Regulations on Taxable Total Profits and Loan Relationships after UK Company Incorporation

15 Oct

While setting up a company UK, the companies are supposed to pay the corporation tax on their total profits liable to tax for every period of accounting. The corporation tax is not liable to the dividends acquired from either a company residing in UK or offshore company formation UK.

If you are thinking of setting up a company UK, then the definition of company must be clear. A company is defined as any limited or unlimited corporate body or unincorporated association. For example, a sports club. It can be a local setup or an offshore company formation UK.

This blog discusses about the residence of companies, accounting periods, total taxable profits, trading income, property business income and other types of incomes, charity donations and finally long accounting periods.

In which case, is a company resident in UK?

A company that is incorporated in the UK, is said to be a resident company of the UK. A company that is incorporated outside of the UK but its control and management is still performed inside the UK, then it will also be called a company resident in UK.

Periods of Accounting

The accounting period is supposed to be a duration of 12 months, and not more than that. In the case of a period exceeding the 12 months’ time, then it must be divided into two periods of accounting out of which the first period is kept to be 12 months long.

The corporation tax is charged with regard to the accounting periods. The two terms, accounting period and the period of accounting are two different terms. A period of account, that is of 12 months, shorter or longer, is the period during which the company does the preparation of accounts, whereas an accounting period initiates when the company begins trading, or else is now liable to the corporation tax, or right after the preceding accounting period terminates. The accounting period normally ends on the earliest of:

  • The end of company’s period of account
  • The company ceasing or entering to be the part of administration
  • 12 months after it has started
  • The company when stopping or starting its trade
  • The company ending its residence in the UK
  • The start of a company’s winding up
  • The company stopping its liability to the corporation tax

In most of the scenarios, both the accounting period and the period of account of a company will be of the duration equal to 12 months.

Total Profits Liable to Tax

The total taxable profits including the gains and income are the sum of all profits minus a few losses. These profits qualify for the charitable donations.

Computation of Corporation Tax

The calculation of corporation tax takes into account the company’s total income and gains acquired from different sources. The computation of income from each distinct kind of source must be done separately since various rules of computation are applicable for each case. Such rules are defined in the Corporation Tax Act of the year 2009. It is important to note that the dividends acquired from an open limited company UK and a company that is not resident in UK, are excluded from the total taxable profits.

Income from Trade

The company’s income acquired from the trade is extracted from the profit prior to the taxation mentioned in the accounts. Since the laws are for the purposes of income tax, the adjustments that are required to the accounts are similar on a large scale and the companies cannot make use of the cash basis. A company can also demand and apply for a relief for the expenses of the management of their investments. In the case when the shares of an open limited company UK being taken as the assets of trading and not as investments, then all the dividends on the shares will then be taken as for the purposes of tax in the form of trading profits.

As far as the qualifying of charitable donations is considered, this is added back while calculating the adjusted profit, rather, they are subtracted from the total profits.

On an accrual basis, the interest that is acquired from the relationship of trading loan is considered as a part of the trading profits. In a similar manner, the payment of interest that is made on a relationship of trading loan is subtracted with the arrival of the profits of trading.

The expenditure suffered by the company before the trade (within 7 years prior to the commencement of the trade) is considered as an allowable expense that is suffered on the very first day of trade, given the condition that it would be allowable if the company was trading when the expenditure was actually suffered.

The post cessation receipts are also included in the trading income that occurs from a trade that would not be chargeable to tax otherwise.

The income tax principles are followed while calculating capital allowances but there is no restriction for the companies in case of the allowances to keep into account any asset used privately. Rather, the employee or the director earns a benefit of tax.

Income from UK Property Business

The income that comes from a property business in UK is liable to tax and it follows similar rules as in the case of income tax. In a nutshell, the allowances on capital in the case of machinery and plant (furniture excluded) are considered during the computation of property losses or income. Secondly, all the activities in UK related to rent are taken as a single income source and computed in the similar manner as the profits of trading.

However, a property income expenditure does not include the payment of an interest on a loan by a company to improve or buy a property. In this case, the rules of loan relationship will be applicable.

Income from Interest

An interest gross, as a normal practice, is acquired by the UK companies. The interest that is related to the loan relationships of non-trading type is liable to tax and the tax is applied separately on an accruals basis as the interest income.

