Tag: Corporation Tax

Associated Companies

A simple guide with scenarios encountered by SME practitioners.

Why is it important?

a. Corporation Tax rate

Limits of standard rate (25%) and small profits rate (19%) are divided by number of associated companies plus one.

Example 1: How limits are calculated.
Suppose A Ltd and B Ltd are associates. As A Ltd has one associated company B Ltd, limit will be divided by 1+1 = 2; and reduce from £250k (25%) to £125k and £50k (19%) to £25k.

Corporation tax limits are for 12 months, thus where the accounting period is six months with one associated company, limits will be divided by four.

b. Deadline for Corporation tax (CT) payment

`Large` companies i.e. companies whose annual profits exceed £1.5m, must pay CT by quarterly installments. £1.5m threshold is divided by number of associated companies.1

Who are associates?

Two companies are associates when one is controlled by another or both companies are controlled by the same person or persons.

Example 2: One company owned by another.
A Ltd owns 100% share capital of B Ltd. A Ltd and B Ltd are associates.

Example 3: Subsidiaries
A Ltd owns 50.5% of B Ltd. A Ltd also owns 100% of C Ltd. All three companies are associates.

Example 4: Two different companies fully owned by same person.
Both A Ltd and B Ltd are 100% owned by Mr A. A Ltd and B Ltd are associates.

Example 5: Two different companies 50% owned by same person.
Mr A owns 50% shares of A Ltd and B Ltd. A Ltd and B Ltd are not associates. As the condition is that Mr A has to own more than 50% shares to have control.

Example 6: Two people owning more than 50% shares in two different companies. (Usually husband wife companies). Both A Ltd and B Ltd are owned by Mr A and Mrs B 50% each. A Ltd and B Ltd are associates. Mr A and Mrs B need not be relatives. Even if they are friends A Ltd and B Ltd are associates.

Example 7: Concept of smallest irreducible number
A Ltd owned 50% each by Mr A and Mr B. B Ltd owned 1/3rd each by Mr A, B and C. Smallest irreducible number to control A Ltd is A + B. In B Ltd it is A+B, A+C or B+C. As A+B is common in both companies, they are associated companies.

Example 8: Directorship
A Ltd is 100% owned by Mr A; there are two directors in A Ltd, Mr A and Mr B. B Ltd is 50% each owned by A and B; and both A and B are directors in B Ltd. A Ltd and B Ltd are not associates as Control is at the participator or general meeting level, not at the administrative or board level.

Companies owned by relatives?

They will only be counted as associates if there is substantial commercial interdependence among them.

Example 9: Different businesses

A Ltd is 100% owned by husband Mr A operating an accounting business. B Ltd is 100% owned by wife Mrs B operating an architectural business. If no substantial commercial interdependence, they are not associates.

Inclusions:

  • Overseas companies
  • Company associated even for 1 day in the accounting period.

Example 10: Associates acquired or disposed during the year.
A Ltd accounting period runs from 1st April 2024 to 31st March 2025. A Ltd had one 100% subsidiary, B Ltd, which he disposed on 30th June 2024 and a new 100% subsidiary, C Ltd, was incorporated on 1st March 2025. In this case both subsidiaries will be counted.

Exclusion

  • Dormant companies – usually passive holding companies.

    Example 11: Dormant company
    A Ltd’s year end is 31s Jan 2025. B Ltd,100% subsidiary of A Ltd, is incorporated on 29th Jan 2025. B Ltd commences trading on 15th Feb 2025. B Ltd will not be counted as an associate for A Ltd the year ended 31st Jan 2025 as B Ltd was associate only for part of the accounting period and was dormant in that part.3


Practitioner’s points:

  • Take care when shortening accounting period of companies as it reduces their limits as well.
  • Date of ceasing and commencing trading will become important; as 1 day trade can reduce limits by half.
  • Ownership percentages become more important.
  • Group profits can be shifted via intra-group sales and management charges.4

Notes:

  1. CTM92520
  2. 14.12.5 Tax Planning : Taxation of Small businesses by Malcolm James.

Further readings:

  1. TAX guide 02/23: Associated companies | ICAEW
  2. Associated companies and corporation tax | ACCA Global
  3. AAT FAQs
  4. Taxation of Small businesses by Malcolm James

How Capital Allowance interact with Capital Gains Tax

This article explains how capital allowance effects capital gains calculations.

A common occurrence in trading businesses is sale of plant & machinery or vehicles used in the business. Rules shown below are applicable both in moveable and fixed plant & machinery for a business following accrual based accounting , for business following cash basis see Bonus point 4 below.

Two scenarios could happen:

  1. Disposal proceeds are less than purchase cost – a loss (usual case)
  2. Disposal proceeds are less than purchase cost – gain

We will try to explain these scenarios, by way of an example.

We need to prepare two calculations – one for capital allowance (CA) and other for capital gains.

X is an individual trader for many years. He brings forward main pool expenditure of £40k. In year 1, he buys a van for £20k and a computer for £5k. He claims AIA on all expenditure. In year 2, he sells the van for £12k and the computer for £8k.

We have illustrated below, how these transactions will affect the Capital Allowance and Capital Gains calculations.

Capital Allowance calculation

Year 1                                                                          Main pool                                        
WDV b/fwd                                                                  40,000
Additions                                                                     25,000
AIA                                        25,000                                                              
                                                                                         40,000
WDV 18%                                                                       7,200                                                              
WDV c/fwd                                                                   32,800

Year 2
WDV b/fwd                                                                   32,800
Disposal value                                                             17,000 a
                                                                                          15,800
WDV 18%                                                                      2,844                                                              
WDV c/fwd                                                                   12,956

a. Disposal value = £12k (van) plus £5k (computer), as disposal value is restricted to original purchase cost.

