Corporation taxation MCQs Flashcards
A woman makes some soy wax from plants grown in her greenhouse and sells it to a candle making company for £2,000 + VAT. The company makes some candles with it and sells all the candles made with the wax to a distributer for £4,000 + VAT. The distributor sells the candles to a retail outlet for £5,500 plus VAT.
How much VAT will be sent to HMRC as a result of the above transactions?
VAT is charged at 20%.
£1,100
£5,500
£2,300
£1,900
£300
£1,100
Correct. The amount in each transaction that is paid to HMRC is the difference between the input tax and the output tax.
A private limited company started trading in February two years ago. It has chosen the calendar year as its financial year, so its first accounting period ended on 31 December of the year in which it commenced trading. During this first accounting period, the company made a trading loss of £50,000 in September. The company made no chargeable gains or losses during this first accounting period.
In its second accounting period, which ended on 31 December the following year, the company made a trading profit of £25,000. The company made no capital gain or losses during the second accounting period.
Can the trading profit of £25,000 made in the second accounting period be set off against the trading loss of £50,000 from the first accounting period?
No, because a trading loss can only be set off against trading profits from an earlier accounting period.
Yes, because no trading or capital losses were incurred in the first accounting period.
Yes, because there were no trading profits or chargeable gains in the first accounting period to offset the £50,000 trading loss.
No, because the company was not carrying on business for a full 12 month period before the accounting period in which the trading loss was incurred.
No, because a trading loss can only be set against trading profits or chargeable gains in the same accounting period.
Yes, because there were no trading profits or chargeable gains in the first accounting period to offset the £50,000 trading loss.
Correct. The trading loss in the first accounting period has first to be set off against any trading profits or chargeable gains in the same accounting period. However, as there were no trading profits or chargeable gains in the first accounting period, the trading loss could then be offset against future trading profits or chargeable gains in subsequent accounting periods, so can be set off against the £25,000 trading profit in the second accounting year.
A company has a Total Taxable Profit of £1,340,000 for the tax year ending 5 April 2022.
Which of the following statements best describes how the company must pay its tax liability to HMRC?
The company will calculate its tax liability and pay HMRC within 9 months and one day of the end of the accounting period.
The company will calculate its tax liability and pay HMRC within 9 months of the end of the accounting period.
The company will calculate its tax liability and pay HMRC in two instalments over the course of the next two accounting periods.
The company will calculate its tax liability and immediately pay HMRC any tax which is due.
The company will calculate its tax liability and pay HMRC in four instalments over the course of the next two accounting periods.
The company will calculate its tax liability and pay HMRC within 9 months and one day of the end of the accounting period.
A private interior design company specialises in penthouse apartments and loft conversions. During its last financial year, the company purchased freehold office premises at a cost of £160,000. In order to do this, it took out a loan, on which it paid interest of £10,500 during the year. The company refitted the premises, which were not in keeping with its design criteria, at a cost of £14,000. Whilst the improvements were being made, the company rented temporary premises on a short-term lease, paying £35,000 in rent. The company also incurred business entertainment expenses of £8,000.
The company had trading receipts of £555,000 in the relevant financial year and other deductible expenditure in the sum of £105,000. It made no disposals of chargeable assets during the year.
What is the company’s TTP for the year?
£244,500
£101,125
£390,500
£404,500
£396,500
£404,500
Correct. This is calculated as follows:
Trading receipts £555,000
Less deductible expenditure £105,000
Less interest paid on loan £10,500
Less rent £35,000
Total £404,500
You have a corporate client which sold some land in September 2022 for £175,000, making a chargeable gain of £25,000. In November 2020, it bought some machinery for £60,000. In May 2023, the client buys new premises for £250,000.
Which statement below represents the best advice to the client regarding the applicability of tax reliefs?
The client can add the chargeable gain of £25,000 onto the purchase price of the premises to reduce any chargeable gain arising from a future sale of the premises.
The client can deduct the chargeable gain of £25,000 against the price of the premises to give a new base cost for the premises of £225,000 or against the price of the machinery to give a new base cost for the machinery of £35,000.
