Unlock the Power of eSignature Lawfulness for Accounting and Tax in United Kingdom

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hello everyone um i'd like to welcome you to this uh corporation tax master class uh with me neil decosta from kaplan so i'm a senior tax lecturer with kaplan and what we've decided to do is to do these various master classes to help uh students so in this master class we're going to be covering corporation tax and i'm going to be explaining the basics behind corporation tax to you so um with regard to corporation tax the first uh aspect we need to consider is the counting periods and the idea behind corporation tax is uh uk resident companies have to pay a corporation tax on their taxable total profits uh arising in an accounting period okay so uk resident companies have to pay corporation tax on their taxable total profits uh this is referred to as ttp arising in an accounting period now while the accounting period for financial accounts can be up to 18 months in length the counting period for tax cannot exceed 12 months so remember in tax our counting period cannot exceed 12 months so if you're given a long period of account what you need to do is to split that long period into two periods of account for tax purposes so the first period of account will be the first 12 months and the second period of account will be the remainder of account so for example let's say we're given the period first of january 2019 up to the 30th of june 20 because that period is 18 months in length so that period is 18 months in length and our tax periods cannot exceed 12 months so when we split it we're going to split it into firstly the first 12 months so the first period will be the first 12 months and in terms of the first 12 months that means the first period will be the first of january 19 up to the 31st of december 19. and the second period will then be the remainder of account so the second period will then be the remainder of account so the second period therefore will be the first of january 20 so first of january 20 up to the 30th of june 20. so the first period of account is the first 12 months and the second period of account is only six months in length so remember in tax we can have a short period of account but we can never have a period of account that's more than 12 months now earlier on what we said is uk resident companies have to pay corporation tax so uh when we tax companies uh what we're doing is we're taxing uk resident companies so uk wrestling companies pay corporation tax on their worldwide profits now in in establishing residence we start off by looking to see where the company is incorporated and if the company is uk incorporated that company would automatically be uk resident alternatively if the company is incorporated overseas what uh the branch of the government that deals with tax the uk is called hmrc what hmrc do is they look and see in which country the company is controlled and managed from okay so we could have a company that's incorporated in an overseas country but if that company is controlled and managed from the uk that company will be treated as uk resident and as far as hmrc is concerned they use two approaches the first approach they use is they look and see where the board of directors meet and if the board of directors hold their meetings in the uk the company will be treated as uk resident so the first thing we're doing is we're looking at the board of directors so board of directors meetings okay and if the board of directors meetings take place within the uk the company will be treated as uk resident so that's the first approach we use the second approach we use is we look and see where major decisions are made so remember it's all major decisions so either the board of directors meetings take place within the uk or major decisions are made within the uk so let's say uh we have a company like microsoft so as far as microsoft is concerned microsoft is a u.s incorporated company okay so microsoft is a u.s incorporated company so what uh hmrc will do is they look and see from which country microsoft is incorporated so as far as microsoft is concerned it's a us-incorporated company and as far as microsoft is control is concerned it's controlled and managed so it's controlled and managed from the us so it's controlled and managed from the u.s so obviously uh you know um here we have a picture of bill gates one of the world's richest men and bill gates bill gates was one of the founders of microsoft so um if we say that a microsoft is controlled and managed by people like bill gates from the us what you can see therefore is microsoft will be treated as a u.s resident so it will be resident in the u.s and because microsoft is resident in the us it's not subject to uk corporation tax so it's not subject to uk corporation tax okay um so um in terms of control and management like i said hmrc look at two approaches they look and see where the board of directors meetings take place and where major decisions are made so here because those two things take place in the u.s microsoft will be treated as being us resident the other person we're going to look at is this lady kylie and kylie kylie is a singer and a presenter as far as kylie is concerned kylie let's say has got a company that makes beauty products and the company is incorporated in australia okay so as far as kylie is concerned she has a beauty company and kylie's