The procedure for HMRC internal reviews and appeals relating to individuals, discussed earlier in this Text, also applies to companies.
2.8 Personal accountability of senior accounting officer of large company
The senior accounting officer of a large company has personal accountability for ensuring that it has appropriate financial systems in place to ensure that the company accurately reports taxable profits and gains.
The senior accounting officer of a qualifying company has personal accountability for ensuring that financial systems are maintained by the company to enable it to accurately report taxable profits and gains. A qualifying company is one which, in the previous financial year, had a relevant turnover of £200 million and/or a balance sheet total of more than £2 billion.
The senior accounting officer (probably the finance director of the company) must take reasonable steps to establish and monitor accounting systems within the company that are adequate for the purposes of accurate tax reporting. The senior accounting officer must also certify annually that the accounting systems are in operation or specify any inadequacies.
The company must notify HMRC of the identity of the senior accounting officer of the company. The company and/or the senior accounting officer personally may be liable to a financial penalty for a careless or deliberate failure to comply with these requirements. The penalty applicable to the senior accounting officer is likely to be £5,000.
3 Payment of corporation tax and interest 6/12
|Large companies pay their corporation tax in quarterly instalments. Other companies pay their tax nine months and one day after the end of an accounting period.|
3.1 Companies which are not large companies
Corporation tax is due for payment by companies which are not large companies (see below), nine months and one day after the end of the accounting period. For example, if a company, which is not a large company, has an accounting period ending on 31 December 2015, the corporation tax for the period is payable on 1 October 2016.
3.2 Large companies
3.2.1 Payment in instalments
Large companies must pay their corporation tax in instalments.
3.2.2 What is a large company?
A large company is one whose profits exceed the profit threshold.
For this purpose profits (which may be referred to as augmented profits) are the taxable total profits of the company plus the grossed-up amount of dividends received from other companies. The grossed-up amount of dividends is the dividend received multiplied by 100/90. You may see the grossed up amount of dividend received referred to as franked investment income (FII).
The exception to this rule is that any dividends received from a 51% subsidiary company (sometimes called ‘group dividends’) are ignored and so are not included as FII.
Key term A company (company B) is a 51% subsidiary of company A if more than 50% of company B’s ordinary shares are owned directly or indirectly by company A.
Q plc had the following results for the year ended 31 March 2016.
Taxable total profits 1,142,000
Dividend received 1 May 2015 from 40% subsidiary 250,200 Dividend received 1 August 2015 from 90% subsidiary 340,200
What are Q plc’s profits for determining whether it is a large company?
Taxable total profits 1,142,000
Dividend from 40% subsidiary plus tax credit £250,200 100/90 278,000
The dividend from the 90% subsidiary is ignored because this is from a company which is a ‘51% subsidiary’.
The profit threshold is £1,500,000 for a 12 month accounting period.
Exam focus The profit threshold will be given in the tax rates and allowances in the exam. point
The profit threshold is reduced in two circumstances.
The first is where the company has a short accounting period where the threshold is scaled down. For example, if a company has a three month accounting period, the threshold is (£1,500,000 × 3/12) = £375,000.
The second is where the company has related 51% group companies at the end of the immediately preceding accounting period. The threshold is divided by that number of related 51% group companies, including the company itself.
Key term A company (company B) is a related 51% group company of another company (company A) if company A is a 51% subsidiary of company B or company B is a 51% subsidiary of company A or both company A and company B are 51% subsidiaries of another company. Non-UK resident company may be included as related 51% group companies. Companies which do not carry on a trade (dormant companies) are not related 51% group companies.
Y Ltd prepares accounts to 31 March each year. At 31 March 2015, Y Ltd had three wholly owned subsidiary companies, V Ltd, X Ltd and Z Ltd, and owned 45% of the ordinary shares of U Ltd. X Ltd did not carry on any trade or business during the year to 31 March 2015. Z Ltd is not resident in the UK.
Y Ltd acquired 75% of the ordinary shares of T Ltd on 1 July 2015.
What is the profit threshold for Y Ltd for determining corporation tax payment dates for the year ending 31 March 2016?
V Ltd and Z Ltd (residence not relevant) are related 51% group companies with Y Ltd so there are three related 51% group companies in total.
X Ltd is not a related 51% group company because it is dormant.
U Ltd is not a related 51% group company because it is not a 51% subsidiary of Y Ltd.
T Ltd was not a related 51% group company at the end of the previous accounting period and so does not reduce the profit threshold of Y Ltd in respect of the year ending 31 March 2016.
The profit threshold for Y Ltd for the year ending 31 March 2016 is therefore £(1,500,000/3) = £500,000.
3.2.3 Due dates for instalments
Instalments are due on the 14th day of the month, starting in the seventh month of the accounting period. Provided that the accounting period is twelve months long subsequent instalments are due in the tenth month during the accounting period and in the first and fourth months after the end of the accounting period. If an accounting period is less than twelve months long subsequent instalments are due at three monthly intervals but with the final payment being due in the fourth month of the next accounting period.
