19 - Corporation Tax 5 Close companies & Self Assessment - - PowerPoint PPT Presentation

Professional, Practical, Proven Close companies & Self Assessment

19 - Corporation Tax 5

Schedule

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Week Monday Chapter Ref. Topic Areas 23rd Dec – 12th Jan 2020 Christmas Break Wk/Lecture 13 13th Jan 8 Capital Allowances Wk/Lecture 14 20th Jan 9 Basis Periods Wk/Lecture 15 27th Jan 10 Corporation Tax – Introduction Wk/Lecture 16 3rd Feb 10 Corporation Tax – Capital Allowances Wk/Lecture 17 10th Feb 10 Losses Wk/Lecture 18 17th Feb 11 Chargeable Gains Wk/Lecture 19 24th Feb

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Close companies and Self-Assessment 2nd Mar – 8th Mar Reading Week 2 Wk/Lecture 20 9th Mar 12 VAT - Introduction Wk/Lecture 21 16th Mar 13 VAT – Detailed computation Wk/Lecture 22 23rd Mar 14 CIS & NIC Wk/Lecture 23 30th Mar

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Revision - CGT Wk/Lecture 24 6th Apr N/A Revision - Income tax Wk/Lecture 25 13th Apr N/A Revision - Corporation tax Wk/Lecture 26 20th Apr N/A Revision – Admin and VAT Week 27 27th Apr Week 28 4th May 11th May Examinations

Schedule

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• Close companies
• Definition
• Exceptions
• Consequences of close company status
• Benefits
• Loans
• Self assessment
• Notification of chargeability
• Corporation tax return and records
• Payment of corporation tax

Close companies and company self assessment

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• A close company is one whose affairs can be controlled and

manipulated by a small group of people, possibly for tax avoidance purposes.

• Most companies in the UK are close companies.
• Certain anti-avoidance legislation exists in relation to close

companies.

Close company

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• A close company is a UK resident company which satisfies certain

conditions

• The main instance of a close company which is under the control
• f:

a) Five of fewer participators, or b) Any number of participators who are also directors of the company.

• The rights of a participator’s associates are aggregated with that

participator’s own rights for the purposes of determining whether a company is a close company.

Definition

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• Persons are deemed to have control over a company, if, taken

together, they: a) Own over 50% of the company’s issued share capital, or b) Have over 50% of the company’s voting power, or c) Would receive over 50% of the company’s income, if it were all distributed, or d) Would receive over 50% of the company’s assets, if the company were wound up.

Control

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• A participator is defined as somebody who has a share or interest

in the capital or income of the company.

• In many instances, a company’s only participators are its

shareholders, but other persons (e.g. option holders, loan creditors) might also rank as participators.

Participator

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• A director, for this purpose, is any person:

a) Who occupies the position of director (whether called a director or not), or b) Whose directions or instructions are normally obeyed by the directors, or c) Who is a manager of the company and (possibly together with associates) controls at least 20% of the company’s ordinary share capital.

Directors

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• The main associates of a participator are:

a) The participator’s business partners b) The participator’s relatives c) The trustees of a settlement established by the participator or by his/her relatives

• For this purpose, a participator’s relatives comprise his or her

spouse (or civil partner), parents and remoter ancestors, children and remoter issue, brothers and sisters.

Associates

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Example: A company’s issued share capital consists of 1,000 £1 ordinary shares, held as follows: No of shares No of shares David 200 Helen 50 Emma 50 Ian 30 Frederick 100 Jacqueline 40 George 50 Others (1 share each) 480 None of the shareholders are associated in any way and no shareholder is also a director.

Close company

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Example: a) Is the company a close company? b) Would the company be a close company: i. If David were Jacqueline’s brother, or ii. If Emma married Ian, or

• iii. If David were Jacqueline’s brother and Emma married Ian?

Close company

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Solution a) The five largest shareholders own 45% of the share capital, so the company is not under the control of five or fewer participators. The company is also not under the control of its directors. Therefore the company is not a close company.