company is incorporated in australia okay so kylie's company is incorporating australia um now as far as kylie is concerned so kylie uh owns the company and she's also director of the company and as far as kylie is concerned what happens now is kylie currently lives in the uk okay so kylie lives in the uk and controls the australian company from the uk so kylie lives in the uk and she controls the australian company from the uk and here so even though the company is incorporated in australia because the company is controlled and managed from the uk what would happen here is kylie's company would be treated as uk resident so it would be treated as uk resident and because it's uk resident it would be subject to corporation tax in the uk okay and the reason for that is because kylie's company is controlled and managed from the uk so if we have an overseas incorporated company um like this company here this company makes beauty products it's incorporated in australia but because it's controlled and managed from the uk it becomes uk resident now the interesting thing is because the company is incorporated in australia this company here is also subject to corporation tax in australia so it's also subject sorry so it's also subject to corporation tax in australia so it's subject to corporation tax in the uk and it's also subject to corporation tax in australia so at times you've got an overseas uh company that may be subject to tax in two countries and if that's the case um in order to compensate for the fact the company may be taxed twice what hmrc do is they offer a deduction from the corporation tax liability called double tax relief so what we can do here is we can claim double tax relief to compensate for being taxed twice so we claim double tax relief to compensate for being taxed twice okay so um here like i said we've got this beauty company that's incorporated in australia but then the owner of the company left australia and moved to the uk and um on that basis that kylie lives in the uk and controls her australian company from the uk her company will then be treated as a uk resident and it is subject to corporation tax in the uk so despite being taxed in australia it's also subject to tax in the uk and because the company is taxed twice what uh hmrc will do is they will offer the company double tax relief to compensate for being taxed twice this then um brings to the question how does the corporation tax proforma work so um let's say we've got a company like bp so bp is one of the biggest companies in the uk how do we work out the corporation tax for bp well we start off with the company's adjusted trading income and what we do is we deduct capital allowances and in terms of capital allowances capital allowances are tax depreciation so uh what we can do is we can claim tax depreciation or capital ounces we also deduct any loan or debenture interest paid for trading purposes so if the company has borrowed money and they've used the money for trading purposes then what we're allowed to do is we're allowed to deduct the finance costs from our taxable trading profits okay so um if they um for example they've they've um they've borrowed some money and they've used the money to buy um a building or some machinery then what we're going to do is we're going to deduct the finance cost in computing our trading profits we also bring in our rental profits we could also have some non-trading loan relationship income and what we mean by this is just the interest received we could also have some patent profits uh we bring in our chargeable gains now if we've got any capital losses what we do is with capital losses we only deduct them from the capital gains so only deduct capital losses from capital gains and then what we say is less qualifying charitable donations this then gives us the figure of taxable total profits and in terms of taxable total profits this figure here is referred to as ttp these are the profits subject to corporation tax so taxable total profits are subject to corporation tax what we then do is we add dividends from outside the 51 group now with regard to dividends um dividends are not subject to corporation tax so here we're only bringing in dividends from outside the 51 group and that then gives us a figure called augmented profits we refer to augmented profits as ap once we've got the fig of augmented profits what we then do is we compare augmented profits with the threshold so we compare with the threshold to find the size of the company so we're comparing augmented profits with a threshold to find the size of the company so we now explain um some of the points in the corporation tax pro forma so companies can claim tax depreciation of capital ounces on plant and machinery and um also research and development they also allowances uh available on research and development so let's say we've got a company like bp for example and bp buys that tanker there okay to to carry um to carry the fuel to the petrol stations what we're allowed to do is we're allowed to claim capital allowances on that we can also claim capital ounces on research and development now when computing capital answers on cars we have to be careful because if the examiner tells you that the car is has got private use by an employee the company is still allowed to claim the full capital answers because the company is a separate legal entity from its employees and as i told you with loan and debenture