Corporate Tax rate for 2017

[john@UKCA]

Pre - Trading Expenditure

Specific deductions: pre-trading expenditure: scope

S57 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), S61 Corporation Tax Act 2009 (CTA 2009)

The above legislation provides relief in respect of certain expenditure of a revenue nature incurred for the purposes of a trade, profession or vocation before it is commenced.

The relief extends only to expenditure which:

is incurred within a period of seven years prior to the commencement of the trade, profession or vocation, and
is not allowable as a deduction in computing the profits of the trade, profession or vocation but would have been so allowable if incurred after the trade had commenced.

The qualifying pre-trading expenditure is treated as incurred on the day on which the trade, profession or vocation is first carried on. It therefore enters into the calculations of the profit or loss for the first year of assessment in which the trade profession or vocation is first carried on. No separate claim for loss relief is required

Therefore, the ‘wholly and exclusively’ test (see BIM37000) still has to be satisfied for the purposes of the relief and no relief can be allowed for capital expenditure (see BIM35000). For the purposes of claiming capital allowances there are special provisions in S12 Capital Allowances Act 2001 to treat pre-trading capital expenditure as incurred on the date trading starts, for the purposes of capital allowances (see CA23020).

[WordIsBond]

Activities or expenditure to do with setting up a business that are not considered trading by HMRC for Corporation Tax purposes include:

preliminary activities such as writing a business plan or negotiating contracts
preliminary expenditure such as incurring costs with a view to deciding whether to start a business

Good post.

Presumably pre-trading expenses can still be deducted in his first year of CT? Otherwise, he may be worse off by losing the deduction even if he gets a lower rate for the first couple months.

Does the date on which OP registered with HMRC for CT come into play here? If he's already registered with an earlier date, and then goes back and says, "Actually, that's the wrong date, I wasn't trading yet," is that going to create a problem for him?

[john@UKCA]

Corporation Tax Accounting period (CATP)

I think I should be paying 19% tax on all my profits but my friend says I will pay proportions of days from Feb to April times 20% and the rest of the year times 19%. It's all confusing to me. Why should I be paying 20 for the period I had no income?

Actually I think you right here, your company was effectively preparing to carry on business for the period 1 Feb 17 to mid April 17 but did not actually become 'active' for corporation tax purposes until the start of its first contract in April 17.

The first CATP for the company therefore covers the period mid April 17 to Feb 18 which will be taxed at the 19% rate.

What is not active for Corporation Tax purposes

There are a number of circumstances where HMRC would generally consider your company or organisation not to be active for Corporation Tax purposes.
When your company or organisation has not yet started trading

HMRC considers that your company or organisation has not yet become active or started trading if it has not yet engaged in any business activity (business activity means carrying on a trade or profession, or buying and selling goods or services with a view to making a profit or surplus).

Your newly-formed company or organisation may not be active for Corporation Tax purposes. However, you may still carry out activities (known as ‘pre-trading activities’) or incur costs (known as ‘pre-trading expenditure’) before you officially open your business without HMRC deeming that you have started trading.

Activities or expenditure to do with setting up a business that are not considered trading by HMRC for Corporation Tax purposes include:

preliminary activities such as writing a business plan or negotiating contracts
preliminary expenditure such as incurring costs with a view to deciding whether to start a business

[jamesbrown]

Thank you for all the replies I didn't get notifications about the updates. My first contract leading to profits started in mid April in the tax year of 2017 when the rate was 19%. Before then I had only costs. According to common sense I should only be paying one tax rate of 19%. I'm losing faith in my accountants.

But your profits all arose in one accounting period, and CT is charged by accounting period. Within that accounting period, the rate varies by financial year, because your accounting period is not aligned with the financial year. The methodology for determining the proportion charged to one CT rate or another within your accounting period is based on the number of days in each financial year. Within your accounting period, you had some days that fell within a financial year at 20% CT (even though you didn't work on those days), so some of your profits for that year will be charged at 20%.

It's partly my fault for adding to the confusion about when the profits arose, but they all arose within one accounting period - apologies for that. Your accountant (or friend?) is correct.

More info here:

https://www.gov.uk/hmrc-internal-man...anual/ctm01405

[zaba]

Thank you for all the replies I didn't get notifications about the updates. My first contract leading to profits started in mid April in the tax year of 2017 when the rate was 19%. Before then I had only costs. According to common sense I should only be paying one tax rate of 19%. I'm losing faith in my accountants.

[jamesbrown]

It is the case if your profits are time apportioned, which I think is the normal way of doing things. It's how FreeAgent calculates it and I'm pretty sure it's how my accountants do it too, with no reference when specific income was accrued:

https://support.freeagent.com/hc/en-...nancial-years-

Right, I think I was confusing myself on reflection. I guess there are two separate issues here. One is the proportion of profit arising in one accounting period or another and the other is the proportion of the accounting period in one financial year or another. The OP is only dealing with the latter problem, because he only has one accounting period. CT is imposed by financial year, but charged by accounting period. You first need to work out when the profit arose w/r to a specific invoice, which may cross financial years and may cross accounting periods, and then need to apportion the accounting period by financial year in order to compute the correct CT proportion for the two financial year periods within the accounting year.

[TheCyclingProgrammer]

I think you're misreading what his friend is suggesting. The suggestion seems to be that the profits are apportioned for the split year by time period either side, regardless of when the profits were accrued, which is not the case.

It is the case if your profits are time apportioned, which I think is the normal way of doing things. It's how FreeAgent calculates it and I'm pretty sure it's how my accountants do it too, with no reference when specific income was accrued:

https://support.freeagent.com/hc/en-...nancial-years-

[jamesbrown]

Your friend is right.

But what difference does it make? You had no income, so no profit, so no tax to pay for that period

I think you're misreading what his friend is suggesting. The suggestion seems to be that the profits are apportioned for the split year by time period either side, regardless of when the profits were accrued, which is not the case.

OP: you will pay CT on the profits accrued within the 20% period at the 20% rate. You will pay CT on the profits accrued within the 19% period at the 19% rate. Profits accrued is not the same as invoice raised or paid, but when the work was done that led to the profit.

[DeludedKitten]

I think I should be paying 19% tax on all my profits but my friend says I will pay proportions of days from Feb to April times 20% and the rest of the year times 19%. It's all confusing to me. Why should I be paying 20 for the period I had no income?

Your friend is right.

But what difference does it make? You had no income, so no profit, so no tax to pay for that period

[zaba]

I opened my limited company on 1st of Feb 2017.
My first profits came to my corporate account in May 2017 for the period from mid April.
My financial year spreads across 2 fiscal years: 2016-2017 when the tax rate was 20% (and I had no income or even a contract in place ) and 2017-2018 when the tax rate was 19% (and I recorded all my income).

I think I should be paying 19% tax on all my profits but my friend says I will pay proportions of days from Feb to April times 20% and the rest of the year times 19%. It's all confusing to me. Why should I be paying 20 for the period I had no income?