Chapter 11 - Corporation tax – taxable total profits Flashcards
Q: What is Corporation Tax, and who is liable to pay it?
A: Corporation Tax is payable by UK resident companies on worldwide income and gains for an accounting period. A company is liable if it is either incorporated in the UK or managed and controlled in the UK.
Q: How is Taxable Total Profits (TTP) defined?
A: Taxable Total Profits (TTP) is the total income and gains a company receives, which is subject to Corporation Tax.
Q: What defines a company’s accounting period for Corporation Tax?
A: An accounting period (AP) typically corresponds to the company’s financial year but cannot exceed 12 months. It begins when the company starts trading or receives chargeable income, and ends 12 months later or when the company stops trading.
Q: What happens if a company’s accounting period exceeds 12 months?
A: The accounting period is split into two: the first 12 months and the remaining period.
Q: How is a corporation tax computation made?
A: The corporation tax computation starts with calculating the TTP, including trading income, property income, non-trading loan relationships, chargeable gains, and qualifying charitable donations.
Q: How are dividends treated in Corporation Tax computations?
A: Dividends received by a company are generally exempt from tax but do affect tax rate and payment dates. Dividends paid are not deductible from profits.
Q: How is trading income calculated for corporation tax?
A: Trading income is similar to that of a sole trader and is adjusted for disallowed expenses, capital allowances, and non-taxable income.
Q: What are capital allowances, and how do they affect trading income?
A: Capital allowances are deductions from taxable trading profits, such as allowances for plant and machinery. They reduce taxable profits by allowing companies to claim tax relief on capital expenditures.
Q: What is the full expensing regime for capital allowances?
A: Full expensing allows 100% tax relief on new and unused plant and machinery (excluding cars) purchased by companies between 1 April 2023 and 31 March 2026.
Q: What is the tax treatment of disposals of assets benefiting from full expensing?
A: If assets purchased under full expensing are disposed of, a balancing charge arises equal to the disposal value.
Q: How is rental income from UK properties taxed?
A: Rental income is taxed on the accruals basis, meaning it is taxed when earned, not when received.
Q: What is the tax treatment of interest income from loan relationships?
A: Interest income is taxed on the accruals basis, and its classification as either trading or non-trading income determines the tax implications.
Q: How are chargeable gains calculated for a company?
A: Chargeable gains are taxed on the profit made from disposing of chargeable assets, with the calculation similar to that for individuals, but companies do not benefit from the Annual Exempt Amount (AEA).
Q: How are Qualifying Charitable Donations (QCDs) treated for corporation tax purposes?
A: QCDs are deducted from taxable profits when calculating TTP. They are only deductible if made on a cash paid basis.
Q: What are the key steps in calculating Corporation Tax liability?
A: 1. Calculate TTP.
2. Calculate augmented profits.
3. Determine the applicable tax rate.
4. Apply the tax rate to TTP.
Q: What are augmented profits in relation to Corporation Tax?
A: Augmented profits include TTP plus any exempt distributions from 51% subsidiaries. They affect tax rate determination.
Q: What is the tax rate for companies with augmented profits greater than £250,000?
A: Companies with augmented profits greater than £250,000 are taxed at the main rate of 25%.
Q: What tax rate applies to companies with augmented profits less than or equal to £50,000?
A: Companies with augmented profits of £50,000 or less are taxed at the small profits rate of 19%.
Q: How is marginal relief applied to companies with augmented profits between £50,000 and £250,000?
A: Marginal relief applies to companies with profits between £50,000 and £250,000, calculated using a specific formula based on profits and the applicable fraction (3/200).
Q: How does the tax rate change for short accounting periods?
A: For short accounting periods (less than 12 months), the £50,000 and £250,000 limits for tax rates are proportionally reduced.
Q: What does it mean for companies to be “associated” for tax purposes?
A: Companies are considered associated if one controls the other or both are controlled by a third company. Control means owning more than 50% of the share capital or voting power.
Q: How does being an associated company affect the corporation tax limits?
A: The £50,000 and £250,000 limits for determining tax rates are divided by the number of associated companies.
Q: How are dividends from associated companies treated for tax purposes?
A: Dividends from associated companies are excluded from the augmented profits calculation, which affects the corporation tax rate.
A: What is the formula for calculating marginal relief?
A: The formula for marginal relief is:
(𝑈−𝐴) × (𝑁/𝐴) x 𝑆𝐹
where U is the upper limit, A is augmented profits, N is taxable total profits, and SF is the standard fraction (3/200 for FY23).