interest paid for trading purposes that's an allowable expense in computing our trading profits in terms of rental profits companies pay tax on rental profits on an accrual spaces and we can deduct all the usual rental expenses except for interest on a loan to buy the rental property now if a landlord receives a lease premium as part of the lease what happens here is part of the lease premium is taxed as rental profits and the way we compute this is we say lease premium received by the landlord less two percent into duration of the lease minus one multiplied by the lease premium and that then gives us the rent in advance so if you receive a lease premium part of the lease premium is taxed as rental income now in terms of interest received by companies it's taxable on an accrual spaces and what we do is we deduct any interest paid for investment purposes from this income including interest paid to purchase a rental property so if you um if you purchase a rental property what happens here is the interest paid to purchase the rental property is treated as paid for investment purposes so it's not deducted from your trading profit it's deducted from your ntlr from your non-trading loan relationship income so you could buy um you could uh use the loan to buy a rental property you could use the loan to buy shares or to finance a takeover so these are the common examples of interest paid for investment purposes now if this results in a net surplus what happens then so if the income is more than the expense we have an ntlr surplus which is taxed as investment income but if it results in a net expense this is called an ntlr deficit and is treated like a trading loss the next item in our corporation tax proforma is capital gains and when we compute the capital gain uh companies are allowed to claim compensation for inflation and this compensation for inflation is referred to as indexation allowance but when we get compensation for inflation we can only claim this indexation allowance up to december 17. so just be aware that there's no indexation allowance available after december 17. and as i told you earlier if you end up with a capital loss you can only take your capital loss and offset it against a capital gain you can't offset the capital loss against other income now in terms of dividends uh dividends are not subject to corporation tax uh both from uh uk or overseas companies because hmrc treat dividends as a as a distribution of post tax profits so the idea here is the paying company has already paid tax on its profits so when the receiving company gets the dividend it doesn't have to pay tax again on that same income but a dividends from outside the 51 group are added to taxable total profits in order to find augmented profits so when we add dividends to our ttp we are only taking dividends received from outside the 51 group now companies pay tax on ttp at 19 so the current rate of tax is nineteen percent um and uh to find the rate of uh to find the size of the company what we do is we compare augmented profits uh with the threshold of 1.5 million so in any tax exam the tax rates will be given to you so um you know whenever you're doing a tax exam always look at the tax rates now if the augmented profits are 1.5 million or less what happens here is we call the company a small company but if the augmented profits are more than 1.5 million what happens here is we call the company a large company so essentially uh companies who have profits of less than the threshold are called small companies companies that are profits of more than the threshold are called a large company in the case of small companies small companies pay corporation tax nine months in one day after the end of the accounting period so if you've got a small company it pays corporation tax nine months in one day after the end of the accounting period with regard to large companies on the other hand they pay corporation tax quarterly and the first payment is due on the 14th of month seven in the period so uh let's say that counting period starts on the 1st of january what we do is we count 7 months so month 7 would be july so here the first payment of corporation tax would be due on the 14th of july in that period and thereafter once you've worked out the first date it's every quarter thereafter every three months thereafter now if the counting period is less than 12 months what happens here is we use a formula 3 over n where n is the number of months in the period so for example let's say the counting period is is 10 months in length instead of you saying 3 over 12 or a quarter what you'd say is 3 over 10. and the last payment is always due no later than three and a half months after the end of the period so uh by three and a half months after the end of the period we must have paid up all our corporation tax so um with large companies um corporation tax they pay tax quarterly with the first payment due on the 14th of month seven now um large companies do not have to pay tax quarterly if the tax is less than 10 000 pounds or it was not large in the previous period and profits are less than 10 million okay so um if um the tax is less than 10 000 or the company was not large in the previous period and the profits are less than 10 million then you do not have to pay tax quarterly and as i told you if there if you're given a short period you use the formula three over n where n is the number of months in the period