When a local authority spins activities out into a LATCO it is important to understand that corporation tax is going to apply to the LATCO just as it does to any privately owned company. This means that it will be required to file annual corporation tax returns before the first anniversary of the end of each accounting period, and to pay corporation tax on its profits (currently at 19%).
The default position is that the LATCO will be taxed on all its profits, no matter what activity they have arisen on, so including trading, rental income, capital gains, investment income and interest receivable. In very specific circumstances, the mutual trading exemption may apply to exempt certain profits from trading with the parent authority, meaning that only non-mutual profits are taxed. Mutual trading is a complex area, where specialist advice should be sought.
The good news is that LATCOs can also claim corporation tax reliefs like any other company. These include capital allowances, loss relief, land remediation relief and R&D tax relief, with the most commonly seen of these being capital allowances and loss relief.
Capital allowances can be claimed on plant, equipment and fixtures and fittings, where the Annual Investment Allowance (AIA) currently means that up to the first £1 million spent in the year can be deducted in the tax computation. The rate of AIA is expected to reduce on 1 January 2021. If the LATCO buys or builds non-residential properties, the Structures & Buildings Allowance may allow relief for the costs over the first 50 years of use.
Where the LATCO incurs losses in a year, these can be carried forward and offset against future profits. Alternatively, trading losses can be carried back to reduce taxable profits in the previous 12 months. Also, if there is a group of LATCOs under common ownership, it is possible for a loss-making group member to surrender its losses to a profitable sister LATCO.
Transactions between the LATCO and the local authority will usually be subject to the transfer pricing rules. This means in practical terms, if the LATCO is charging the authority less for its services than it would a third-party, its taxable profits could be adjusted upwards. Equally if the authority charges the LATCO more for its services or in interest than a third party would charge, the LATCO can only take a tax deduction for that lower amount.
As you can see, there is plenty for LATCOs to think about when it comes to corporation tax, so it helps to have an expert advisor like Ensors on hand.