Corporation tax for ATX-UK

Part 4 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).

So far in this article GF Ltd has begun trading, acquired an additional business in the UK and started a new manufacturing business overseas. In this part we consider the implications if the rate of corporation tax in Marineland was only 8%, such that the corporation tax liability in Marineland could be less than three quarters of the equivalent UK liability. It would then be necessary to consider the application of the CFC rules.

The CFC regime

As has already been noted, a CFC is a non-UK resident company that is controlled by UK resident companies and/or individuals. The CFC regime imposes a UK corporation tax liability, a ‘CFC charge’, on the corporate owners of a CFC where UK profits have been artificially diverted from the UK.

In determining whether or not there will be a CFC charge there are two matters to consider:

• for there to be a CFC charge the CFC must have ‘chargeable profits’, and
• there will not be a CFC charge if one or more of the exemptions is available to the CFC.

Chargeable profits

Chargeable profits are those income profits (not chargeable gains) of the CFC, calculated using UK tax rules, which have been artificially diverted from the UK.

The exemptions

Even though a CFC may have chargeable profits, there is no CFC charge if one of the following exemptions applies.

• Exempt period exemption – This 12-month exemption from the CFC rules can apply where a non-UK resident company is acquired by UK resident persons, such that it becomes a CFC. For this exemption to be available the company must continue to be a CFC for the accounting period following the exempt period but it must NOT be subject to a CFC charge for that period.
• Tax exemption – As has already been noted, the tax exemption applies where the local tax paid by the CFC is at least 75% of the amount of tax the CFC would have paid in the UK if it were UK resident.
• Excluded territories exemption – This exemption applies where the CFC is resident in one of the territories specified as being excluded, and certain conditions relating to its tax treatment in that territory are satisfied. This removes the need to prepare the detailed calculations necessary in respect of the tax exemption where the CFC is located in a tax regime with similar tax rates to the UK.
• Low profits exemption – This exemption applies where the CFC’s profits do not exceed £500,000 and its non-trading income does not exceed £50,000.
• Low profit margin exemption – This exemption applies where the CFC’s accounting profits are no more than 10% of its expenditure.

The CFC charge

If none of the exemptions is available, a CFC charge will be levied on UK resident companies (not individuals) entitled to at least 25% of the CFC’s profits. The charge is calculated as follows:

• UK corporation tax at the main rate (25%) on the proportion of the CFC’s chargeable profits (the profits artificially diverted from the UK) to which the UK resident company is entitled
• less a deduction for an equivalent proportion of any creditable tax.

Creditable tax consists of:

• any double tax relief that would be available to the CFC if it were UK resident
• any income tax suffered by the CFC on its income, and
• any UK corporation tax on the income of the CFC that is taxable in the UK.

Applying the rules to an overseas subsidiary of GFL

If none of the exemptions is available, the CFC charge will be levied on the company’s chargeable profits, ie those profits which have been artificially diverted from the UK. If the chargeable profits are assumed to be £80,000, the CFC charge levied on GF Ltd will be calculated as follows.

Conclusion

When answering a question in the exam, any reference to CFCs (or any other technical issue for that matter) must be in accordance with the requirements and the facts of the question. Accordingly, if a question concerned the proposed investment in Marineland as set out in part 3 of this article, the consideration of CFCs should be brief as, due to the rate of corporation tax, any subsidiary in Marineland would not result in a CFC charge due to the tax exemption.

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 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.