Proforma Corporation Tax Computation
|CORPORATION TAX COMPUTATION FOR AP ENDED:||£|
|NET CHARGEABLE GAINS||X|
|LESS: LOSS RELIEF||(X)|
|LESS: QUALIFYING CHARITABLE DONATIONS (QCD)||(X)|
|TAXABLE TOTAL PROFITS (TTP)||X|
|LESS: CORPORATION TAX (TTP x 19%)||X|
|LESS: DOUBLE TAXATION RELIEF (DTR)||(X)|
|CORPORATION TAX PAYABLE||X|
CORPORATION TAX is DUE 9 MONTHS AND 1 DAY after the end of the ACCOUNTING PERIOD – UNLESS A LARGE COMPANY AND PAYS BY QUARTERLY INSTALMENTS.
The FILING DATE is 12 MONTHS after the PERIOD OF ACCOUNT.
Relief for TRADING LOSSES. If a company makes a trading loss, its trading income assessment for that period in the corporation tax computation will be NIL.
The LOSS may then be relieved in the CURRENT PERIOD against TOTAL PROFITS, followed by a 12 MONTH CARRY BACK to an earlier period against TOTAL PROFITS and / or by CARRY FORWARD to relieve against ANY PART of FUTURE TOTAL PROFITS.
The key elements to remember are that the CARRY BACK is only ALLOWED once a current year loss claim has been made. This UNLOCKS the ability to CARRY BACK the loss. No partial claims are allowed for current year and prior year thereby wasting the QCD. But, ANY PART of LOSSES CARRIED FORWARD can be used, which does NOT waste the QCD.
Note: The losses are ALWAYS relieved against TOTAL PROFITS whichever year is relieved.
Property Business Losses
These are the same as Trading Losses except you CANNOT CARRY BACK Property Losses.
They are set off against TOTAL PROFITS in the CURRENT YEAR and are then CARRIED FORWARD to set off against ANY PART of FUTURE TOTAL PROFITS.
Are the most restricted of the losses. They cannot be CARRIED BACK like PROPERTY BUSINESS LOSSES. But also, in the CURRENT YEAR, they are only relieved against CURRENT YEAR CAPITAL GAINS and then CARRIED FORWARD to set off against NET CAPITAL GAINS in the future.
Losses in the Final 12 Months of Trading
Losses are calculated for the FINAL 12 MONTHS OF TRADING. This is simpler than the TERMINAL LOSS CALCULATION for an UNINCORPORATED TRADER.
The carry back period is extended to 36 MONTHS for losses incurred in the 12 MONTHS PRIOR TO CESSATION. LOSSES can be carried back against TOTAL PROFITS of the 36 MONTHS PRECEDING the loss making period on a LIFO BASIS.
Substantial Shareholding Exemption
If a company owns more than 10% of the share capital of another company for more than 12 MONTHS in the 6 YEARS PRIOR TO DISPOSAL, then GAINS are EXEMPT and LOSSES are NOT ALLOWABLE.
Overseas Aspects of Corporation Tax
Determining UK RESIDENCE:
Under UK law, a company is RESIDENT in the UK if:
- INCORPORATED in the UK, or
- incorporated elsewhere, BUT has its PLACE OF CENTRAL MANAGEMENT & CONTROL in the UK (This will look at location of board meetings, where effective day-to-day management decisions are made, and residence status of the Directors)
If a company is determined to be UK RESIDENT it is chargeable to corporation tax on WORLDWIDE PROFITS & GAINS. This includes:
- ALL UK PROFITS
- OVERSEAS BRANCH PROFITS (unless EXEMPTION made)
- other OVERSEAS INCOME (e.g RENTAL INCOME and INTEREST INCOME)
- CHARGEABLE GAINS.
UK Resident Companies Trading Overseas
The normal provision in tax treaties (based on the OECD model) is that an OVERSEAS COUNTRY will usually only tax income arising in its country from the commercial operation of a UK resident company if:
- a trade is carried on WITHIN ITS BOUNDARIES, and
- the profits are derived from a PERMANENT ESTABLISHMENT set up for that purpose.
The term ‘WITHIN A COUNTRY’S BOUNDARIES’ is important, as ‘TRADING WITH’ as opposed to ‘WITHIN’, another country will likely avoid any liability to OVERSEAS REVENUE TAXES.
What is a Permanent Establishment?
Within an OVERSEAS country a PERMANENT ESTABLISHMENT includes:
- A place of management
- a branch
- an office
- a factory, a workshop or any mine or other place of extraction of natural resource.
