TX-SUCCESS | Ajith Antony

COMPUTING TAXABLE TOTAL

PROFITS AND THE CORPORATION
TAX LIABILITY

One of the 15-mark questions in Section C will focus on corporation tax.

Corporation tax may also be tested in 10-mark questions in Sections B or C.
You should also expect to see one or more questions on corporation tax in
Section A.

Residence of companies
A company is UK resident if it is:
➢ Incorporated in the UK or
➢ If it is incorporated overseas and its central management and control
are exercised in the UK.

The scope of corporation tax

Companies must pay corporation tax on their taxable total profits for each
accounting period. Corporation tax is chargeable in respect of accounting
periods.

Accounting periods
An accounting period cannot exceed 12 months in length so a long period of
account must be split into two accounting periods. If an accounting period
is more than 12 months in length, the first 12 months of the accounting
period is treated as the first accounting period and the rest months will treat
as second period of accounting.

An accounting period must begin either:

➢ when a company starts trading; or
➢ otherwise immediately after the end of the previous accounting
period.

An accounting period must end on the earliest of:

➢ 12 months after its commencement; or
➢ at the end of the period of account; or
➢ at the commencement of the winding-up of the company; or
➢ when the company ceases to be liable to corporation tax.

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Financial year
A financial year runs from 1 April to the following 31 March and is identified
by the calendar year in which it begins. For example, the year ended 31 March
2020 is the Financial year 2020 (FY 2020).

The rates of corporation tax are fixed for financial years.

Computation of Taxable total profits

Proforma computation
Trading profits XX
Property business income XX
Non-trading interest incomes XX
Chargeable gains XX
Miscellaneous income XX
Total profits XX
Less: losses deductible from total profits (XX)
Less: qualifying charitable donations (XX)
Taxable total profits (TTP) XXX
Corporation tax liability (TTP*CT%) XXX
Double taxation relief (XX)
Corporation tax payable XXX

Dividends received from other companies (UK resident and non-UK

resident), for the purposes of the Taxation (ATX – UK) exam, are usually
exempt and so not included in taxable total profits.

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CORPORATION TAX COMPUTATION

Corporation tax will be computed on taxable total profit of the company. The
rate of tax percentage is fixed on the basis of augmented profit of the company
as follows.

Augmented profit Tax rates

FY-23 FY-22 FY-21

up to £50,000 19%

Between £50,000 & £250,000 25% 19% 19%

Above £250,000 25%

Augmented profit (AP)

AP = Taxable Total Profit + Dividend received from non-group

companies

Marginal relief
Marginal relief is available for companies which had the augmented profit
between £50,000 & £250,000. Marginal relief may compute as follows

𝑻𝑻𝑷
(𝑼𝒑𝒑𝒆𝒓 𝒍𝒊𝒎𝒊𝒕 − 𝑨𝒖𝒈𝒎𝒆𝒏𝒕𝒆𝒅 𝒑𝒓𝒐𝒇𝒊𝒕) ∗ 𝑺𝒕𝒂𝒏𝒅𝒂𝒓𝒅 𝒇𝒓𝒂𝒄𝒕𝒊𝒐𝒏 ∗
𝑨𝑷
Or

𝑻𝑻𝑷
(𝟐𝟓𝟎, 𝟎𝟎𝟎 − 𝑨𝒖𝒈𝒎𝒆𝒏𝒕𝒆𝒅 𝒑𝒓𝒐𝒇𝒊𝒕) ∗ 𝟑/𝟐𝟎𝟎 ∗
𝑨𝑷
Upper limit = 250,000

Standard fraction = 3/200

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The lower and upper limits are proportionately reduced if a company’s accounting
period is less than 12 months in length.

Lower limit & Upper limit will be reduced if;

➢ the company having a short accounting period (less than
12 months)
➢ the company has any associated company.

Associated Companies
The lower and upper corporation tax limits are effectively shared if a
company has associated companies.
• Companies are associated if they are under the same control. This
basically means a shareholding of more than 50%.
• Companies that are only associated for part of an accounting
period count as associated companies for the whole of that period.
• Dormant companies (not carrying on a trade or business) do not
count as associated companies.
• For associated company purposes, it is irrelevant where a company
is resident. Therefore, companies which are resident overseas can
be included.

Accounting Periods Straddling 1 April 2023

Separate calculations are required (on a time-apportioned basis) if a
company’s accounting period falls partly into the financial year 2022 and
partly into the financial year 2023.
Only the 19% single rate of corporation tax is applicable to profits apportioned
to the financial year 2022.
Where a marginal relief calculation is required for the financial year 2023, it
is easier to time apportion the overall marginal relief calculation rather than
apportioning each separate figure. However, a fully time apportioned
approach is safer when dealing with a short accounting period.

