Part 2: Calculation of liability in respect of profits
Overview
23.This Part is about the calculation of liability. Chapter 1 provides an introduction to the Part.
24.Chapter 2 is about the rates at which corporation tax is charged.
25.Chapter 3 is about the calculation of the amount of profits to which rates of corporation tax are applied.
26.Chapter 4 is about currency.
Chapter 1: Introduction
Section 2: Overview of Part
27.This section is new.
28.Subsection (5) explains that the final stages of the calculation of the corporation tax payable by a company are found in paragraph 8 of Schedule 18 to FA 1998.
Chapter 2: Rates at which corporation tax on profits charged
Section 3: Corporation tax rates
29.This section introduces the rates of corporation tax. It is based on section 2 of CTA 2009.
30.The main rate has to be set annually. But the small profits rate may, in principle, be set at any time. In practice the annual Finance Act sets the small profits rate (and the associated limits and fractions, if they change) for the financial year immediately preceding the year for which it sets the main rate. So, for instance, section 7 of FA 2009 set the main rate for financial year 2010; and section 8 of the Act set the small companies’ rate (renamed small profits rate in this Act) and fractions for the financial year 2009.
Chapter 3: Calculation of amount to which rates applied
Overview
31.This Chapter explains how to calculate the company’s profits on which corporation tax is chargeable for an accounting period. These are the profits referred to in the first step in paragraph 8(1) of Schedule 18 to FA 1998. The applicable rates of corporation tax set out in the preceding Chapter of this Act are applied to the amount of these profits.
32.In this Act these profits are known as “taxable total profits”.
33.The main corporation tax self-assessment provisions in Schedule 18 to FA 1998 have not been rewritten.
Section 4: Amount of profits to which corporation tax rates applied
34.This section sets out the stages by which the profits of a company on which corporation tax is chargeable are calculated. Subsections (1) and (2) are new and subsections (3) and (4) are based on section 834C of ICTA.
35.The starting point is to find a company’s total profits. Subsections (3) and (4) rewrite the definition of total profits in section 834C of ICTA. Section 834C was inserted by CTA 2009 into ICTA: it is based on section 9(3) of ICTA which was repealed by CTA 2009.
36.Step 1 in subsection (3) refers to the amount in respect of which the company is chargeable under the charge to corporation tax on income after any reduction required to give effect to relief from tax. This covers reliefs that reduce one or more of the components of income subject to the charge. Relief for trade losses brought forward against trade profits of the subsequent accounting period is an example of a relief that operates against a single component of income. Reliefs that potentially operate against more than one component of income include relief under section 68 of the Act for losses on disposals of certain shares (see section 71(1)) and relief under section 457 of CTA 2009 for non-trading deficits from loan relationships.
37.Similarly Step 2 refers to the amount to be included in respect of chargeable gains (under section 8 of TCGA) after any reduction required to give effect to relief from tax. This caters for reliefs that operate to reduce the amount of chargeable gains that feeds into the total profits calculation:again relief under section 457 of CTA 2009 for non-trading deficits from loan relationships is an example of a relief that potentially operates in this way.
38.Under subsection (4) the calculation of total profits is subject to the provisions of the Corporation Tax Acts. One example of the kind of qualification covered by this subsection is provision of the kind to be found in Chapter 3 of Part 11 of the Act, under which certain income of charitable companies is not taken into account in calculating total profits (see, for example, section 478(1)).
39.“Total profits” is defined for the purposes of the Corporation Tax Acts by reference to section 4(3) and (4): see sections 1118(5) and 1119.
40.Subsection (2) completes the calculation of the profits of a company on which corporation tax is chargeable for an accounting period, in this Act the company’s “taxable total profits”. Step 1 starts with the total profits of the period. Step 2 provides for the deduction of any amounts which can be relieved against the total profits of the period.
41.The reference to amounts which can be relieved allows for particular rules about deductions from total profits such as those that apply to the calculation of ring fence profits from oil activities.
42.The qualification in subsection (4) for subsection (2) takes into account non-standard provision for relief such as the relief under section 459(1)(b) of CTA 2009 for non-trading deficits from loan relationships. Under section 462, relief is given by way of set off against components of total profits, but only after certain reliefs listed in section 463(5) of CTA which operate against total profits.
43.In Schedule 1 there is an amendment to section 1219(1) of CTA 2009 which deals with relief for expenses of management. In section 1219(1), which is based on section 75(1) of ICTA, the reference is to the deduction being made in calculating total profits. The amended subsection refers to the deduction being made from total profits.
44.Under the new section 1219(1A), the deduction for management expenses is given priority over all other deductions made in the calculation of taxable total profits.The effect of the law is not changed by this amendment and the revised wording accords with both current interpretation and practice.
