4.

Accounting periods
4.1When an accounting periods start
You might think that a company’s first accounting period starts at the date that a company is incorporated. However, the first
accounting period does not actually starts to trade, or when the profits of a company first become liable to corporation tax.

Key point: The first accounting period does not start until a company starts to trade, or when its profits first become liable to
corporation tax

4.2 When an accounting period finishes

Key point:
End of accounting period is earliest of:
-12 months after start of period
-end of company’s period of account
-date company ceases to trade

Activity 1
A Ltd commenced trading on 1October 2004, and has prepared accounts for the 15-month period from 1 October 2004 to 31
December 2005. What are A Ltd’s accounting periods?
Answer activity 1
The 2 periods are:
(a) 12 months from 1 October 2004 to 30 September 2005(the start of trading to 12 months after the beginning of the
accounting period)
(b) 3 months from 1 October 2005 to 31 December 2005(from the end of the previous accounting period to the end of the
period of account)
5.A BASIC CORPORATION TAX COMPUTATION
5.1 Basic principles
1.A company’s liability to corporation tax is computed by reference to profits made during an accounting period. The
term”profits” includes chargeable gains(these are discussed later in this chapter)
2.PCTCT: profits chargeable to corporation tax
3.Rate of corporation tax payable depends on the financial year

5.2 Classification of income

1.Most income is classified for corporation tax purposes according to its nature and source
2.Strictly, income is classified into Schedules and Cases for the purposes of corporation tax. For example, trading income is
called Schedule D Case I income. This schedule system used to apply for both income tax and corporation tax purposes but the
income tax terminology has been rewritten for 2005-06 onwards as part of the process of making tax legislation clearer and
easier to use. In particular, the term” Schedule D Case I” has been replaced by the term”trading”

3.This means that the taxable trading profit of a company is called its Schedule D Case I profit whilst that of an individual is
simply called trading income or trading profit. In order to avoid any confusion, the examiner has decided to use the new
terminology for both corporation tax and income tax in the examination from the June 2006 sitting

4.The relevant sources of income, together with their old names in brackets are

-Trading profit(Schedule D Case I profit)

-Interest income(Schedule D Case III income)
-Property business income(Schedule A Income)
-Overseas dividends(Schedule D Case V Income)
It is important to classify income correctly as the rules(for example, the types of expenditure that can be deducted) are different
for each source

5.3Patent royalties

From 1 April 2002, patent royalties received are taxed as trading income on an accruals basis. This means that no adjustments
or entries are necessary as the royalties will already be included in the Schedule DI profit figure

Prior to 1 April 2002, patent royalties were assessable for tax on the basis of when they were received.

Key point : Patent royalties received on or after 1 April 2002 are included in the Schedule DI profit for tax purposes

5.4 Dividends received from UK companies

Dividends received from UK companies are effectively exempt from corporation tax. They are therefore not included in
calculating a company’s profits chargeable to corporation tax. This is because such dividends are paid out of post-tax profits of
the company paying them, and are not subject to further tax.

Although exempt from corporation tax, dividends received have an impact on the rate of corporation tax that is applicable.
This is dealt with later in this chapter
It is only dividends from UK companies that are treated in this way. In chapter 8 you will see how dividends from overseas
companies are subject to corporation tax

5.5 Chargeable gains

Corporation tax is also charged on any chargeable gains that a company makes during an accounting period, even though gains
are not income as such.

In basic terms, a capital gain arises when a company disposes of an asset as a profit. Chargeable gains are those capital gains
that are not exempt.
Chargeable gains are dealt with in Chapter 5

5.6Charges on income
Many payments that a company makes are deductible against specific source of income. For example, trading expenses are
deducted in arriving at the trading profit.
Certain other payments, however, are not deductible against a specific source of income, but against total income. These are
called charges on income( or sometimes just’charges’). Charges on incomes are deducted from the total of profits(income
and chargeable gains)from all sources to arrive at the profits chargeable to corporation tax. Charges on income are covered in
Chapter 4
Key point:
Payments which are only deductible against total income are called charges on income.
5.7 Expenses of management

Prior to 1 April 2004 where a company incurred expenditure in managing investment s a corporation tax deduction was only
available for the expenses where the company qualified as an”investment” company

From 1 April 2004 any company with an investment business is allowed a deduction against the company’s total profits for the
expenses incurred(excluding capital expenditure) in managing the investment business

A company with an investment business means “any company whose business consists wholly or partly in the making of
investments”. The investment business may be in addition to the company’s trade or may be the company’s sole activity

Where the management expenses exceed the company’s total profits the unrelieved amounts can be surrendered in the current
year as group relief(see Chapter 7) or carried forward for offset against future total profits

