Our tax preparation specialists tell you all how to calculate your Corporation Tax if your company disposes of business assets
At DSR Tax Refunds Ltd, we know that working out your company’s finances is hard work, and that’s before you have to deal with any chargeable gains. That’s why our experts want to help make life as easy as possible for you by sharing our specialist knowledge with you. So, whether you are wanting more information about VAT or need to know about charitable tax relief, our handy guides are here to help. All our information is based on HMRC sources, so you can rest assured that these guides are filled with helpful and accurate information.
Corporation tax and asset disposal
If your company sells a business asset for a profit (or somehow makes a profit on its disposal), you will usually be required to pay Corporation Tax on that profit. The profit is also called a ‘chargeable gain’.
Company assets are items owned by your company (usually large or expensive items which will be owned for a period of time, rather than things which are used and discarded such as printer toners or envelopes). Assets include items such as equipment, machinery, land and property as well as financial investments such as shares.
Who has to pay Corporation Tax on chargeable gains?
You will be required to pay Corporation Tax on chargeable gains if your organisation is one of the following:
- A limited company
- A foreign company with a branch or office in the UK
- Most types of unincorporated associations, like clubs or co-operatives
How do you work out and report your gain?
Firstly you will need to work out your gain and that will help you determine whether you will have to pay any tax on it.
The gain is usually the difference between what you initially paid for the asset and what you sold it for. If you gave it away or sold it for less than it was worth the help the buyer, you will have to use the market value of the asset rather than what you got for it. You are allowed to deduct your own costs from the profit, so if you had any Stamp Duty to pay or picked up any solicitors fees, for example, you could reduce the amount of your gain by this amount.
If your gain relates to an ‘intangible asset’, such as intellectual property or business reputation (also known as ‘goodwill’) you will need to use different rules to work out your gain. This will depend on when your limited company first owned these intangible assets.
Once you have calculated your gain, you need to report these gains to HMRC on your Company Tax Return. How much tax you then pay will be dependent on whether you claim any allowances or reliefs on your Corporation Tax.
When would you pay Capital Gains Tax instead of Corporation Tax on chargeable gains?
If you are a self-employed sole trader or a business partner registered for Self Assessment, you would pay Capital Gains Tax rather than Corporation Tax because your business wouldn’t qualify for Corporation Tax.
If your company is not classed as resident in the UK and is controlled by 5 people of fewer, you would pay Capital Gains Tax rather than Corporation Tax on any gains made on UK residential property.
How do you calculate a chargeable gain?
As already mentioned, the gain is classed as the difference between what you paid for the asset and what you got for it when you sold (or otherwise disposed) of it. You would have to use the market value of the asset if you gave it away or sold it for less than it was worth as a favour. You are entitled to deduct any of your own costs from the asset disposal, such as professional fees or Stamp Duty.
If you had the asset before December 2017, before you can work out your gain, you need to work out how much you would have paid for the asset in today’s money. You can do this using HMRC’s Indexation Allowance. This means your gain will be smaller so you will have to pay less tax on it.
You work out the gain by using the following steps:
- Work out the asset’s value when you sold it (this is usually how much your company received for the asset – unless you sold it for less than it was worth).
- Subtract the amount your company paid for the asset. If you acquired it in some other way than buying it, you will need to use the market value of the asset at the time you acquired it.
- Take away any money your company spent buying, selling or improving the asset (do note though, that you can’t deduct maintenance costs – only the costs of actually improving the asset).
- Using HMRC’s Indexation Allowance December 2017 guide for the month when you sold the asset, if you originally acquired the asset before December 2017. Find the inflation factor for the year and month when your company acquired the asset and multiply this by the amount you paid for the asset. Subtract this from your profit. You only need to do this step if you owned the asset before December 2017. Use the same inflation factor if you made any improvements to the asset.
You should now have your chargeable gain. If you are not sure you have worked it out correctly, you can ask HMRC to check by filling in a ‘post-transaction valuation check’ form but it will take at least 2 months for the HMRC response.
What happens if you make a loss on an asset?
If you make a loss when you sell an asset, you can reduce your total chargeable gains by deducting this loss. Losses can only be deducted from chargeable gains – they can’t be deducted from trading profits or any other profit your business may make. Any loss that you claim will be reduced by any amount you have claimed as capital allowances.
How are intangible assets treated?
Intangible assets refer to non-physical assets, such as intellectual property or goodwill (otherwise known as business reputation). The way that these gains are taxed depends on when they were first owned by your limited company.
- For assets first owned after 31st March 2002: you will need to include these gains in your trading profits (business income). You will then pay Corporation Tax on your trading profits.
- For assets first owned before 1st April 2002: you will need to use HMRC’s detailed guidance to work out your gains because the situation is far more complex. It is dependent on the nature of the intangible asset, as types of intellectual property, for example, copyright, trademarks or franchise rights, are treated in different ways. You might need the help of a tax professional who is expert in the field of gains due to its complicated nature.
How can DSR Tax Refunds Ltd help?
We know that setting up a business can be hard work – there’s so much to think about and that’s before you start thinking about asset disposal. Our friendly team of tax specialists at DSR Tax Refunds Ltd are on hand to help make life easier for you. We’re the experts at identifying your maximum allowable expenses so call us on 0330 122 9972 – we’re the tax experts you can trust.