Capital Gains Calculation

Capital gains is only applied on assets if sold above its original purchase price. Thus, van is ignored for Capital Gains.

                                                                                   Computer b         
Disposal proceeds                                                 8,000
Purchase cost c                                                        5,000
Unindexed Gain                                                      3,000
Indexation allowance (estimated)                 (500)
Indexed Gain                                                             2,500

Note:

b. Gain or loss is computed on each asset individually.
c. Capital allowance taken on assets are completely ignored. TCGA 1992 sec 41

Practice notes:

  1. We should keep note of each item added to the pool – date added/purchased and amount added. Date is important as companies get indexation allowance for items purchased before 31st December 2017. Usually, commercial tax filing software will have the facility to record assets individually and calculate indexation allowance.

Source:

  1. Book – Taxation by Alan Melville
  2. Book – Tolley’s Tax Guide para 22.19, 22.46 and 38.4

Bonus:
1. In case X sells a table to his friend for £1k (market value £2k). Disposal value will be £1k if his friend runs a trading business where he can claim Capital Allowances . In case his friend does not run a trading business and cannot claim Capital allowances disposal value will be £2k.

2. In case X gifts the table to his employee, disposal value will be nil. But tax maybe payable by employee under ITEPA 2003.

3. In case X gifts the table to his brother, disposal value will be £2k (market value).

See HMRC Manual CA23250 on disposal values.

4. For business following cash basis accounting – When a asset is disposed off for more than its purchase price, business owner will be taxable on the full disposal value even if it is higher than purchase price. Source ICAEW Tax guide 04/24.

Consultant receiving shares instead of monies

Our client (a limited company) provides consultancy services. Recently they provided services to a company based in Portugal. Portuguese company paid them in shares instead of monies.

Question 1: Whether shares received will be considered trading income?

Answer: 

  1. Corporation tax

Yes, the value of trading income received in non-monetary form is taxable in full as trading income. See section 49A CTA 2009; as inserted by FA 2016. HMRC simply enacts in legislation, 1948 House of Lords decision in Gold Coast Selection Trust Ltd v Humphrey (30TC209). See Explanatory Notes to FA 2016; Volume 1 Page 177.

  • VAT

As services are provided out of UK, VAT is not chargeable. See VAT Notice 741A Section 12.

  • Accounting

As per FRS 105 (micro entities) Section 18 Revenue Clause 18.7:

(b) …at the fair value of the goods or services given up

Conclusion:

Thus, if the client receives shares or any other goods or services, client should value the items received and enter it as trading income in its books.

Question 2: What is the value of shares received?

We asked the client to estimate the number of hours they will spend on this assignment and multiplied it by their usual hourly rate to get the trading income.

Bonus

You may have noticed that client would need to pay corporation tax now on an estimated income, when they have not received any cash funds. These shares are long term investment.

Employee Benefit – life insurance policies for employees

Group life insurance is a common benefit provided by employers, this blog explains its tax implications.

Group life policies are often purchased by employers see IPTM1125

Employees

Group life policies which insure individuals up to the age of 75 and only provide death benefits for the dependants of that person will not give rise to income tax charges see IPTM7020

For Full guidance see IPTM 7015 to IPTM 7060

A contribution paid by an employer in respect of their employee scheme is not taxable as earnings for the employee concerned; see PTM031100

Employers

Tax relief on employer contributions is given by allowing contributions to be deducted as an expense in computing the profits of a trade and so reducing the amount of an employer’s taxable profit ;
see PTM043100 and see BIM45525

Tax relief can only be given on contributions that have actually been paid. The amount shown in the profit and loss account in respect of the obligations of defined benefit schemes may be substantially different from the amount of contributions paid to the scheme, but it is only the amount actually paid that can be considered for tax relief. see PTM043200

Contributions in respect of members who are directors who are shareholders or connected to a controlling director

Broadly, the employer’s contribution will be wholly and exclusively for the purposes of the trade if the contribution paid in respect of a controlling director or a connected employee is in line with a contribution that would have been made for an unconnected employee in a similar situation.

Case law – Beauty Consultants Ltd v Inspector of Taxes [2002] SpC 321 see BIM45530

General guidance on employer’s contributions in the Business Income Manual at BIM46000.

Loan to directors and Shareholder

These rules are covered under Corporation Tax Act (CTA) 2010: Section 455 to 465

Section 455 will apply to loans to directors who are also shareholder (owning 5% or more) and to shareholders who are not directors. It does not apply to directors who are not shareholders.

When was the loan repaid Tax Position
Within 9 months of Year end (YE) No Tax
After 9 months of YE Tax @ 32.5% (previously use to be 25%)

Relief given in the YE when loan re-paid. Relief should be claimed within 4 years.

 

Tax avoidance measures:

Section 464C introduced w.e.f. 20 March 2013. Basically any window dressing is set aside. For more information see CTM61615.

 

Repaying loan via dividends/salary/bonus is not window dressing.

 

Points to be aware:

1)     No non-business expenses posted as business expense.

2)     All employment income has appropriate tax and NIC deducted.

3)     If DLA balance anytime during the year over £10k. It will be treated as beneficial loan and showed by reported in P11D and NIC Class 1A paid.

Please note this limit does not apply to Sec 455 charge.

To avoid this , one can issue interim dividends to ensure loan balance does not go over £10k anytime during the year.

Useful links:

Agent toolkit