Company chargeable gains

1 Gains, indexation and losses

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In this TX lecture: The damaged-asset rules are not examined in FTX; compensation for lost or destroyed assets remains examinable.

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In this TX lecture: Deriving indexation factors is not examined in FTX; use the factors supplied in a question.

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2 General

Unlike individuals, where income tax is paid on income and capital gains tax is paid on taxable gains (i, e, two separate taxes), a company's chargeable gains are included in the calculation of Taxable Total Profits (TTP) and one tax, corporation tax, paid on them along with income.

A UK resident company is chargeable on its worldwide gains and may dispose of a chargeable asset not only by sale but also on the loss or destruction of an asset.

All assets are chargeable assets unless they are specifically exempt.

2.1 Calculation of gains and losses for companies

The calculation of the chargeable gains and allowable losses is much the same as for individuals, with the exception that companies may be entitled to deduct an additional 'cost' known as the 'indexation allowance'.

2.2 The indexation allowance

The indexation allowance (IA) uses the rise in the retail price index (RPI) as an allowance for the effects of inflation.

Indexation is frozen at December 2017. Earlier eligible expenditure may still get the supplied factor up to that date; no further indexation accrues after it.

The calculation of the IA for each element of cost is as follows:

Relevant indexation factor × capital expenditure

The indexation factor is applied to the acquisition cost (including incidental costs of acquisition) and enhancement costs separately (as these will be incurred on different dates).

You should use the indexation factor provided in the question for the movement from the month of expenditure to the month of disposal (or December 2017 if disposed of after that date).

The IA is available to reduce a gain but cannot create or increase a loss.

Unused indexation allowance is wasted.

If the RPI falls, rather than increases, between the date of acquisition and the date of disposal, then the indexation allowance is £ Nil.

3 Gains and losses

1. Capital gains are chargeable to corporation tax.

2. Capital losses only arise when net proceeds are less than allowable cost.
   REMEMBER: Indexation allowance may not be used to either create or increase a loss.

3. If capital gains and losses arise in the same accounting period, they are netted off.

If the resultant figure is a gain, it is charged to corporation tax.

If the resultant figure is a loss, it is carried forward and set against future capital gains.

1. Capital losses may only be relieved against chargeable gains, not income.

4 Share matching rules for companies

In this TX lecture: Takeovers and share exchanges are not examined in FTX.

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Disposal of shares gives rise to a chargeable gain or allowable loss. It is difficult however to identify which shares are being sold, and therefore establish the cost of those shares sold where it is only some of the shareholding being sold and the shares had been acquired over a period of time at different costs.

It is necessary to identify the shares sold by using matching rules as laid down by HMRC which, are not exactly the same as the matching rules that used when dealing with the same problem for individuals disposing of shares. Thus the shares sold are deemed to be disposed of in the following order:

• shares acquired on same day

• shares acquired in previous 9 days

• shares contained within the share pool which is made up of any shares acquired more than 9 days previous.

The share pool records the number and cost of shares for each acquisition and disposal as it did for individuals, but also has to deal with the fact that companies are entitled to indexation allowance.

Thus whenever the pool changes value (i.e.shares are purchased (including a rights issue) or sold) the pool must be updated for indexation and so the pool has an additional column, 'Indexed Cost' and indexation is kept track of within the pool.

When shares are disposed of, the average cost is deducted from the pool (as for individuals) and for companies the average indexation must be calculated too. This is calculated as the difference between the figures for average cost and average indexed cost which are deducted from the 'Indexed Cost' column.

Indexation factors will be given in the question and indexation allowance is frozen at December 2017.

5 Bonus issues

1. A bonus issue increases the number of shares held with no corresponding increase in cost.

2. The bonus shares are simply added to the number of shares column in the pool.

3. As a bonus issue does not change the value of the pool, so do not index the pool before adding in the number of shares in the bonus issue, but remember that the next time the pool changes value, the indexed cost in the pool must be indexed from the date of the last indexation that took place, not the date of the bonus issue.

6 Rights issues

1. A rights issue again increases the number of shares held, but this time there is also a cost associated with the shares. It is therefore dealt with in the same way as any other acquisition.

2. The indexed cost in the pool is indexed to the date of the rights issue. The rights shares are added to the number of shares column and the cost is then added to both the cost and indexed cost columns in the pool.

Apply same-day acquisitions, then acquisitions in the preceding nine days (earliest first, FIFO), then the pool. The company rule looks backward, unlike the individual 30-day look-forward rule. Pool indexation is frozen at December 2017; later acquisitions add cost but get no new indexation.

7 Replacement of business assets (Rollover Relief)

7.1 Definition

A gain may be ‘rolled over’ (and the gain deferred) where it arises on the disposal of a qualifying business asset where the sale proceeds are reinvested in another qualifying business asset.

7.2 Qualifying assets

Both the old and new assets must fall into one of the following categories:

1. Land and buildings

2. Fixed plant and machinery

Note that goodwill is not a qualifying asset for companies.

Both the old and new assets must be used in a trade of the vendor.

7.3 The relief

1. The relief works in the same way for companies as it does for individuals, with the exception that indexation allowance may be available.

2. The indexed gain is not taxed immediately but is postponed ('deferred') until the company makes a disposal of the replacement asset without further replacement.

3. The postponement is achieved by deducting the gain deferred on the old asset from the cost of the new asset.

4. Where the disposal proceeds of the old asset are not fully reinvested, the gain cannot be fully deferred.

5. The replacement asset must be bought in the period 12 months before to 36 months after the disposal of the old asset.

6. A claim must be made within 4 years from the end of the accounting period in which the disposal occurred.

8 Depreciating assets

8.1 Definition

1. An asset with an expected life of a maximum 60 years

2. Fixed plant and machinery

Note: You will only be examined on fixed plant and machinery and leasehold property with a life of 60 years or less.

8.2 Effect

If the new asset is a depreciating asset:

1. The indexed gain deferred is not deducted from the cost of the new asset

2. Instead it is postponed until the earliest of:

   1. the disposal of the new asset

   2. the date the new asset ceases to be used in the trade

   3. 10 years after the new asset was acquired

1. When the replacement asset is a depreciating asset, the gain is deferred as in (b) above. However, if a non-depreciating asset is purchased before the deferred gain crystallises, the original gain may be rolled over against the cost of the new, non-depreciating asset and will only crystallise on sale of the non-depreciating asset.