TRADING INCOME

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TAX ADJUSTED TRADING PROFIT FOR COMPANIES

Net profit as per profit or loss A/c XXX

+ Disallowed expenditures:

▪ Expenses not related to trade

▪ Capital expenditures
▪ Depreciation/Amortization/Impairment
▪ Fines or penalties – unless incurred by employees
▪ Increase in provision for receivables
▪ Elements of personal expense by owner
▪ Gift aid donation
▪ Loss on disposal of assets
▪ Entertainment of customers
▪ Donation to political parties and national charities
▪ 15% of lease rent for motor cars emitting CO 2 > 50g/km XXX
▪ Legal expenses in relation with grand of lease
(--) Allowed expenditure

▪ Any expenses related to trade

▪ Pre trading expenditures (Within 7 years from commencement of
trading – Treat as expense on the 1st day of trade)
▪ Revenue natured expenses
▪ Impaired debts
▪ Entertainment and gift for employees
▪ Donation to local charities for advertisements
▪ Gift to third parties provided <£50 per person per annum; not
food/drink or tobacco items and given for advertisement purpose
▪ Gift of inventory as sample
▪ Capital allowances (XXX)

(--) Disallowed income

▪ Rental income
▪ Bank interest
▪ Dividend income
▪ Profit on disposal of assets
▪ Decrease in provision for receivables (XXX)

+ Allowed income

▪ Drawings of goods by owner

▪ Impaired debt recovered
▪ Revenue from sale of inventory XXX

TAX ADJUSTED TRADING PROFIT XXX

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Capital allowances
The calculation of capital allowances follows income tax principles.
For companies, however, there is never any reduction of allowances to take
account of any private use of an asset. The director or employee suffers a
taxable benefit instead.

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A company's accounting period can never exceed 12 months. If the period of

account is longer than 12 months it is divided into two. The capital allowances
computation must be carried out for each period separately.

Property business income

Companies must use the accruals basis to calculate their property business
income. The deductibility of property expenses generally follows income tax
principles

Interest paid by a company on a loan to buy or improve property is not a

property business expense. The loan relationship rules apply instead (see
below). The restriction for tax relief on finance costs does not apply to
companies.

INTEREST INCOME (Loan relationships)

If a company borrows or lends money, including issuing or investing in loan

stock or buying gilts, it has a loan relationship. This can be a creditor
relationship (where the company lends or invests money) or a debtor
relationship (where the company borrows money or issues securities).

Trading loan relationships

If the company is a party to a loan relationship for trade purposes, charged
through its accounts are allowed as a trading expense and are therefore
deductible in computing trading income.

Similarly if any credits – i.e. interest income or other debt returns –

arise on a trading loan these are treated as a trading receipt and are taxable
as trading income.

Treatment of non-trading loan relationships

If a loan relationship is not for trade purposes, any debits or credits (e.g.
interest paid or received) must be pooled. A net credit on the pool is chargeable
as interest income.

Interest charged on underpaid tax is a debit and interest received on overpaid

tax is a credit under the rules for non-trading loan relationships.

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Miscellaneous income
Patent, Royalties, Commission received which do not relate to the trade are
taxed as miscellaneous income. Patent royalties which relate to the trade are
included in trading income normally on an accruals basis.

Qualifying charitable donations

Qualifying charitable donations are deductible from total profits when
computing taxable total profits. Almost all donations of money to charity by a
company can be qualifying charitable donations whether they are single
donations or regular donations.

Long periods of account

If a company has a long period of account exceeding 12 months, it is split into
two accounting periods: the first 12 months and the remainder.

➢ Trading income before capital allowances and property income are

apportioned on a time basis.
➢ Capital allowances and balancing charges are calculated for each
accounting period.
➢ Other income is allocated to the period to which it relates
➢ Chargeable gains and losses are allocated to the period in which they
are realised.
➢ Qualifying charitable donations are deducted in the accounting period
in which they are paid.

Rate of corporation tax

For financial year 2020, there is a single rate of corporation tax (the main rate)
which is 19%. This rate is applied to the company's taxable total profits to
compute the corporation tax liability. The rates of corporation tax for financial
year 2017 and financial year 2018 were also 19%.

Accounting period in more than one financial year

An accounting period may fall within more than one financial year. If the rates
for corporation tax are the same in both financial years, tax can be computed
for the accounting period as if it fell within one financial year.
However, if the rates for corporation tax are different in the financial years,
taxable total profits are time apportioned between the financial years.

Choice of business medium

An individual can choose between trading as a sole trader or trading through
a company. Trading through a company may reduce the overall tax and

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national insurance liability, in particular if profits are extracted in a tax-

efficient manner.

Trading as a sole trader or through a company

An individual starting in business must decide whether to trade as a sole
trader or as a company.

A sole trader pays income tax on trading income and also Class 2 and Class
4 national insurance contributions.

A company pays corporation tax on its taxable total profits. Any director's
remuneration (salary, bonus) and its associated Class 1 employer's national
insurance contributions are deducted in computing those profits. The
employment allowance is not available if the director is the only employee. the
remaining profits after corporation tax can then be paid out to shareholders
as a dividend. The individual as a director pays income tax on employment
income and Class 1 employee's contributions on cash earnings.