Close company

David 200 Frederick 100 Emma 50 George 50 Helen 50 Total 450

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Solution i. If David were Jacqueline’s brother, her 4% holding would be aggregated with his and the five largest shareholders would control 49% (45% + 4%) of the company. The company would not be a close company ii. If Emma married Ian, his 3% would be aggregated with hers and the five largest shareholders would control 48% (45% + 3%) of the share capital. The company would still not be a close company.

• iii. If David were Jacqueline’s brother and Emma married Ian, the

five largest shareholders would control 52% (45% + 4% + 3%) of the share capital. The company would then be a close company.

Close company

David (+Jacq) 200 + 40 Frederick 100 Emma 50 George 50 Helen 50 Total 490 David 200 Frederick 100 Emma (+ Ian) 50 + 30 George 50 Helen 50 Total 480

Consequences

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• There are two main tax consequences of close company status.

These are: a) Benefits in kind provided by the company to its participators

• r their associates are generally treated as distributions.

b) Loans made to participators or their associates are assessed to tax.

Consequences of close company status

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• Benefits in kind provided by a close company to its participators

(or their associates) are generally regarded as distributions. The taxation effects of this are as follows: a) The cost to the company of providing the benefit is disallowed when computing its corporation tax liability b) The company is deemed to have made a distribution equal to the amount of the benefit in kind which would have been assessed to income tax if the benefit had been received by an employee c) The person receiving the benefit is taxed as if he or she had received a dividend of the same amount as the deemed distribution.

Benefits in kind provided to participators

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Example On 31 August 2019, a close company provides one of its shareholders with a holiday costing £3,600. This is charged as an expense in the company’s income statement for the year to 31 March 2020. The shareholder concerned is not a director or employee of the company. Required: Explain the tax treatment of this item. Solution The £3,600 is disallowed in the company’s tax computation for the year to 31 March 2020. The company is deemed to have made a distribution of £3,600 and the recipient of the holiday is taxed as if he/she had received a dividend of £3,600.

Benefits in kind provided to participators

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• If a close company makes a loan to a participator (or associate),

the tax consequences are as follows: a) The company is required to pay an amount of tax which is calculated at 32.5% of the amount of the loan (25% prior to 6 April 2016). This tax is known as a S455 tax and is payable nine months and one day after the end of the accounting period in which the loan is made. However, no tax is payable in relation to any part of the loan which is repaid to the company before the date on which the tax falls due. b) The tax paid when the loan was made is repaid to the company if the participant repays the loan or if the loan is written off. The tax repayment is made nine months and one day after the end of the accounting period in which the loan is repaid or written off.

Loans made to participators

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c) Anti-avoidance legislation has been introduced with effect from March 2013, to close a loophole which was used by companies to avoid paying the S.455 tax. Loans were repaid before the deadline and then taken out again shortly after the deadline. If repayments of more than £5,000 are made against a loan and the loan is redrawn within a 30 day period, the company will remain liable for the S.455 tax. Where the loan to the participator is £15,000 or more, the time limit of 30 days does not apply. Here, if the loan is repaid with the intention of redrawing the loan again, the S.455 tax will still be charged.

Loans made to participators

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d) If the loan is written off, wholly or in part, the participator is deemed to have received income equal to this amount. e) Certain loans are excluded from the treatment described

• above. These include loans made to a participator in the

normal course of the company’s business and loans not exceeding £15,000 made to a participator who is full-time employee or director of the company, so long as that participator (with associates) has no more than a 5% interest in the company. If the company has made loans to participators during the year and they remain outstanding at the end of the period, the company must inform HMRC of these loans by submitting a Form CT600A to HMRC.

Loans made to participators

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Example On 1 May 2019, a close company which prepares accounts to 31 March each year lends £30,000 to John, who is one of its directors. No interest is charged on this loan. John owns 18% of the company’s

• rdinary share capital.

