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HA 40: Liability for qualifying company election tax
or “Tax payable when a company chooses to become a qualifying company”
You could also call this:

“How to work out the tax when your company becomes a qualifying company”

You need to know how to calculate qualifying company election tax if your company is becoming a qualifying company. The calculation uses a formula that considers several factors:

The formula looks at what would happen if your company sold all its property (except cash) and paid off all its debts. It also considers the money in your company’s tax accounts and any unpaid taxes.

To use the formula, you need to work out:

  1. How much money would be left if your company sold everything and paid its debts. This is called ‘dividends’ in the formula.

  2. The total of money in your company’s tax account and any unpaid taxes. This is called ‘balances’.

  3. How much income your company would make from selling everything, minus any costs. This is called ‘assessable income’.

  4. The current tax rate for companies.

The formula then uses these numbers to calculate how much election tax you need to pay.

The law also says that if you pay any taxes just to lower your election tax, that won’t count in the calculation.

Remember, this calculation is done based on your company’s situation just before it becomes a qualifying company.

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Next up: HA 42: Paying qualifying company election tax

or “How to pay the special tax to become a qualifying company”
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Part H Taxation of certain entities
Qualifying companies (QC)

HA 41Calculating qualifying company election tax

  1. The amount of qualifying company election tax that a company must pay under section HA 40 is calculated using the formula—

    (dividends + balances − assessable income − (balances ÷ tax rate)) × tax rate.

    Where:

    • The items in the formula are defined in subsections (3) to (6).

    • Dividends is the sum of the amounts that would be dividends if the company—

    • disposed of all its property, other than cash, to an unrelated person at market value for cash; and
      1. met all its liabilities at market value, excluding income tax payable through disposing of the property or meeting the liabilities; and
        1. was liquidated, with the amount of cash remaining being distributed to its shareholders without imputation credits attached.

          1. Balances is the sum of the following amounts:

          2. the balance in the company’s imputation credit account:
              1. an amount of income tax payable for an earlier income year but not paid before the relevant date, less refunds due for the earlier income year but paid after the relevant date.

                  1. Assessable income is the total assessable income that the company would derive by taking the actions described in subsection (3)(a) and (b) less the amount of any deduction that the company would have for taking those actions.

                  2. Tax rate is the basic rate of income tax set out in schedule 1, part A, clause 2 (Basic tax rates: income tax, ESCT, RSCT, RWT, and attributed fringe benefits) for the relevant income year of the company.

                  3. In subsections (3) to (5), the relevant date for measuring items in the formula is the date just before the company became a qualifying company or, as applicable, at the time the company ended its existence.

                  4. For the purposes of subsection (4)(c),—

                  5. income tax payable is income tax that would, when paid, give rise to a credit in the company’s imputation credit account under sections OB 4 to OB 29 (which relate to imputation credits):
                    1. a refund of income tax due is the amount that would, when paid, give rise to a debit to the company’s imputation credit account under section OB 30 to OB 59 (which relate to imputation debits):
                      1. if the company pays income tax with a purpose or intention of reducing the amount of election tax, the amount of credit in the imputation credit account is reduced by the amount of the credit arising from the company's action, unless that purpose is merely incidental.

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                        Notes
                        • Section HA 41(3)(c): amended, on , by section 129(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                        • Section HA 41(4)(b): repealed, on , by section 129(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                        • Section HA 41(4)(c): amended (with effect on 30 June 2009), on , by section 259(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                        • Section HA 41(4)(d): repealed (with effect on 30 June 2009), on , by section 259(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                        • Section HA 41(6): amended, on , by section 562 of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
                        • Section HA 41(8)(c): substituted (with effect on 30 June 2009), on , by section 259(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                        • Section HA 41 list of defined terms FDP: repealed (with effect on 30 June 2009), on , by section 259(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                        • Section HA 41 list of defined terms FDP account: repealed, on , by section 129(3) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                        • Section HA 41 list of defined terms FDP credit: repealed, on , by section 129(3) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).