CHAPTER 19- COMPUTING
CORPORATION TAX
F6- Taxation
Chapter 19- Computing corporation tax
The scope of corporation tax
Companies pay corporation tax on their taxable total profits.
Companies
Companies must pay corporation tax on their taxable total profits for each accounting
period.
Accounting periods
An accounting period cannot exceed 12 months in length, so a long period of
account(exceeding 12 months) must be split into two accounting periods. The first
accounting period of a long period of account is always 12 months in length.
Corporation tax is chargeable in respect of accounting periods. It is important to
understand the difference between an accounting period and a period of account.
A period of account is any period for which a company prepares accounts; usually this
will be 12 months in length, but it may be longer or shorter than this.
An accounting period is the period for which corporation tax is charged and cannot
exceed 12 months.
Special rules determine when an accounting period starts and ends.
An accounting period starts on the earliest of:
• When a company starts to trade
• When the company otherwise becomes liable to corporation tax (e.g. it opens a
bank account which pays interest)
• Immediately after the previous accounting period finishes
An accounting period finishes on the earliest of:
• 12 months after the beginning of the accounting period
• The end of the company’s period of account, and
• The date the company begins or ceases to trade
• The company starting or ceasing to trade
• The company entering/ceasing to be in administration
• The commencement of company’s winding up
• The company’s ceasing to be resident in the UK
• The company’s ceasing to be liable to corporation tax
If a company has a period of account exceeding 12 months (a long period of
account), it is split into two accounting periods: the first 12 months and the remainder
Financial year
Tax rates are set for financial years.
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Chapter 19- Computing corporation tax
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 2024 is the
Financial year 2023 (FY 2023). This should not be confused with a tax year, which runs
from 6 April to the following 5 April.
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.
It’s important to determine the residence because if it’s a UK resident, corporation tax is
charged on all profits wherever they arise (worldwide income and gains)
Taxable total profits
Taxable total profits comprise the company's income** and chargeable gains (total
profits) less some losses and qualifying charitable donations. It does not include
dividends received from other companies.
**Income includes trading income, property income, income from non trading
relationships (interest) and miscellaneous income.
The computation of chargeable gains and losses for a company is dealt later on.
A company's taxable total profits are arrived at by aggregating its various sources of
income and its chargeable gains and then deducting losses and qualifying charitable
donations.
Here is a pro forma computation.
£
Trading profits X
Property business income X
Interest income from non-trading loan relationships X
Miscellaneous income X
Chargeable gains X
Total profits X
Less losses deductible from total profits (X)
Less qualifying charitable donations (QCDs) (X)
Taxable total profits for an accounting period X
Dividends received from other companies (UK resident and non-UK resident), for the
purposes of the F6 exam, are usually exempt and so not included in taxable total
profits. Dividends paid are not deductible.
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Trading income
The adjustment of profits computation for companies broadly follows that for
computing business profits subject to income tax. There are, however, some minor
differences.
The adjustment of profits computation for companies broadly follows that for
computing business profits subject to income tax (Chapter 7). There are however some
minor differences.
There is no disallowance for 'private use' for companies; instead the director or
employee will be taxed on the benefit received.
Qualifying charitable donations are added back in the calculation of adjusted profit.
They are treated instead as a deduction from total profits.
Investment income including rents is deducted from profit before taxation in arriving at
trading income but brought in again further down in the computation (see below).
Pre-trading expenditure
Pre-trading expenditure incurred by the company within the 7 years before trade
commences is treated as an allowable expense incurred on the first day of trading
Capital allowances
The calculation of capital allowances follows income tax principles (Chapter 8)
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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.
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; one for the first 12 months and one for the
balance.
The capital allowances computation must be carried out for each period separately.
Companies were entitled to enhanced capital allowances from 1st April 2021 to 31st
March 2023 when purchasing new plant and machinery.
Enhanced capital allowances
As of April 2021, companies can benefit from enhanced capital allowances on new
plant and machinery purchases.
• Not available to sole traders and partnerships
• New plant and machinery only
• Not available on cars
The enhanced capital allowances are:
• 130% first year allowance for expenditure falling into the main pool (known as a
‘super deduction’)
• 50% first year allowance for expenditure falling into the special rate pool
For expenditure falling into the special rate pool, the 100% annual investment
allowance should be claimed as far as possible, in preference to the 50% first year
allowance stated above.