Required: Explain the tax treatment of this loan if: a) John repays the loan in full on 15 February 2021. b) John repays £11,500 of the loan on 15 February 2021 and the remaining £18,500 is written off by the company on the same day.

Loans made to participators

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Solution Tax of £9,750 (32.5% of £30,000) is payable by the company on 1 January 2021. Since the loan is interest free, it is treated as a beneficial loan and John is subject to income tax on the related benefit in kind. As regards the eventual repayment or write-off of the loan: a) The tax of £9,750 is repaid to the company on 1 January 2022. b) The £9,750 is repaid on 1 January 2021 but the company cannot claim tax relief in relation to the £18,500 of the loan which has been written off. This is because the amount written off is not treated as a debit arising under a loan relationship and therefore the company is denied tax relief in relation to this amount.

Loans made to participators

9 months and 1 day after 31 March 2020 9 months and 1 day after 31 March 2021

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Solution John is treated as receiving income in 2020-21 of £18,500. This is taxed in the same way as dividend income and so might give rise to further income tax at the dividend upper or dividend additional rates if John’s total income is sufficiently high.

Loans made to participators

Balance of loan written off in February 2020

Self assessment

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The system of self assessment for companies is similar in many ways to the system that applies for individuals. A company must prepare and submit a corporation tax return within 12 months of the end of the period of accounts and pay any tax due within 9 months and 1 day of the end of the chargeable accounting period (except for large companies). A company with a long period of account will have two chargeable accounting periods (CAP) as a CAP cannot exceed 12 months. It will therefore have two payment dates (9 months and 1 day after the end

• f each CAP) but only one filing date (one year after the end of the

period of account).

Self assessment

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A company must notify HMRC within three months of the start of its accounting period that it has been incorporated and it has begun trading. This can be done online, or with a form CT41G – New Company Details. The company must also notify HMRC of any changes to the accounting period. If a chargeable company does not receive notification from HMRC of their obligation to submit a tax return, then they must notify HMRC within 12 months of the end of its accounting period. Failure to notify HMRC of chargeability will result in a standard penalty that is based on a percentage of the unpaid tax 12 months after the end of the accounting period.

Notification of chargeability

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• A company must prepare and submit a corporation tax return on a

form CT600.

• Online filing is now compulsory, either using the HMRC Company

Tax software which can be downloaded, or commercial tax packages.

• The CT600 return includes a formal self-assessment of the

company’s tax liability for the accounting period covered by the

• return. Unlike individuals, a company is not able to ask HMRC to

calculate its liability.

• The return must attach a copy of its financial accounts and

corporation tax computation along with the CT600.

• The accounts must be submitted in iXBRL (Inline eXtensible

Business Reporting Language).

Corporation tax returns and records

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A company must retain all of its business records and accounts until the later of:

• Six years from the end of the accounting period.
• The date any enquiries are complete.
• The date after which enquiries cannot begin.

The bookkeeping records must be complete, up to date and must be sufficient to make a correct and complete return. A penalty may be charged for failure to maintain and keep proper records. This penalty can be up to £3,000 per year of assessment.

Corporation Tax records

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• HMRC has the right to amend a company’s return within nine

months of the date on which the return is filed.

• Similarly the company has the right to amend its return and self-

assessment within 12 months of the required filing date of the return.

• A company which believes that it has made an overpayment of

corporation tax may make a claim for recovery of this overpaid tax (whether or not the alleged overpayment was caused by an error in a tax return). Such a claim must be made within four years of the end of the accounting period to which it relates.

Amendments and Errors

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• If HMRC wishes to open an enquiry into a company’s tax return

which is filed on or before the required filing date, then the enquiry must usually begin within 12 months of the date on which the return is filed. This means that the “enquiry window’ for returns which are submitted early will close correspondingly early.

