F6 Taxation (UK)

Section A: The UK tax system Section B: Income tax liabilities Section C: Chargeable gains Section D: Corporation tax liabilities Section E: Inheritance tax Section F: National insurance contributions Section G: Value Added Tax Section H: The obligations of tax payers and/or their agents Taxation (UK)

Designed to give you the knowledge and application of: Corporation tax liabilities D1. The scope of corporation tax D2. Taxable total profits D3. The comprehensive computation of corporation tax liability

Learning outcomes  Compute the corporation tax liability and apply marginal relief. [2]  Explain the implications of receiving franked investment income. [2]

The corporation tax liability and apply marginal relief Tax rates applicable to Corporation Tax Small profits rate Applicable to companies with profits not exceeding the lower limit of the small profits’ rate. Tax is charged at 21%. £300,000 for FY 2010 Main rate Applies to companies whose profits are more than the upper limit of the small profits rate Tax is charged at 28%. £1,500,000 for FY 2010 Continued…

Tax rates Above £1,500,000 £300,000 Small profit rate 28% less Marginal Relief 21% 28% Tax rates £0 Augmented profits Main rate Marginal rate Marginal relief Available to companies whose profits do not exceed the upper limit but more than the lower limit. Upper limit for FY 2010 is £1,500,000. Hence, for companies whose profits lie between £300,000 and £1,500,000, tax rate is applicable at main rate, but tax liability is reduced by Marginal Relief. Refer to Test Yourself 1 on page 386 Continued…

 UK dividends are termed as franked investment income (FII).  They are paid net of 10% tax.  For calculation purposes dividends needs to be grossed up by 100/90. Explain the implications of receiving franked investment income Dividends received From UK company From other than UK company Exempt from corporation tax Not included in the chargeable profits of the receiving company to avoid double taxation Added to taxable total profits to determine the rate of corporation tax rate Continued…

Standard Fraction x (U -A) x N/A U = Upper limit A = Augmented profits = TTP + gross dividend received N = Taxable total profits (i.e. TTP) The fraction is 7/400 Where Marginal relief Company Corporation Tax Liability Marginal Relief Amount reduced by if company’s augmented profits fall between lower and upper limits (i.e. tax liability is calculated at main rate less marginal relief) Refer to Test Yourself 2 on page 387 Continued…

Financial Year Small profits rate20%21% Main rate30%28% Lower limit£300,000 Upper limit£1,500,000 Marginal relief fraction1/ 407/ 400 A long period of account must be split into two accounting periods. The first accounting period is always twelve months long. The rest of the period of account forms the second accounting period.  If the accounting period of the company straddles 31 March for long period of accounts, then the accounting period will fall into two financial years.  If the corporation tax rates, the marginal relief fraction or the lower limit and the upper limit of the companies are different for the two financial years, then the corporation tax liability has to be calculated for each financial year separately. Refer to Test Yourself 3 on page 389 Continued…

RECAP  Compute the corporation tax liability and apply marginal relief. [2]  Explain the implications of receiving franked investment income. [2]