Corporation tax for ATX-UK

Part 1 of 4

This is the Finance Act 2023 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2024 to 31 March 2025. Candidates sitting ATX-UK after 31 March 2025 should refer to the Finance Act 2024 version of this article (to be published on the ACCA website in 2025).

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.

This is not an introductory article: it is relevant to students coming to the end of their studies and finalising their preparations to sit the exam. It does not include comprehensive explanations of the rules but assumes a reasonable knowledge.

This article is intended to be read proactively – ie statements made should be confirmed as true by reference to your understanding or to a relevant study text. This approach will enable situations to be analysed from first principles rather than by reference to a rigid set of memorised planning points.

The tax rates and limits for financial year 2023, ending on 31 March 2024, are used throughout this article.

Early years

Kai Milford and his friend, Fay Dusky, formed GF Ltd on 1 April 2022. 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 2023. As a result, its taxable total profits, after paying salaries to Kai and Fay, were only £40,000.

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 2023 would have been £7,600 (£40,000 x 19% as augmented profits do not exceed £50,000).

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
• Corporation tax – Groups and chargeable gains for ATX-UK

Written by a member of the ATX-UK 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 the 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.