Question 01- J plc purchased main pool machinery for £300,000 and special rate pool
plant for £1,400,000 in the year ended 31st March 2023. Calculate J plc’s maximum
allowance.
Property business income
Rental income is deducted in arriving at trading income but brought in again further
down in the computation as property business income.
The calculation of property business income follows income tax principles (Chapter 6).
Companies must use the accruals basis to calculate their property income.
***However, 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).
Loan relationships (interest income)
Treatment of trading loan relationships
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If the company is a party to a loan relationship for trade purposes, any debits – ie
interest paid or other debt costs – charged through its accounts are allowed as a
trading expense and are therefore deductible in computing trading income. An
example of a trading loan relationship is a loan to buy plant and machinery to use in
the trade.
Similarly if any credits – ie 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 one to which the company is a party for trade purposes any
debits or credits must be pooled. A net credit on the pool is chargeable as interest
income.
Examples of non-trading loan relationships would be cash on deposit at the bank
(creditor relationship), or a loan to purchase a property that is rented out (debtor
relationship).
Interest is deductible on the accruals basis
Incidental costs of loan finance
Under the loan relationship rules expenses(debits) are allowed if incurred directly: -
1) To bring a loan relationship into existence
2) Entering into or giving effect to any related transactions
3) Making payment under a loan relationship or related transaction
4) Taking steps to ensure the receipt of payment under the loan relationship or
related transaction
Miscellaneous income
Patent royalties 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 deducted from total profits when computing
taxable total profits.
Donations to local charities which are incurred wholly and exclusively for the purposes
of a trade are deducted in the calculation of the tax adjusted trading profits.
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Question 2-
Marlborough Ltd is a UK resident trading company. The company’s statement of profit
or loss for the year ended 31st March 2024 is as follows:-
Notes
1. Loan stock interest- The loan stock interest is in respect of loan stock held by
Marlborough Ltd as an investment. The amount of £14,500 is the amount
received and accrued to 31st March 2024
2. Rental income- the rental income is in respect of a warehouse which is held as
an investment and is let out to an unconnected company. The rental income of
£18,000 is the amount accrued to 31st March 2024
3. Professional fees include-
Accountancy and audit fees- £4,600
Debt collection of trade debts- £5,000
Legal fees in connection with renewing a 25 year lease- £1,300
Legal fees in connection with director’s motoring offences- £2,000
4. Repairs and renewals include-
Extension to factory- £7,988
Repainting exterior of company’s offices- £6,000
5. Other expenses include
100 pens with an advertisement for a company, given to customers- £2,100
Qualifying charitable donations- £5,000
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6. Loan interest- relates to the warehouse let out. The amount shown is the amount
paid and accrued to 31st March 2024
7. Plant and Machinery
On 1st of April 2023 the tax written down value of the main pool was £22,500. The
following transactions took place during the year ended 31st March 2024
Cost/Proceeds(£)
10th June 2023 Purchased general plant 20,200
25th January 2024 Sold a van(original cost (11,500)
of £17,000)
15th March 2024 Purchased a motor car 10,600
CO2 emissions 48g/km
*Assume that enhance capital allowance don’t apply
The motor car purchased on 15th March 2024 is used by company’s sales
manager. 30% of the mileage is for private journeys.
Required
1. Calculate M’s trading profits for the year ended 31st March 2024 indicating all
allowed and disallowed expenses.
2. Calculate M’s taxable total profits for the year ended 31st March 2024
Long periods of account
Long periods of account are split into two accounting periods: the first 12 months and
the remainder.
As we saw earlier in this chapter, 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.
Where the period of account differs from the corporation tax accounting periods,
profits are allocated to the relevant periods as follows:
• 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 (e.g. interest accrued).
Miscellaneous income, however, is apportioned on a time basis.
• Chargeable gains and losses are allocated to the period in which they are
realized
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• Qualifying charitable donations are deducted in the accounting period in which
they are paid.