• However, if a company’s tax return is filed late, or the company

amends its tax return, the deadline for starting an enquiry is extended to the quarter date (31 Jan, 30 Apr, 31 Jul or 31 Oct) which follows the first anniversary of the date that the return is filed or the amendment is submitted.

Enquiries

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• If a company fails to file a return by the required date, HMRC may

make a determination of the amount of tax due. A determination can be displaced only if the company delivers the required return.

Determinations

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• Unless HMRC opens an enquiry into a company’s tax return, the

tax liability for the accounting period may usually be regarded as finalised when the enquiry window has closed. However, HMRC may raise a later “discovery assessment” if it is discovered that insufficient tax has been assessed.

• The time limit for making a discovery assessment is normally four

years after the end of the accounting period concerned. This increases to six years if the loss of tax has been caused by negligence on the part of the company (or a related person) and 20 years in the case of dishonesty.

Discovery Assessments

Corporation Tax payment

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• A company’s corporation tax liability for an accounting period is

generally payable by means of a single payment which is due nine months and one day after the end of the period.

• However, certain large companies are required to pay their

corporation tax by instalments. Large here means PCTCT >= £1.5m.

• Electronic payment of corporation tax is now compulsory.

Due date of payment

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Example 1 A company’s period of account is the year to 31 July 2019. Required When is the corporation tax liability for the period due for payment? Solution The year to 31 July 2019 is a single accounting period. Corporation tax for the period is payable nine months and one day after 31 July 2019, which is 1 May 2020.

Due date of payment

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Example 2 A company’s period of account is the 18 months to 31 December 2019. Required When is the corporation tax liability for the period due for payment? Solution This period breaks down into two chargeable accounting periods. These are the year to 30 June 2019 and the six months to 31 December 2019. Corporation tax for these two chargeable accounting periods is due as follows: i. Corporation tax for the year to 30 June 2019 is payable nine months and one day after 30 June 2019, which is 1 April 2020. ii. Corporation tax for the six months to 31 December 2019 is payable nine months and one day after 31 December 2019, which is 1 October 2020.

Due date of payment

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As mentioned previously, large companies are generally required to pay their corporation tax by instalments. The main features of the instalments payment system are as follows: a) In general, a company is regarded as “large” for an accounting period if it has profits for that period which exceed £1.5m. For this purpose, a company’s “profits” are its taxable total profits for the

• period. However, a large company is not required to pay tax by

instalments for an accounting period if: i. It has profits of £10m or less for the accounting period and was not a large company in the 12 months preceding that period, or ii. Its tax liability for the period does not exceed £10,000.

Payment by instalments

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The limits of £1.5m, £10m and £10,000 are all scaled down for accounting periods of less than 12 months. Also, the £1.5m and £10m limits are reduced if the company has one

• r more related companies.

Instalment payments are based on the company’s own estimate of its corporation tax liability for the accounting period. When the tax liability for the year is finalised, the company is charged interest on any underpaid instalments and is paid interest on any overpaid instalments. For a 12-month accounting period there are four equal instalments. The first instalment falls due six months and 14 days from the start

• f the accounting period. The remaining three instalments then fall

due at quarterly intervals.

Payment by instalments

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For instance, if the accounting period is the year to 31 December 2019, instalments fall due on: 14 July 2019 14 October 2019 14 January 2020 & 14 April 2020.

Payment by instalments

Six months and 14 days from the start of the accounting period Three months after the 1st payment

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If an accounting period is of less than 12 months duration, the final instalment is always due three months and 14 days after the end of the period. Earlier instalments are due on the usual quarterly dates but only to the extent that those dates fall before the date of the final instalment. For instance, if an accounting period consists of the eight months to 30 September 2019, corporation tax is due in three instalments on 14 August 2019, 14 November 2019 and 14 January 2020.

Payment by instalments

Six months and 14 days from the start of the accounting period 3 months and 14 days after the end of the accounting period

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In order to calculate the amount of each instalment, it is first necessary to multiply the corporation tax liability by 3/n, where n is the number of months in the accounting period. Each instalment is then equal to this figure, except that the final instalment may be lower than this in order to bring the total of the instalments to the correct amount.

