Corporation Tax

1
Corporation Tax

• Introduction to Taxation, ch. 10
• Business Law, chs. 15 and 16

2
Company Tax

• Corporation tax
• Directors salaries and fees
• Dividends
• Comparison

3
Corporation tax

• Companies do not pay
• Income tax
• Capital gains tax
• Inheritance tax
• Companies pay corporation tax on their
• Income profits, and
• Capital gains

4
Income profits

• Assessed by reference to the categories of income
  tax
• Trading income (business profits)
• Savings income (interest/dividends)
• Property income (rent)
• Capital gains assessed by CGT rules
• use same process to calculate gain

5
Differences

• No personal allowances
• - No equivalent of IT personal allowance
• - No CGT allowance
• Capital Gains
• - Indexation not frozen in 1998
• - Tapering relief not available to companies
• Different basis of assessment
• - CT assessed on the companys accounting
  reference period - payable 9 months later
• Different tax rates

6
Corporation tax rates

• Profit up to 300,000 all at
  20
• Eg profit 70,000 tax is 20 of 70,000
  14,000
• Profits between 300,000 and 1,500,000
• 20 on first 300,000
• 32.5 above that
• Profit over 1,500,000 all at 30
• Eg profit 1.6m tax is 30 of 1.6m 480,000

7
Example of the marginal rate

• Profits 950,000
• First 300,000 taxed at 20 60,000
• Next 650,000 taxed at 32.5
• 650,000 x 32.5 211,250
• Total tax 271,250

8
Corporation tax rates contd

• Important issue is to ascertain which band the
  taxable profit falls within ie is it
• - up to 300,000 or
• - between 300,000 and 1.5m or
• - over 1.5m
• This then determines the applicable rate

9
Losses

• Trading losses
• can be set off against other income or capital
  gains in the same accounting period,
• or carried back one year
• or carried forward
• Capital losses
• cannot set against income
• can be set against capital gains in future
  periods (indefinitely)

10
Groups of companies

• Many companies are groups of companies
• Typically, a holding company owns the shares in
  the other companies in the group
• Tax planning issues about whether to create a
  group like that or just have separate companies
• Generally, the losses of one company in the group
  can be set against the profits of other companies

11
Close companies

• One controlled by five or fewer participators
  or by participators who are directors
• Participator is widely defined, but includes
  shareholders and others who share profits
• Associates are treated as one participator
• (eg close family, partners and trustees of
  family settlements)
• In practice, most smaller private companies are
  close companies

12
Special rules

• Company lends over 15,000 to participator
• Company liable to tax of 25 of loan value
  (repayable when loan paid off)
• Company gives benefits in kind to participator or
  associate
• Treated as a distribution (dividend)
• Taxable as investment income
• Company makes gift to participator
• Can be treated as gift by other participators to
  the recipient - inheritance tax implications

13
Taking money out of the company

• 1. Pay fees and salaries to directors
• 2. Pay dividends to shareholders

14
Directors salaries

• An expense for the company
• Director has to pay income tax under ITEPA 2003
  (employment income)
• Company deducts tax under the P.A.Y.E. system
• National insurance contributions payable by both
  the company and the director

15
Dividends

• Not an expense for the company
• No tax effect on the company
• Investment income for the shareholder
• Taxed at special rates
• 10 standard rate (tax credit !)
• 32.5 higher rate

16
Compare partnership company

• Partners pay tax at IT rates
• Higher rate (40) on income over 39,825
• Paid on all profits (including retained)
• Companies pay much lower rates, higher rate is
  30 and that is re profits over 1.5m
• Dividends have tax advantage (especially when
  recipient is not higher rate tax payer)

17
Example

• Business with three individuals
• Total profits 120,000
• Take out 32,000 each
• Compare partnership tax and company tax

18
As a partnership

• Profits per partner 40,000
• (NB all taxable even if some (8k) left in
  business)
• Less personal allowance 5,225
• Taxable 34,775
• 10 on 2,230 223
• 22 on 32,370 7,121
• 40 on 175 70
• Total tax per partner 7,414
• (Total retained funds is 3 x 8k 24,000)

19
As a company

• Company pays corporation tax
• Pays small salaries to directors
• e.g. 6,000
• Directors are also shareholders so rest paid to
  them as dividends
• - ie 26,000

20
Companys corporation tax

• Companys profits 120,000
• (after all other expenses)
• Less salaries (3 x 6,000) 18,000
• Taxable profits 102,000
• Tax at 20 20,400
• Distributable profits 81,600
• Dividends (3 x 26,000) 78,000
• Retained profit 3,600

21
Each individual gets 32,000

• Directors salary 6,000
• Less personal allowance 5,225
• Taxable income 775
• Taxed at 10 starting rate 77.50
• Rest (26,000) is taken as dividend
• Still less than 34,600 basic rate so 10
• But covered by tax credit 0
• Total tax paid by indv 77.50

22
Comparison

• As partners, each pays 7,414
• Total tax (x3) 22,242
• Company pays 20,400
• Each director pays 77 (x3) 231
• Total 20,631
• Total saving re whole business 1,611

23
Contd

• BUT Total saving for individuals
• 7,414 77 7,337
• (There would also be NI contributions as well,
  which would work out more for the partners)
• Note also the difference in retained profits
• Partnership - 24,000
• Company - 3,600