and the last payment is always due three and a half months after the end of the period so let's now look at a question to help us understand how to compute corporation tax and state when it's payable so what we're told here is magic has the following results for the year ended 31st of march 20. the company has got trading income of 250 000 rental income of 20 bank interest of 25 uh capital gains of 18 and it's paying qcd so qcds are qualifying charitable donations of 23 000 and it's received dividends of a hundred thousand okay and we're asked to state uh to calculate the corporation tax liability and state when it's payable so if you're listening to the video what i recommend you do now is pause the video and work through the question okay so just pause the video work through the question and then come back and see me work through the question for you so um let's look and see how to do magic so what we're going to do is we're going to start off with the trading income so we've got trading income there and the trading income is 250 000. once we've got the trading income what we then do is we then bring in our rental income so we have rental income so the company owns a rental property and the company is receiving rental income of 20 000. we then pick up our bank interest so bank interest which is 25 and then our capital gains and we've got capital gains of 18 000. so all i'm going to do is add up that income now so i'm adding up the income so 250 20 25 and 18 and that gives me income of 313 000. once i've got the 313 000 what i then do is i then deduct the qcds so the qualifying charitable donations so less qcds and the qcds are 23 000. this then gives me the important figure which is referred to as ttp so taxable total profits so the ttp is 219 000. and once we've got the 290 what we then do is we add the dividends so these are dividends from outside the 51 group and the dividends are a hundred thousand and that gives us augmented profits of 300 000. now we know that the threshold is 1.5 million and because 390 is less than the threshold what this tells us is the company is small okay so the company's more so to work out the tax all we're going to do is we're going to tax the 290 000 so we only add the dividends to find the size of the company but the profits that are subject to tax are ttp so what i'm going to do is i'm going to take the ttp which is 290 000 and we tax the 290 000 at 19 to give us 55 100. and this corporation tax is payable nine months and one day after the end of the period so the period here the year end was 31st of march 20 so all we do is we add 9 months to that and that gives us the 31st of december 20 and then we add a day so it's nine months and one day after the period so it's due on the 1st of january 2021. so that's how we do our corporation tax we add in the income we deduct the qcds the qualifying charitable donations to arrive at ttp so ttp is the profits that are going to be taxed so taxable total profit but to find the size of the company we then add dividends from outside the 51 group so our augmented profits here 390 which is less than the threshold so that means the company is small and the profits will be taxed at 19 so uh when we tax profits we're taxing ttp so dividends are not subject to corp tax and because the company is small the tax is payable nine months in one day after the end of the period so the period ends on the 31st of march 2020 so we add nine months to that which gives us the 31st of december 20 and we write it as the 1st of january 21. good let's now look at another question and this is a question called crystal ball and what we're told for crystal ball is um the company has got uh crystal ball has got results for the 11 months to the 31st of march 20. so here the counting period is 11 months in length so remember we can have a period that's less than 12 months but we can never have a period of more than 12 months and we've got a trading income rental income and capital gains and here we've got dividends received of two hundred thousand so once again we're asked to calculate the corporation tax liability and state when it's payable so what i recommend you do is pause the video have a look at working through uh the question so to see if you can find the corporation tax and state when it's payable and then come back and watch the video and see how i'm working out the tags so i'm now going to show you how to do this question here which is crystal ball so once again we start off with the trading income so we have trading income of eight hundred thousand we also have rental income off a hundred thousand uh capital gains of seven hundred thousand so that gives us a 1.6 million we don't have any qcds here so this 1.6 million is the figure of ttp but then to find the size of the company what we're going to do is add the dividends and we have dividends of 200 000 to give us 1.8 million now to find the size of the company what we now do is we compare augmented profits with the threshold and what we can see here is the threshold is 1.5 million now the 1.5 million relates to a 12-month period but because the period here is 11 months in length what we have to do is time apportion the threshold by multiplying by 11 over 12. and that gives us one three seven five thousand so when we compare profits with the threshold what's going to happen here is you can see augmented profits are more than the threshold and that means the company is