Chapter 4: Currency
Overview
45.This Chapter contains a basic rule about the currency in which companies calculate and express their income and chargeable gains (see section 5) followed by four special rules (sections 6 to 9) which apply in certain cases, and rules dealing with how to convert losses carried backwards or forwards. It is based on sections 92 to 92E of FA 1993.
46.References in this Chapter to a company’s “functional currency” are to the currency that is most commonly used in the general economic and business environment in which the company operates – so for a company operating primarily in the UK the “functional currency” is sterling.
47.Schedule 2 contains rules that cover circumstances where a company elects that changes made by FA 2009 should only apply to accounting periods beginning on or after the date on which FA 2009 received Royal Assent, instead of on or after 29 December 2007.
Section 5: Basic rule: sterling to be used
48.This section states the basic rule for the preparation of company tax returns. It also provides signposts to the four special rules, which detail how a company is to comply with the basic rule in certain cases. It is based on section 92 of FA 1993.
Section 6: UK resident company operating in sterling and preparing accounts in another currency
49.This section sets out the first special rule. It is based on section 92A of FA 1993.
50.This special rule applies to a UK resident company that prepares its accounts in a currency other than sterling and whose functional currency is sterling (see subsection (1)), and which has prepared its accounts in accordance with GAAP.
51.When this special rule applies, profits or losses (adjusted to comply with corporation tax rules) must be calculated in sterling.
Section 7: UK resident company operating in currency other than sterling and preparing accounts in another currency
52.This section sets out the second special rule. It is based on section 92B of FA 1993.
53.This special rule applies to a UK resident company whose functional currency is not sterling (see subsection (1)(b) and (c )), that prepares its accounts in a currency that is different from its functional currency and which has prepared its accounts in accordance with GAAP. It is immaterial whether the currency used to prepare the accounts is sterling or another currency.
54.When this special rule applies, the company’s profits or losses (adjusted to comply with corporation tax rules) must be calculated in the functional currency. The resulting amount of those profits or losses must then be translated from the functional currency into sterling (see subsection (2)).
Section 8: UK resident company preparing accounts in currency other than sterling
55.This section sets out the third special rule. It is based on section 92C of FA 1993.
56.This special rule applies to a UK resident company whose accounts currency is not sterling, but which is not subject to the special rule in either section 6 or section 7. This rule applies, for example, if the company’s functional currency is the same as the currency used to prepare the accounts.
57.When this special rule applies, profits or losses (adjusted to comply with corporation tax rules) must be translated from the accounts currency into sterling.
Section 9: Non-UK resident company preparing return of accounts in currency other than sterling
58.This section sets out the fourth special rule. It is based on sections 92C and 92E of FA 1993.
59.This special rule applies to a non-UK resident company which trades in the United Kingdom through a permanent establishment, and which in the preparation of its return of accounts for the permanent establishment has prepared its accounts in a currency which is not sterling.
60.When this special rule applies, profits or losses (adjusted to comply with corporation tax rules) must be translated from the accounts currency into sterling.
Section 10: The equivalent in another currency of a sterling amount
61.This section provides the method of determining the “appropriate exchange rate” to be used for conversion of sterling amounts into another currency where required by section 7, 8 or 9. It is based on sections 92B, 92C and 92E of FA 1993.
Section 11: Sterling equivalents: basic rule
62.This section sets out the method for translating an amount from a non-sterling currency into sterling where required by section 7, 8 or 9. It is based on sections 92D and 92E of FA 1993.
63.This section is subject to special rules dealing with losses carried forwards or backwards.
Section 12: Sterling equivalents: carried-back amounts
64.This section sets out how a loss is to be converted into sterling from another currency in order to establish the sterling amount of a carried-back loss. It is based on section 92DA of FA 1993.
Section 13: Sterling equivalents: carried-forward amounts
65.This section sets out how a loss is to be converted into sterling from another currency in order to establish the sterling value of a loss carried forward to a later period. It is based on section 92DB of FA 1993.
Section 14: Carried-back amounts
66.This section applies where a company accounts in sterling or identifies sterling as its functional currency, but carries back a loss to an accounting period where it computed its profits and losses for tax purposes in a currency other than sterling. It is based on section 92DC of FA 1993.
Section 15: Carried-forward amounts
67.This section applies where a company accounts in sterling or identifies sterling as its functional currency, but carries forward a loss to an accounting period where it computes its profits and losses for tax purposes in a currency other than sterling. It is based on section 92DD of FA 1993.
Section 16: Sections 13(2) and 15(5): profit against which carried-forward amount to be set
68.This section provides interpretation of what is meant by the profit in a later period against which a loss is to be set off. It is based on section 92DE(3) and (4) of FA 1993.
Section 17: Interpretation of Chapter
69.This section provides interpretation of a number of terms used in the Chapter. It is based on sections 92DE and 92E of FA 1993.