Random or Miscellaneous Income

A miscellaneous income includes the expenditure and the income that is related to the intellectual property that is not under utilization by any property business or a trade.

Chargeable Gains of the Company

The chargeable gains are a part of the total taxable profits in the case of companies. They are not supposed to make payment of the capital gains tax.

Charitable Donations that Qualify

The charitable donations that qualify or the qualifying charitable donations are to be subtracted from the total profits during the computation of total taxable profits.

Whether it be single donations or regular donations, almost all types of donations by a company of money to charity can be qualified as the charitable donations. There is no requirement of a claim being made in order to treat a payment as a qualifying charitable donation.

Donations that are made to the charities of local type and are suffered exclusively and entirely for the trade purposes are subtracted while computing tax adjusted profits of trading.

Extended and Lengthy Periods of Account

In the case of a company having a longer period of account that extends the duration of 12 months, then it is divided into two accounting periods, the first one being 12 months long and the second duration is the remaining months after separating 12 months’ period.

The rules for the allocation of relevant periods when there occurs a difference between the period of account and the corporation tax periods of accounting, is described below:

  • The calculation of balancing charges and capital allowances is done for each accounting period
  • The allocation of chargeable losses and gains is done to the period in which their realization is performed
  • The division of the property income and the trading income prior to the capital allowances is done based on time
  • The allocation of any other income is done to the period with which it is related. For example, the interest (when it was accrued) to the period. However, the apportion or division of a miscellaneous income is performed based on time
  • The qualifying charitable donations are subtracted in the accounting period in which their payment is made

Relationships of Loan

In the case when a company borrows or lends money, then a loan relationship occurs. The relationships of trading loan are treated as a trading income. The loan relationships that are of non-trading nature are also considered as income of interest.

When a company lends or borrows money, that may include investing or issuing in stock of loan or buying gifts, then it is said to have a loan relationship. In the case where a company lends or invests money, then we call it a creditor relationship. On the contrary, when the company issues securities or borrows money, then we call it a debtor relationship. Both the capital items and the revenue are liable to the rules of loan relationship.

Relationships of Trading Loan

In the case of a company being a part of a loan relationship, for the purposes of trade, or any debits including debt costs and payable interest, that is charged via its accounts are permitted as an expense of trading and hence, are to be subtracted in the computation of profits of trading. Let’s consider the example of a company that pays interest on a loan pulled out to buy machinery and plant, or an office or factory vicinity to be utilized in the trade will be able to subtract the interest that is to be paid for the purposes of tax.

In a similar manner, in the case of the occurrence of any credits that may include an interest income or debt returns, arising on a loan of trading, then these are taken as receipt of trading and are liable to tax as a part of profit of trading. The occurrence of this event is not very common, but in the case of a money lending trade so it will have to abide by the rules for the loan relationships of non-trading genre.

Relationships of Non-Trading Loan

In the case if the company has a loan relationship, but not for the purposes of trade, then the pooling of any credits and debits must be done. Consider the example of a company that pays interest on a loan pulled out in order to buy a property of investment, then it would not be able to subtract the interest from the profits of trading for the purposes of tax, Rather, this debit of non-trading type should be netted off against bank credits and non-trade credits.

A net credit or an income on the pool is to be charged as the income of interest. In the case of a loss or a net deficit, a facility or compensation through relief is available.

The Incidental Costs in the Case of a Loan in Finance

According to the rules of loan relationship, the debits or the expenses are allowed if they are suffered directly:

  • Giving effect to or entering into any of the related transactions
  • Taking measures to make sure that the receipt of the payments according to the relationship of loan or similar transactions
  • Bringing a loan relationship into occurrence
  • Making the payment according to the relationship of loan or similar transactions

A similar or related transaction means any acquisition or disposal (in part or in entirety) of liabilities or rights under the relationship, that includes any occurring from an issue of security keeping in question any debt of money. The categories of incidental costs as mentioned above, are also allowable in the case of the company not entering into the relationship of loan, that is known as the abortive costs. The cost that is suffered directly by manipulating the terms of a relationship of loan are also permitted.

The capital costs also receive the same treatment in the case of taxation.

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