Filing Corporation Tax Return for a company that only has investment income

Filing Corporation Tax Return for a company...

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I have two new investment company clients and need to prepare both accounts and corporation tax returns for these. 

The first Ltd Company has a small shareholding in another small unlisted limited company (less than 1%) and the only income received is via dividend income (with tax already deducted).

The second small Ltd company is a partner in an LLP and the only income received is via profit distribution in the LLP.  The Ltd Company was in existence prior to the change in legislation for LLP Corporate Partners.  In essence it is an investment company as the only income that it receives is via profit distribution from LLP. 

I have two questions

what is the correct classification of these companies (i.e. they are not trading, they are investment but what category do they fall under)? and

what low cost software is available for filing the corporation tax return for both these entities.  As a small practice I cannot afford expensive software, especially where it will be seldom used. 

Replies (4)

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By Paul Soper
27th Feb 2015 15:35

Research?

I'd suggest you download a copy of the form CT600 and the guide.  In the guide you find the answer to most of your questions - for example concerning company type you'll find this..

1 Unit trust or open­ended investment company (please see CTM48000). Type 1 should
not be entered by non­exempt unauthorised unit trusts (NEUUTs) that come within the
charge to CT from April 2014.
2 Close investment­holding company (please see CTM60700).
3 Company in liquidation which is chargeable at the main rate following the first
period after liquidation (please see CTM60780).
4 No longer used.
5 Insurance (policyholders' share of profits charged at a rate equivalent to the basic rate
of Income Tax under S88 Finance Act (FA) 1989).
6 Members' club or voluntary association (please see CTM40105 and CTM41305 and
the Business Income Manual (BIM) at BIM24200).
7 Property management company (please see BIM24782).
8 Charity or owned by a charity (please see CTM40050).
9 Real Estate Investment Trust C – residual company (please see the Guidance on Real Estate
Investment Trusts (GREIT) at GREIT01040).
10 Real Estate Investment Trust C – tax­exempt company (please see GREIT01040).

 

You first company is type 2, the other isn't and so the space should be left blank.

Company no 2 is a member of an LLP and whilst you might regard this as a stream of investment income it depends on the activity of the LLP.  LLPs are companies but whilst active they are taxed as though they were a partnership - there will be a partnership return which you should obtain a copy of, that will contain a partnership statement which will detail the type of income generated and you return it in accordance with that description.

You can file the return on line

 

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Replying to Montrose:
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By MaryFranks
02nd Mar 2015 13:19

CIHC

Paul, most grateful for your guidance.  I am clear on Company 2.  I have been reading the guidance and links on 1 and still have some questions regarding CICH and

1. calculating the income to report,

2. Acceptable expenses and

3. the correct category for recording the income.

 

In regard to 1 I shall use an example to help me explain d understand

Company A issues a dividend certificate to  Company B showing net Dividend of £10,000 with a notional tax credit of £1,111.11.  Company A would however have had PBT of £12,500 in order to issue a Dividend of £10,000.  Hence tax already paid is £2,500. Is this correct?

Assuming this s correct and Company B has costs of £1,800 against its only income as above of £12,500, Company B will have PBT of £10,200.  The CIHC tax due (at 23% for 13/14) is £2,346.  Am I right in thinking that no further tax is due and that it is possible to claim a tax refund?

In regard to expenses is it reasonable to pay a Director a small salary of £7000 against gross income of £58,000?

And my final question - HMRC software cannot be used to file CIHC.  In using commercial software is it correct to record the gross income under Other Operating Profit, Franked Investment Income  or should it be somewhere else?

 

 

 

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By Paul Soper
02nd Mar 2015 14:55

Simple solution

A qualifying distribution made by one UK company to another is exempt from CT, you don't have to consider the amount unless it would take you into a higher band of charge by reference to other income (and that ceases to apply from 1 April onwards.  The only way in which that receipt would be potentially chargeable to CT is if the distribution was in connection with a tax avoidance scheme.  The gross equivalent of a dividend is Franked Investment Income but since 2008 (when the exemption was extended to overseas as well as UK dividends) it requires disclosure but no more.  There is NO liability on dividends even if the company is a CIHC.

Then you throw in "is it reasonable to pay a Director a small salary of £7000 against gross income of £58,000" - where did the £58,000 come from?"  The answer is that it is reasonable to pay whatever the company wants to pay provided for the purpose of the company's business (and administering a 1% holding doesn't sound like it involves a lot of work, however the director must still comply with statutory duties) but dividend income is still exempt from CT...

 

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By MaryFranks
02nd Mar 2015 16:48

Simple Solution

Thanks again.

 By way of background I took this client over from another Accountant in 13/14 and the profit distribution for that year was as per the example.  However in 14/15 the profit distribution will be closer to £58000 and whilst I believe there is no benefit in drawing salary the client has insisted on doing so as advised by a previous accountant (following your comments this in fact means he will be paying more tax than he needs to).  The client also has a salaried position at the higher tax rate elsewhere and the structure was set up to enable him to hold the reserves for future years (retires in 4-5 years) when his tax rate will be lower. 

I am still unclear as to the value to report as income on the Ltd Co Accounts.  I am assuming that it should be recorded as franked investment income but would appreciate confirmation on this and whether the value is £11,111.11.

 

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