1.5 Corporation Tax Computation iclu..TTP, Trading Inc, NTLR, Other inc, QCD

Question 1

Write down the adjustment of profit computation (see illustration)

When a company has 2 AP’s what happens to the adjustment of profits calculation?

Answer 1

The adjustment of profits before CAs is calculated for the period of account as a whole.

Illustration not available

Question 2

What is the most important source of income for most companies?

Answer 2

Trade profit

Question 3

What expenditure can be added back to calculate the trade profits for a company? x12

Answer 3

• Depreciation of fixed assets (unless finance lease)
• Unallowable amortisation (most goodwill and pre-2002 IFAs)
• Capital expenditure (including legal fees on purchase or sale of capital items)
• Losses on the disposal of fixed assets.
• Entertaining (unless staff entertaining).
• Gifts (unless cost ≤£50 is not food/drink/tobacco and carries a conspicuous advertisement for the trader).
• 15% of hire cost of cars with CO2 emissions > 50g/km (>110g/km for leases entered into before 1 April 2021)
• Fines and penalties
• Bribes
• Donations to national charities
• Non-trading interest payable
• COST OF ACQUIRING A SUBSIDIARY

Question 4

Re: 15% restriction, if there are maintenance costs related to the leasing of cars. What do you do with that cost when calculating the Tax Adjusted Profits?

Answer 4

The maintenance cost associated with the leasing of cars is DEDUCTED from the leasing cost.

(SEE: BOOK PAGE 175 LONG QUESTION 26)

Question 5

What are the allowable expenses where no adjustments are made in calculating the Tax Adjusted Trade Profit? x4 re: companies

Answer 5

• Legals fees re: renewal of a short lease i.e. <50 years.
• Maximum of 4 statutory redundancy payments on the cessation of trade.
• Pension contributions paid in the period.
• Wages & salaries accrued provided paid ≤9 months from period end.

Question 6

If requirements for the allowable expenses are met, what needs to happen?

Answer 6

Nothing needs to happen

Question 7

If requirements for the allowable expenses are not met, what needs to happen?

Answer 7

The expenses need to be added back.

Question 8

What is the allowable income not taxed as trade income that is deducted to calculate the Tax Adjusted Trade profit? x5

Answer 8

• Rental income/interest income, dividend income (usually exempt).
• Profit on disposal of fixed assets.
• Capital Allowances (no private adjustments)

Question 9

Explain if there is tax relief for Dividends Paid or Dividends Received?

Answer 9

No tax relief received for Dividends Paid.

But Dividends Received are classed as non-trading income.

Question 10

What is the treatment for legal fees associated with share issue and legal fees for the acquisition of capital assets?

Answer 10

Legal fees associated with share issue and the acquisition of capital assets are not trade related therefore needs to be added back.

Question 11

If a capital addition is not included in the P&L what happens to the item when calculating the Tax Adjusted Trade Profits?

Answer 11

Capital additions in P&L are added back. If not in P&L do not add back. Relief is given via Capital Allowances.

Question 12

What will arise when a company ceases to trade? And where in the CA comp?

Answer 12

Balancing adjustments will arise in each of the separate pools.

Question 13

What types of balancing adjustment are there?

Answer 13

A balancing adjustment is either:
- balancing allowance; or
- balancing charge.

Question 14

When does a balancing allowance arise?

Answer 14

A Balancing Allowance arises if proceeds< TWDV
(ie proceeds are less than the TWDV)
i.e.

Proceeds £12,000
TWDV £50,000

Question 15

When does a balancing charge arise?

Answer 15

A Balancing Charge arises if the proceeds >TWDV
(ie proceeds exceed the TWDV)

i.e.
Proceeds £25,000
TWDV £10,000

Question 16

Which type of balancing adjustment will arise only on cessation of trade and which will arise while trade is continuing?

And in which pools?

Answer 16

• Balancing allowance will only ever arise on the GP and SRP on cessation of trade.
• Balancing charge can arise in the GP or SRP while trade is continuing.

Question 17

If a balancing charge arises while trade is continuing, when is this likely to happen?

Answer 17

If plant is sold in the year and disposal proceeds exceed the tax written down value of the pool.

Question 18

When can you get a balancing allowance in a single asset pool?

Answer 18

You can get a balancing allowance in a single asset pool when you sell or dispose of the asset that is in it.

Question 19

When doing the adjustment of profits calc, how are balancing charges and balancing allowances treated?

Answer 19

• You add balancing charges to your taxable profits.
• You take balancing allowances off your taxable profits.

Question 20

What may the Temporary FYA at 130% (super deduction) or at 50% (SR allowance) be available for?

When must the expenditure have been incurred?

Answer 20

May be available on the purchase of new unused plant and machinery.

Between 1 April 2021 and 31 March 2023.

Question 21

What does NTLR tax?

On what basis are non-trading profits normally calculated for companies?

Answer 21

Taxes all non-trading interest receivable by companies, less interest payable on non-trading loans.

Normally calculated on an ‘accruals’ basis.

Question 22

What are the main differences for CT when computing the TTP, compared to individuals? x8

Answer 22

• No private use adjustments.
• Interest payable on trading loans is allowed as a deduction from trade profits.
• Interest payable on non-trading loans (e.g. interest on a loan to buy an investment property or shares) is added back for trade profits but is deducted from non-trade profit (loan relationships).
• interest receivable will be treated as non-trade profits (loan relationship) in most cases
• Donations to charity are paid gross by companies and are deductible in arriving at the TTP as a qualifying charitable donation (QCD).
• Companies do not normally pay tax on dividends received, nor do they receive tax relief for dividends paid.
• Companies pay CT on their net chargeable gains (chargeable gains less capital losses) of the period.
• Indexation allowance is deducted in arriving at the chargeable gain.

Question 23

Re: Disallowable expenditure, what do you need to remember re: the 15% hire cost of cars?

Answer 23

15% of hire cost of cars is disallowable if the car has:

• CO2 emissions > 50g/km;
• > 110g/km for leases entered into before 1 April 2021