large okay and here we can assume that the company was large in the previous period as well so because the company is large we have to pay this tax quarterly so we're going to start by working out the tax now remember dividends are not subject to corporation tax so when we tax profits we're going to tax ttp so i start by taking the ttp which is 1.6 million and i tax that at 19 so remember you'll always be given the rates of corporation tax uh in the exam so just use the relevant rates so perhaps uh if the rates change like in the uk we're planning on changing the rates of tax in a few years the rates of corporation tax are going to go up just use the rates you're given and that gives us 304 thousand so the tax is uh 304 000 but we have to pay this quarterly now the counting period was 11 months in length and it ends on the 31st of march 20. so it ends ends on the 31st of march 20. so what we're trying to say here is the counting period ends on the 31st of march 20 but because it's 11 months in length it started instead of starting on the 1st of may it starts in the sorry instead of starting on the 1st of april it starts on the 1st of may 19. so this period is 11 months in length and the first payment of tax has got to be on the 14th of month seven so the 14th of month seven so what we're saying here is may is month one so we're just going to count seven months on our fingers so may june july august september october november so that means month 7 is november so we're going to start paying the corporation tax on the 14th of november 19. okay so the first payment is due on the 14th of month seven in the period so the first payment as we said is due on the 14th of november 19. we've worked out the corporation tax to be three or four thousand and normally um each payment will be a quarter or 25 percent and the way we compute the 25 is by simply saying 3 over 12. but the idea here is the counting period is only 11 months in length so what we're going to do is we're actually going to pay 3 of 11 off the tax and that gives me 82 909 the second payment on account is due three months later so we're going to count three months from the 14th of november uh so november december january feb guys so it's 14th of feb so a lovely romantic day okay so 14th of feb 20. so you know romantic day for many of you but for this company here it's not a romantic day because on valentine's day the company has to pay corporation tax and the company has got to pay 82 909. the third payment is due three months later which would be the 14th of may 20 and once again we're going to pay 82 909. now with regard to the fourth and final payment the fourth payment remember is due no later than three and a half months after the end of the period so the period ends on the 31st of march 20 so if we add three and a half months to that so we've got march april may june plus half a month gives us 14th of july so because of the three and a half month rule the last payment is due on the 14th of july 20. and on the 14th of july 20 and at this point we've paid three or four thousand times nine over 11. so the final payment will be three or four thousand multiplied by two over eleven which is fifty five two seven three so with regard to large companies uh companies whose profits are more than the threshold instead of them paying corporation tax nine months and one day after the period large companies have to pay tax early and they have to pay the tax during the accounting period and that's why large companies only pay the tax quarterly if the company was large in the previous period as well because obviously you have to start paying the tax during the accounting period and um what we're trying to say here is the first payment is due on the 14th of month 7 and quarterly thereafter but the last payment must be due no later than three and a half months after the end of the period if the counting period is 12 months in length then each installment will simply be 3 over 12 which is 25 percent or a quarter but if the counting period is short less than 12 months then you use the formula 3 over n where n is the number of months in the period so here instead of saying 3 over 12 we said 3 over 11. so we're going to pay three payments of 3 over 11 and the final payment will be 2 over 11. so um this now brings us to the end of our master class and corporation tax so like i said my name is neil decosta um and what i've done is i've written an amazing book called advanced tax condensed and that's got all the technical knowledge you need for advanced tax um in about 150 color pages with multiple images and neil's tips it's an amazing book there's also another book coming out which called taxation condensed which is for uh the more basic uh tax paper okay so there's taxation condensed and then there's advanced tax condensed and uh you know the book comes with free um uk postage and packing and it's available on my website neil decosta.com and you know you could even pay by paypal um in three installments so it's been a pleasure meeting you guys i hope all of you have enjoyed this corporation tax master class and you know look out for more master classes from kaplan so like i said with kaplan uh we're the premier uh uh training organization um for the fight in the finance sector in the uk and we look forward to welcoming you guys um on all our courses okay it's a pleasure meeting you and i hope to see you guys again on future uh masterclasses