TXF6 UK
Syllabus E. Corporation Tax Liabilities E4. The comprehensive computation of corporation tax liability

E4a. E4a.Compute the corporation tax liability

Syllabus E4a)

Compute the corporation tax liability.

How to calculate the corporation tax liability?

Corporation tax liability

A company will pay corporation tax at the rate of 19% for FY18 and FY17.

If a company’s CAP falls into a previous financial year prior to F17 a hybrid rate will need to be calculated.

  • As you know, dividends received by a company from non-associated companies are not charged to corporation tax. 

    However, they do determine whether a company is small or large.

How?

You will need to add the dividends figure to the taxable total profits. 

If the total of this exceeds the upper limit, then the company will be deemed to be large. 

Do not forget that dividends are just used to determine whether a company is small or large, they are never subject to corporation tax!

Illustration:

A company has taxable total profits of £1,450,000. 

They have received a dividend from a non-associated company of £250,000.

  • Will they be considered to be a large company?

Illustration:

T.T.P    £1,450,000
Dividend     : £250,000   £250,000
Augmented profits    £1,700,000

Yes, the total has crossed £1,500,000 and therefore the company will be considered to be a large company.

They will pay corporation tax at 19% like small companies but the difference is that they will have to pay their corporation tax in quarterly instalments.

Corporation tax due 19%*£1,450,000 = £275,500

Related 51% companies

Companies count as related 51% group companies if:

  1. One company owns more than 51% of the other

  2. Both companies are owned more than 51% by the same company

Which companies can/cannot be included in the group?

  1. An individual is not a company, therefore if an individual controls 2 companies, there will only be 2 associated companies in the group, the individual will not be a part of the group.

  2. Dormant companies are not considered to be related companies.

  3. Companies resident overseas are considered to be related companies.

What is control?

The parent company needs to own more than 50% of the share capital of the subsidiary at the end of the previous chargeable accounting period. The 50% needs to be both direct and effective interest. For example, if A Ltd owns 51% of B Ltd and B Ltd owns 51% of C Ltd, the situation would be as follows:

A Ltd is related to B Ltd so A would divide the limit by 2.

B Ltd. is related to A Ltd and C Ltd so B Ltd would divide the limit by 3.

C Ltd is related to B Ltd to C Ltd would divide the limit by 2.

What are the tax implications of related 51% group companies?

  1. One annual investment allowance is given to the entire group. The group can decide which companies get the allowance. Therefore, it is tax efficient to allocate the allowance to large companies and companies which have purchased special rate pool assets.

  2. The upper limit of £1,500,000 is divided by the number of related 51% companies to determine an upper limit for each company in the group. If the individual company’s profits exceed the upper limit, then they are deemed to be a large company and must pay quarterly instalments of their corporation tax.

Illustration:

Q Ltd owns 51% of Z Ltd. and 65% of A Ltd. 
Z Ltd. owns 100% of Z Inc. (overseas company).
A.  Ltd. owns 100% of B Ltd. and 100% of C. Ltd. (dormant company)

Which companies are related 51% group companies?

Solution:

There are 5 related companies in this group.

  • Q Ltd, Z Ltd, Z Inc, A Ltd and B Ltd.

    C Ltd. is not considered as it is a dormant company.

  • The upper limit would be £1,500,000/5=£300,000

Illustration:

Q Ltd owns 51% of Z Ltd. and 65% of A Ltd. 
Z Ltd. owns 50% of Z Inc. (overseas company).
A.  Ltd. owns 60% of B Ltd. and 100% of C. Ltd. (dormant company)

Which companies are 51% group companies of Q Ltd?

Solution:

Q Ltd is only related to Z Ltd and A Ltd so the limit would be divided by 3. 

C Ltd is excluded because it is dormant.

  • B Ltd is excluded because the effective interest is less than 51% (65%*60% = 39%)

  • Z Inc is excluded because the effective interest is less than 51% (51%*50% = 25.5%)

  • Note

    A Ltd would include Q Ltd and B Ltd as related 51% companies. (Limit/3)

    B Ltd would include A Ltd as a related 51% (Limit/2)

    Z Ltd would include Q Ltd as a related 51% (Limit/2)

Hopefully you can see from these illustration that there is not just one answer for a group.

It depends from which company you are looking from.

The limit could be different for each company.

When do large companies pay their C.T. instalments?

A large company will pay corporation tax in installments in the second year that they are large on:

  1. First installment = 3/CAP x Estimated C.T. liability on 14th of 7th month in CAP

  2. Second installment = 3/CAP x Estimated C.T. liability on 14th of 10th month in CAP

  3. Third installment = 3/CAP x Estimated C.T. liability on 14th of 13th month in CAP

  4. Fourth balancing payment = (Final C.T. liability - payments already made) on 14th of 16th month in CAP

Illustration

A Ltd. is a large company and has a final C.T. liability of £600,000 for the year ended 30/04/2018.

What/when are installments and the balancing payment made?

  • Solution

    First installment of 3/12 x £600,000 = £150,000 on 14th November 2017

    Second installment of 3/12 x £600,000 = £150,000 on 14th February 2018

    Third installment of 3/12 x £600,000 = £150,000 on 14th May 2018

    Balancing payment of (£600,000 - £450,000) = £150,000 on 14th August 2018