Payment by instalments

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Example: A large company has a corporation tax liability of £720,000 for an accounting period. Required State the dates on which instalments are payable and compute the amount of each instalment if the accounting period is: a) The year to 31 March 2020. b) The five months to 31 May 2019.

Payment by instalments

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Solution: a) The year to 31 March 2020. Instalments are due on 14 October 2019, 14 January 2020, 14 April 2020 and 14 July 2020. Each instalment is equal to £720,000 x 3/12 = £180,000 b) The five months to 31 May 2019. Instalments are due on 14 July 2019 and 14 September 2019. The first instalment is equal to £720,000 x 3/5 = £432,000. The second and final instalment is £288,000, bringing the total to £720,000.

Payment by instalments

Six months and 14 days from the start of the accounting period The final instalment is always due three months and 14 days after the end of the accounting period 3/n, where n is the number of months in the accounting period

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• Interest on underpaid corporation tax generally runs from the date
• n which the tax should have been paid until the date on which it

is actually paid.

• Interest on overpaid corporation tax generally runs from the date
• n which the tax was paid or (if later) the date on which it was

due to be paid, until the date of repayment.

Interest on underpaid and overpaid corporation tax

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Interest on overpaid corporation tax is calculated at a lower rate than the interest on underpaid tax:

https://www.gov.uk/government/publications

Interest receivable on a repayment of overpaid corporation tax is taxable as a credit arising from a non-trading loan relationship. Similarly, interest payable on underpaid corporation tax is deductible as a non-trading debit.

Interest on underpaid and overpaid corporation tax

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Q1 (3) May 2017 (adapted) Tardez Ltd had a Corporation Tax liability of £182,750 for the y/e 30 June 2020 which it did not pay until 31 July 2021. Tardez Ltd is not considered a large company for Corporation Tax purposes. Required How much interest will Tardez be charged by HMRC in respect of the late payment? a) £4,950 b) 2,475 c) 2,285 d) 1,523

Interest on underpaid and overpaid corporation tax

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Solution The Corporation Tax should have been paid 9 months and 1 day after the year end, i.e. 1 April 2021. It was not paid until 31 July 2021, so it was four months (April, May, June, July) late. £182,750 x 2.5% (ORI 19/20) x 4 ÷ 12 = £1,523 d) £1,523 is the correct answer.

Interest on underpaid and overpaid corporation tax

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The main penalties which may be imposed in relation to corporation tax are as follows:

• 1. Late submission of tax return
• 2. Failure to notify
• 3. Inaccurate tax returns
• 4. Failure to keep records

Penalties

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Penalties are charged if a company does not file its corporation tax return by the required date. These penalties are currently as follows: 1) If the return is up to three months late, a fixed penalty is charged

• f £100. This is increased to £500 for a third consecutive late

return. 2) If the return is over three months late, a fixed penalty is charged

• f £200. This is increased to £1,000 for a third consecutive late

return.

Late submission of tax return

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In addition to the above penalties, a further tax-geared penalty is charged if the return is submitted more than six months late. The penalty is expressed as a percentage of the amount of tax unpaid at the end of the six months as follows:

• If the return is made between six and twelve months late, the

penalty is 10% of the tax unpaid six months after the return was due.

• If the return is made more than 12 months late, the penalty rises

to 20% of the tax unpaid six months after the return was due.

Late submission of tax return

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A penalty may be charged if an inaccuracy in a tax return or other document leads to an understatement of the amount of corporation tax payable and the inaccuracy is either careless or deliberate. This penalty regime also applies if HMRC issues an assessment which understates the amount of the tax payable and the company fails to take reasonable steps to notify HMRC of this fact within 30 days. As is the case for income tax the amount of any penalty depends on the company’s degree of culpability and generally varies between 0% and 100% of the additional tax which becomes payable as a result of correcting the inaccuracy or understatement. See the table on the next slide.