D Ltd is a large company which has a 12 month accounting period which ends on 31 December 2015.
What are the due dates for payment of D Ltd’s instalments of corporation tax for this accounting period?
3.2.4 Calculating the instalments
Instalments are based on the estimated corporation tax liability for the current period (not the previous period). A company is therefore required to estimate its corporation tax liability before the end of the accounting period, and must revise its estimate each quarter. It is extremely important for companies to forecast their tax liabilities accurately. Large companies whose directors are poor at estimating may find their companies incurring significant interest charges. Companies can have instalments repaid if they later conclude the instalments ought not to have been paid.
The amount of each instalment is computed by:
- Working out 3 CT/n where CT is the amount of the estimated corporation tax liability payable in instalments for the period and n is the number of months in the period
- Allocating the smaller of that amount and the total estimated corporation tax liability to the first instalment
- Repeating the process for later instalments until the amount allocated is equal to the corporation tax liability
If the company has an accounting period of 12 months, there will be four instalments and each instalment should be 25% of the estimated amount due.
B Ltd is a large company which has a corporation tax liability of £440,000 for the year ended 31 March 2016. Show when the corporation tax liability is due for payment.
|14 October 2015||110,000|
|14 January 2016||110,000|
|14 April 2016||110,000|
|14 July 2016||110,000|
The position is slightly more complicated if the company has an accounting period of less than 12 months, as is shown in the following question.
K plc is a large company which has a corporation tax liability of £880,000 for the eight month accounting period to 30 September 2015. Show when the corporation tax liability is due for payment.
£880,000 must be paid in instalments.
The amount of each instalment is 3 = £330,000
|The due dates and the amounts payable are:|
|14 August 2015||330,000|
|14 November 2015||330,000|
|14 January 2016||220,000 (balance)|
A company is not required to pay instalments in the first period that it is a large company, unless its profits exceed £10 million. The £10 million threshold is reduced proportionately by the number of related 51% group companies (including the company in question) at the end of the previous accounting period.
Any company whose corporation tax liability does not exceed £10,000 need not pay by instalments.
3.3 Interest on late or overpaid tax
Interest runs from the due date on over/underpaid instalments. The position is looked at cumulatively after the due date for each instalment. HMRC calculate the interest position after the company submits its corporation tax return.
Companies which do not pay by instalments are charged interest if they pay their corporation tax after the due date, and will receive interest if they overpay their tax or pay it early.
Interest paid/received on late payments or over payments of corporation tax is dealt with as investment income as interest paid/received on a non-trading loan relationship. For the purpose of the exam sittings in September 2016, December 2016 and March 2017, the assumed rate of interest on underpaid tax is 3.0% and the assumed rate of interest on overpaid tax is 0.5%.
3.4 Group payment arrangements 6/13
Where more than one company in a group is liable to pay their tax by instalments, arrangements may be made for the instalments to be paid by one company (the nominated company), and allocated amongst the group. These provisions were introduced because groups often have uncertainties over the tax liabilities of individual group members until all relevant group reliefs and claims are decided upon following the end of the accounting period.
|||Tax rates are set for financial years.|
|||There is a single rate of corporation tax which is applied to a company’s taxable total profits to compute the corporation tax liability.|
|||A company must notify HMRC within three months of starting to trade.|
|||Corporation tax returns must usually be filed within twelve months of the end of an accounting period.|
|||A compliance check enquiry into a return, claim or election can be started by an officer of HMRC within a limited period.|
|||The senior accounting officer of a large company has personal accountability for ensuring that it has appropriate financial systems in place to ensure that the company accurately reports taxable profits and gains.|
|||Large companies pay their corporation tax in quarterly instalments. Other companies pay their tax nine months and one day after the end of an accounting period.|
- Youngs Ltd makes up a 12 month set of accounts to 31 December 2015. When must the company file its CT return based on these accounts?
- When must HMRC give notice that they are going to start a compliance check enquiry if a return was filed on time by a company not in a group?
- Which companies must pay quarterly instalments of their corporation tax liability?
- State the due dates for the payment of quarterly instalments of corporation tax for a 12 month accounting period.
- Freeman Ltd changes its accounting date and makes up accounts for the 8 months to 31 December 2015. The company is large and is due to pay tax by instalments. Outline when the tax is due.
- In question 5, if the CT liability is £1,000,000 for the 8 month period what amount is due at each date?
Answers to quick quiz
- By 31 December 2016.
- Notice must be given by one year after the actual filing date.
- ‘Large’ companies which are broadly those with profits exceeding £1,500,000 4 14th day of:
- 7th month in AP
- 10th month in AP
- 1st month after AP ends (d) 4th month after AP ends 5 Due dates are:
14 November 2015
14 February 2016 14 April 2016
6 £375,000, £375,000 and finally £250,000.