Corporation tax (for Advanced Taxation - United Kingdom (ATX-UK) (P6))

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Part 1 of 4

This is the Finance Act 2017 version of this article. It is relevant for candidates sitting the Advanced Taxation – United Kingdom (ATX-UK) (P6) exam in the period 1 June 2018 to 31 March 2019. Candidates sitting ATX-UK (P6) after 31 March 2019 should refer to the Finance Act 2018 version of this article (to be published on the ACCA website in 2019).

From the September 2018 session, a new naming convention is being introduced for all of the exams in the ACCA Qualification, so from that session, the name of the exam will be Advanced Taxation – United Kingdom (ATX-UK). June 2018 is the first session of a new exam year for tax, when the exam name continues to be P6 Advanced Taxation (UK). Since this name change takes place during the validity of this article, ATX-UK (P6) has been used throughout.

This article follows a company as it begins trading, acquires an additional business, and eventually invests overseas. It sets out the commercial decisions taken by the company and its shareholders at the different stages in the company’s development and summarises the tax implications of those decisions. After reading about each stage in the company’s development, stop and think about the possible tax implications before reading on.

Early years

Kai Milford and his friend, Fay Dusky, formed GF Ltd on 1 April 2016. Kai and Fay each acquired 40% of the company at a cost of £100,000. Kai used a recent inheritance to acquire the shares whereas Fay took out a bank loan for £100,000 secured on her house. The remaining 20% of the shares is owned equally by five unrelated individuals. Kai and Fay work full time in the management of the company. The other shareholders are passive investors.

GF Ltd incurred significant start-up costs during the year ended 31 March 2017. As a result, its taxable total profits, after paying salaries to Kai and Fay, were only £60,000.

The tax implications arising out of these events are:

  • The interest paid by Fay on the loan to acquire the shares in GF Ltd is qualifying deductible interest. This is because GF Ltd is a close company (it is controlled by Kai and Fay, ie by fewer than five shareholders) and Fay owns more than 5% of the company. Qualifying deductible interest is a tax-allowable payment that is deducted in arriving at Fay’s net income.
  • GF Ltd’s corporation tax liability for the year ended 31 March 2017 would have been £12,000 (£60,000 x 20%).

Conclusion

It is always important to identify whether or not a company is a close company. It is then necessary to consider the facts of the situation in order to determine which, if any, of the implications of a company being close are relevant.

Part 2 of this article reviews the implications of the company acquiring the business of another company.

Note: The corporation tax issues relating to groups are considered in two further articles:

  • Corporation tax – Group relief (for ATX-UK (P6))
  • Corporation tax – Groups and chargeable gains (for ATX-UK (P6))


Written by a member of the ATX-UK (P6) examining team

The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.

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