5.8 Layout of a corporation tax computation

Profits chargeable to corporation tax(PCTCT)=profits(income and chargeable gains) from all sources-charges on income

An example of a corporation tax computation is as follows

Simple Ltd-Corporation tax computation for the year ended 31 March 2006

$
Trading profit 82,000
Interest income 12,000
Dividends from non-UK companies 4,000
Property business profit 8,500
Chargeable gains 9,500
116,000
Less: Expenses of management (500)
Less: Charges on income (5500)
Profits chargeable to corporation tax 110,000
Franked investment income($9,000 x 100/90) 10,000

Profit 120,000
Corporation tax liability $110,000 at 19% 20,900

Subsequent chapters will cover the following areas:

Chapter Content
2 and 3 Calculation of the trading profit
6 How relief is given for trading losses
4 Property business, income, interest income and charges on income

5 Chargeable gains
7 The special rules that apply to groups of companies
8 Calculation of the dividend income from non-UK Companies, other overseas matters
9 How the tax payable is collected under the self-assessment system

6.Franked investment income

Dividends from UK companies are deemed to be paid net of a 10% tax credit.
Dividends received from UK companies plus the associated 10% tax credit are known as franked investment income(FII)

You should remember that dividends received from UK companies are effectively exempt from corporation tax. However, they
can have an impact on the rate of corporation tax that is applicable.
In the example of a corporation tax computation u will have seen a figure for franked investment income. Franked investment
income is the gross amount of dividends received including the associated 10% tax credit

The tax credit is 10/90 of the net dividend received (or 10% of the gross dividend)Therefore if a company receives dividends
of $18,000, the tax credit is $18,000 x 10/90=$2,000 and the figure of franked investment income is $20,000($18,000+$2,000)

If the examiner refers to “dividends” the figure will be net of the 10% tax credit and needs to be grossed up to be included in
the computation. If FII is referred to, it means the dividend is already gross of the 10% tax credit.

6.1 The implications of receiving franked investment income

Franked investment income is added to the profits chargeable to corporation tax in order to arrive at the profit figure. Although
corporation tax is calculated on the profits chargeable to corporation tax, it is the profit figure that determines which rate of
corporation tax is applicable

It is only dividends received from UK companies that are treated in this way. Dividends received from overseas companies are
taxable and not therefore franked investment income.

Dividends received from 51% group companies(groups are dealt with in Chapter 7) are also not treated as franked investment
income. Such dividends are completely outside the scope of corporation tax, and can therefore be ignored.

7.The corporation tax liability

7.1 The rates of corporation tax

For the Financial Year 2005(remember this runs from 1 April 2005 to 31 March 2006) there are 3 rates of corporation tax, as
follows:

A starting rate of corporation tax of 0% applies where a company’s profits for an accounting period are $10,000 or below

A small companies rate of corporation tax of 19% applies where a company’s profits for an accounting period are $300,000 or
below

A full rate of corporation tax of 30% applies where a company’s profits for an accounting period exceed $300,000
You will be given the following table in the examination showing the rates of corporation tax. We will cover taper reief, also
known as marginal relief, later in this chapter.

Financial Year 2003 2004 2005

Starting rate Nil Nil Nil
Small companies rate 19% 19% 19%
Full rate 30% 30% 30%
Starting rate lower limit 10,000 10,000 10,000
Starting rate upper limit 50,000 50,000 50,000
Small companies rate lower limit 300,000 300,000 300,000
Small companies rate upper limit 1,500,00 1,500,00 1,500,000
0 0
Taper relief fraction
Starting rate 19/400 19/400 19/400
Small companies rate 11/400 11/400 11/400
Corporation tax is calculated on the profits chargeable to corporation tax, but it is the profit figure(PCTCT plus FII) that is
compared to the limits stated above to determine which rate of corporation tax is applicable.

7.2 Payment of the corporation tax liability

The corporation tax liability is collected under the self-assessment system

The liability is normally due for payment nine months and one day after the end of the accounting period. For the year ended
31 March 2006 the due date is 1 January 2007. Certain companies are required to pay part of their liability by instalments

Example: The small companies rate of corporation tax

Beach Ltd had the following results for the year ended 31 March 2006

$
Trading profit 169,400
Dividend from UK company(amount received) 5,400
Calculating the corporation tax liability
Solution
$
Profits chargeable to corporation tax 169,000
Franked investment income($5,400 X 100/90) 6,000
Profit 175,000
Corporation tax liability $169,000 at 19% 32,110

The profit is below $300,000 so the small companies rate applies