A UK RESIDENT COMPANY that has a PERMANENT ESTABLISHMENT trading WITHIN an OVERSEAS country will normally be charged to tax on its overseas profits arising by both HMRC under UK RESIDENCE rules AND the OVERSEAS tax authority under their own tax laws. Double Taxation Relief (DTR) will be available in the UK.
Election to Exempt Profits of an Overseas Permanent Establishment
A UK RESIDENT company can make an IRREVOCABLE ELECTION to exempt profits from its OVERSEAS PERMANENT ESTABLISHMENT from UK CORPORATION TAX.
The consequences of this election are:
- No UK tax on profits of overseas PERMANENT ESTABLISHMENT (P.E.)
- No UK tax on capital gains arising in the OVERSEAS P.E.
- No LOSS RELIEF available for the OVERSEAS PERMANENT ESTABLISHMENT in the UK.
- No CAPITAL ALLOWANCES available for plant & machinery used by the OVERSEAS P.E.
Once the ELECTION is made it applies to ALL OVERSEAS P.E.’s of the COMPANY. so CAREFUL CONSIDERATION IS NEEDED to decide if the election is worthwhile. In fact, the election may not be worthwhile if DOUBLE TAXATION RELIEF means that there is LITTLE or NO UK CORPORATION TAX PAYABLE OR if LOSSES ARE EXPECTED in ANY OVERSEAS branch in the future.
Alternative Overseas Investment Structures
The two principal methods of setting up a permanent place of business overseas are:
- setting up a BRANCH
- INCORPORATING a new SUBSIDIARY (I.E. setting up an overseas resident company).
As mentioned earlier, the BRANCH will likely be seen as a PERMANENT ESTABLISHMENT and liable to tax in the UK & OVERSEAS.
Since the new subsidiary will be INCORPORATED OVERSEAS, as long as it is NOT CENTRALLY MANAGED AND CONTROLLED from the UK but within the OVERSEAS COUNTRY then it will be RESIDENT there and not in the UK.
OVERSEAS SUBSIDIARY: Overseas PROFITS are NOT taxed in the UK, if they are left overseas. Profits REMITTED to the UK parent company may be chargeable when received. OVERSEAS DIVIDENDS are exempt from UK corporation tax.
Controlled Foreign Companies (CFC)
There are ANTI AVOIDANCE rules in the UK that target companies that set up overseas subsidiaries in tax havens to divert profits away from the UK.
A CFC is defined as:
- A NON-UK RESIDENT company
- CONTROLLED by UK RESIDENT COMPANIES AND/OR INDIVIDUALS.
- that has ARTIFICIALLY DIVERTED PROFITS from the UK.
If certain conditions are met then a CORPORATE shareholder that OWNS AT LEAST 25% OF THE CFC, may suffer corporation tax in respect of its holding in the CFC, known as a CFC charge. There is NO CFC CHARGE for INDIVIDUAL SHAREHOLDERS.
EXEMPTIONS TO THE CFC CHARGE
The CFC CHARGE does NOT apply if ANY ONE of the following applies:
- EXEMPT PERIOD (The first 12 months of the overseas company coming under the control of UK residents provided it continues to be a CFC in the following accounting period and it is NOT subject to a CFC CHARGE in that future accounting period – i.e. one of the other exemptions applies in the future period) It does NOT apply to newly incorporated companies.
- EXCLUDED TERRITORIES (HMRC provide a list of territories where the tax rates are high enough to avoid a CFC charge)
- LOW PROFITS (The CFC’s TTP are £500,000 or less – of which no more than £50,000 comprises NON-TRADING PROFITS)
- LOW PROFITS MARGINS (The CFC’s accounting profits are no more than 10% of RELEVANT OPERATING EXPENDITURE)
- TAX EXEMPTION (The tax paid in the OVERSEAS COUNTRY is at least 75% of the tax that would be due if the CFC were a UK resident company)
MNEMONIC to remember this: ENERGETIC ELEPHANTS LOVE LIFTING TREES
The CFC Charge
The CFC charge applies only to CHARGEABLE PROFITS NOT to GAINS. The CHARGEABLE PROFITS are the INCOME of the CFC that has been ARTIFICIALLY DIVERTED from the UK, calculated at UK tax rates.
The CFC Charge is ADDED TO THE CORPORATION TAX LIABILITY of the UK company holding the shares in the CFC.
To calculate to CORPORATION TAX CHARGE. EXCLUDE CHARGEABLE GAINS and ONLY TAKE the COMPANY’S % OWNERSHIP OF PROFITS and % OWNERSHIP OF OVERSEAS TAX PAID.