Inaccurate tax returns

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• Amount of penalty is based on Potential Lost Revenue (PLR) as a

result of the error:

Penalties

Reason for the error Type of Disclosure Minimum Penalty Maximum Penalty Careless (fails to take reasonable care) Unprompted 0% 30% Prompted 15% Deliberate (knowingly sent HMRC an incorrect document Unprompted 20% 70% Prompted 35% Deliberate and concealed (knowingly sent and tried to conceal the inaccuracy) Unprompted 30% 100%. Prompted 50%

Past exam question

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Orandale is a UK registered close company that began trading on 1 September 2017 and completed its first period of account for the 18 months ended 28 February 2019. Ed Monroe, one of the company directors was advanced £46,000 on his director’s current account by the company on 5th October 2018. The company does not charge interest on an overdrawn director’s current account and £22,000 was

• utstanding at 28 February 2019 and remains outstanding at 6 April

2019.

August 2019 exam question –Q2

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Required:

• 1. State the date by which the company must notify HMRC that it has

been incorporated and commenced trading.

• 2. List the Corporation Tax returns forms that will be required to be

completed and the dates these will cover.

• 3. Orandale is not a large company. State the dates that any

Corporation Tax payable will become due for the CAP’s identified.

• 4. Outline the tax consequences to Orandale of the loan to Ed

Monroe.

• 5. Outline the personal tax consequences in 2018/19 for Ed Monroe

as a director of the amount outstanding at 28 February 2019.

August 2019 exam question –Q2

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Solution:

• 1. State the date by which the company must notify HMRC that it has

been incorporated and commenced trading. A company must notify HMRC within three months of the start of its accounting period that it has been incorporated and it has begun trading. Three months from 1 September 2018 is 1 December 2018.

August 2019 exam question –Q2

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Solution:

• 2. List the Corporation Tax returns forms that will be required to be

completed and the dates these will cover. The company must prepare and submit two corporation tax returns

• n a Form CT600.

The first return will cover the 12 months 1 September 2017 to 31 August 2018. The second return will cover the 6 months 1 September 2018 to 28 February 2019.

August 2019 exam question –Q2

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Solution:

• 3. Orandale is not a large company. State the dates that any

Corporation Tax payable will become due for the CAP’s identified. Corporation tax is payable 9 months and one day after the end of the chargeable accounting period. The 12 months 1 September 2017 to 31 August 2018 will be due on 1 June 2019. The 6 months 1 September 2018 to 28 February 2019 will be due on 1 December 2019.

August 2019 exam question –Q2

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Solution:

• 4. Outline the tax consequences to Orandale of the loan to Ed

Monroe. Loans to participators or their associates are subject to tax at 32.5%

• n the value of the loan.

This is known as S455 tax and is payable 9 months and 1 day after the end of the chargeable accounting period. The loan was initially given on 8th October 2018 so this is in the second (short) chargeable accounting period to 28 Feb 2019. If Ed has not repaid the loan by 1 December 2019 (the date of payment of the S455 tax) the company will be required to make a tax payment of £7,150 (£22,000 x 32.5%).

August 2019 exam question –Q2

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Solution:

• 5. Outline the personal tax consequences in 2018/19 for Ed Monroe

as a director of the amount outstanding at 28 February 2019. The loan is interest free and therefore a benefit in kind will arise: £22,000 x 2.5% = £550 The company must also pay class 1A NIC on the benefit in kind at the rate of 13.8% by 19 July 2019.

August 2019 exam question –Q2

Disclaimer

Care has been taken to ensure that all data and information in Academy lectures is factual and that numerical values are accurate. To the best of our knowledge, all information in the Academy lectures is accurate at the time of publication. Accounting Technicians Ireland and its lecturers assume no responsibility for errors or misinterpretation

• f the information contained in these lectures or in its

use.