COMPANIES AND INCOME TAX

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COMPANIES AND INCOME TAX
Theory and Practice of Taxation BModule
codeC33TB2Lecture 9
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COMPANIES AND INCOME TAX Companies are not
charged income tax on their profits but a) have
an obligation to deduct Income Tax when making
certain payments to individuals and partnerships
and account for this tax to the HMRC, andb)
receive income from individuals and partnerships
from which Income Tax has been deducted at
source. NBThis does not apply to payments
between companies which are made Gross.
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A) PAYMENTS MADE UNDER DEDUCTION OF TAX
Debenture/ loan interest (20) Patent
royalties (22)The Income Tax must be
accounted for to the HMRC B) INCOME RECEIVED
UNDER DEDUCTION OF TAX Debenture/loan interest
(20) Patent
royalties
(22)Income Tax is offset
against AAn excess of A will need to be paid to
HMRC.An excess of B will be allowed as a credit
against Corporation Tax or will be repaid
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QUARTERLY ACCOUNTING SYSTEM Income Tax due to
HMRC is remitted on a Quarterly basis. The
quarters are the Calendar quarters i.e. those
ended 31 March, 30 June, 30 September and 31
DecemberEXCEPTWhere the companys year end
does not coincide with one of these dates.In
such a case the Company has FIVE accounting
periodsone ending on each Calendar quarter date
and a fifth ending on the date of the companys
year end.The tax is payable 14 days after the
end of the quarter (or period)
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QUARTERLY ACCOUNTING SYSTEM

• Example
• Quids Ltd makes up accounts to 31 May each year.
  Name its Income Tax quarterly reporting periods
  for year to 31 May 2007.
• Solution
• (i) 1 June 2006 to 30 June 2006
• (ii) 1 July 2006 to 30 September 2006
• (iii) 1 October 2006 to 31 December 2006
• (iv) 1 January 2007 to 31 March 2007
• (v) 1 April 2007 to 31 May 2007

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QUARTERLY ACCOUNTING SYSTEM The procedure, each
quarter, isCalculate the income tax deducted
from payments made and income tax suffered on
income in the period and account for the net
amount.The return is made on form CT61.
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QUARTERLY ACCOUNTING SYSTEM If, in any return
period, there is an excess of tax suffered over
tax deducted, the company can reclaim income tax
paid in earlier return periods of the CAP. If
income tax has not been paid in earlier periods
this income tax suffered under deduction is
carried forward and used to reduce any income tax
payments in later return periods. If, for the
whole CAP, the company has suffered a net
deduction of income tax at source, the net IT
suffered is deducted from the companys
Corporation Tax liability. If IT suffered at
source exceeds the CT liability, the Inland
Revenue will make a repayment of the Income Tax.

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QUARTERLY ACCOUNTING SYSTEM

• Example V Ltd has the following net payments and
  receipts for the year ended 31 March 2007
  
  Payments Receipts1/6/06 Debenture interest
  paid 8,0001/7/06 Patent royalties
  paid 1,56013/9/06 Loan interest
  received
  12,00010/11/06 Debenture interest paid
  8,00030/1/07 Patent royalties paid
  15,60030/3/07 Loan interest received
  3,200What is the income tax
  payable or repayable each quarter?

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QUARTERLY ACCOUNTING SYSTEM

• V LtdReturn periods1/4/06 - 30/6/06IT deducted
  8,000 x 20/80 2,000payable
  14/7/061/7/06 - 30/9/06 IT deducted 1,560 x
  22/78 440less IT suffered
  12,000 x 20/80 3,000Net suffered
  
  2,560Amount repayable 14/10/06
  2,000 Carry forward
  560

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QUARTERLY ACCOUNTING SYSTEM

• V Ltd (cont)1/10/06 - 31/12/06IT deducted 8,000
  x 20/80 2,000Less bfwd
  
  560 payable 14/1/07
  1,4401/1/07 - 31/3/07IT deducted
  15,600 x 22/78 4,400Less IT
  suffered 3,200 x 20/80
  800Payable 14/4/07
  3,600