Question 3-
X makes up an 18 month set of accounts to 30th September 2024 with the following
results:-
Trading income(no capital allowances claimed) - £180,000
Interest income- 18 months @ £500 per month- £9,000
Capital gain(1st August 2024 disposal) - £250,000
Less qualifying charitable donation(paid 31st March 2024)- £50,000
What are the taxable total profits for each of the accounting periods based on the
above accounts
Computing corporation tax liability
Rate of corporation tax
The rates of corporation tax are fixed for financial years. From FY17 to FY22, Corporation
tax was charged at 19% of the taxable total profits, regardless of the level of a
company’s profits. For FY23, the rates of corporation tax are:
• 25% (main rate) where augmented profit (Taxable trading profits + Dividends
received from group companies) are greater than or equal to the upper limit
(£250,000)
• 19% (small profits rate) where augmented profits don’t exceed the lower limit
(£50,000)
• 25% less marginal relief where the level of augmented profits is between the limits
Question 04
HMF Limited had the following results for the year ended 31st March 2024:
Trading profits - £230,000
Dividends received from non – group companies - £25,000.
What is the corporation tax liability?
Small profits rate
The small profit rate of 19% applies where the company’s augmented profits do not
exceed £50,000 (the lower limit)
Question 05
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CIF Limited had the following results for the year ended 31st March 2024:
Trading profits - £23,000
Dividends received from non – group companies - £2,500
What is the corporation tax liability?
Marginal relief
Marginal relief applies where the augmented profits of an accounting period of a UK
resident company are above the lower limit but less than the upper limit. We first
calculate the corporation tax at the main rate and then deduct the relief. The formula
for calculating the marginal relief are:
Marginal relief = (Upper limit – Augmented profits) * Standard fraction * (Taxable total
profit/Augmented profits)
Standard fraction = 3/200
If no dividend received then the final part of the formula can be ignored since it would
be one.
Question 06
FEB Limited had the following results for the year ended 31st March 2024:
Trading profits - £200,000
Dividends received from non – group companies - £10,000
What is the corporation tax liability?
Effective marginal rate of tax
If there are no dividends, there is a marginal rate of 26.5%, which applies to any taxable
total profits that lie between the upper limits and lower limits.
Accounting period in more than one financial year
An accounting period may fall within more than one financial year. If the rates of
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 financial years, taxable total
profits are time apportioned between the financial years.
Associated companies
For tax purposes, a company is associated with another company if either controls the
other, or if both are under the same control. Control broadly means holding over 50% of
the share capital.
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• If a company has one or more associated companies, then the profit limits are
divided by the number of associated companies + 1 (for the company itself)
• Companies which have only been associated for part of an accounting period
are deemed to have been associated for the whole period for the purpose of
determining the profit limits.
• Dormant companies don’t 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.
Question 07
O Limited has the following shareholding:
W Limited – 30%
S Ltd – 70%
A Ltd – 100%
C Ltd – 100%
B Ltd – 100%
C Ltd – 100%
O Ltd’s shareholding in A Ltd was disposed on the 30th September 2023, and the
shareholding in C Ltd was acquired 1st February 2024. The other shareholding were all
held throughout the year ended 31st March 2024. All the companies are UK resident
except B Ltd, which is resident overseas. All the companies are active trading
companies except C Ltd which is dormant.
What are the associated companies for the purposes of calculating O’s tax liability?
Question 08
For the 8 month period ending 31st March 2024, T limited has taxable total profits of
£70,000. T limited has one 100% subsidiary which it had for many years. Calculate T
limited’s corporation tax liability for the 8 month period ended 31st March 2024.
Choice of business medium
Trading as a sole trader or through a company
Sole trader Company
Income tax on trading income Corporation tax on taxable total profits
Class 2 and Class 4 NICs No Class 2 and Class 4 NICs for director or
shareholder
Income tax on dividend income
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Question 4
S is starting a new business and expects to make profits of £48,000 before tax and NI. He
wants to know how much net income (take home) he would receive from the business
if he trades as a sole trader or alternatively through a company of which he would be
the only shareholder, director and employee with the company paying him a salary of
£9,000 and then an amount equal to the company’s remaining profits (after
corporation tax) as a dividend(no employment allowance since he is the only
employee and director of the company). He has no other income.
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