The client can deduct the chargeable gain of £25,000 against either the cost of the machinery or the premises which will help it to reduce the amount of corporation tax it has to pay.
The client can deduct the chargeable gain of £25,000 from the price of the premises only to give a new base cost for the premises of £225,000
The client cannot deduct the chargeable gain of £25,000 against the price of the premises as the premises was not purchased within the qualifying time limit.
The client can deduct the chargeable gain of £25,000 from the price of the premises only to give a new base cost for the premises of £225,000
Correct. This represents the operation of roll over relief to defer the payment of a chargeable gain tax liability.
Question 1
A company had total sales in the accounting period ending 31 March 2023 of £2,400,000.
The company incurred the following costs during the accounting period:
Costs £
Stock 335,000
Salaries 333,000
Electricity/ gas/ telephone and rates 98,000
Rent 19,000
Insurance 6,000
The company sold some warehouse premises in June 2022 for £610,000. It purchased them
in January 2010 for £360,000.
Which of the following best describes the company’s trading profit for the accounting
period?
A £88,779
B £2,400,000
C £791,000
D £1,609,000
E £250,000
Answer
Option D is correct. Trading profit is calculated by subtracting deductible expenditure from
sales. The sale of the warehouse is irrelevant for the purposes of calculating trading profit.
Here, the listed deductible expenditure adds up to £791,000. Sales of £2.4 million less
deductible expenditure of £791,000 = £1,609,000.
Question 2
A large trading company has an accounting period which ends on 31 March. In May 2022
it buys brand new plant and machinery costing £1,000,000. At the start of that financial year
it had a pool of plant and machinery worth £500,000. Assume that the company always
claims the maximum capital allowances available and that the rates for capital allowances
remain the same as for the previous financial year.
Which ONE of the following statements best describes the capital allowance the
company can claim in the accounting period ending 31 March 2023?
A £1,000,000
B £1,300,000
C £90,000
D £270,000
E £1,390,000
Answer
Option E is correct. In the accounting period ending 31 March 2023, the company can claim
the super-deduction of £1,300,000 (130% x £1,000,000) in relation to the brand new machinery.
It can also claim 18% of the existing pool of £500,000, that is, £90,000.
This gives total capital allowances for the accounting period of £1,300,000 + £90,000 =
£1,390,000.
Question 1
A private limited company made income profits of £600,000 in its accounting period
ending 31 March 2023. In the same accounting period, it also made a chargeable gain of
£1 million. It is not entitled to any tax reliefs or exemptions.
Which of the following statements best describes the company’s tax position for the
accounting period ending March 2023?
A It will have a capital gains tax liability of £200,000.
B It will have a corporation tax liability of £304,000.
C It can reduce its liability to tax on the chargeable gain by deducting an annual
exemption of £12,300.
D It is a company and so not required to pay any tax in respect of capital gains.
E It will pay income tax on its trading profits and capital gains tax on its
chargeable gains.
Answer
Option B is correct. Companies pay corporation tax on their gains, not CGT or income
tax (meaning that options A, D and E are wrong) on their gains and do not benefit
from an annual exemption (meaning that option C is also wrong). It is necessary to add
income profits and chargeable gains together in order to ascertain total profits and the
appropriate rate of tax. This company has total profits of £1,600,000, and pays corporation
tax of 19% on these profits, giving a tax liability of £304,000.
Question 2
A company’s income in the accounting periods from 1 April 2020 to 31 March 2023 is set
out below. The company’s accounting reference date is 31 March.
Year Trading profit (£) Rental income (£)
2020/21 25,000 20,000
2021/ 22 15,000 20,000
2022/23 (10,000) 20,000
Assume that it is now late 2023 and the client is still trading but anticipates making a loss
again for the financial year 2023/24. Its rental properties are empty and the company is
receiving no rent for them. If the company continues to trade, which of the following best
describes the tax relief(s) the client should claim for its losses in the 2022/23 accounting
period?
A Terminal carry- back relief, because the company has stopped making trading profits.
B Carry- forward relief, so that the losses can be set against future profits of the
same trade.
C Carry- across relief, so that total profit for 2022/23 is reduced to £10,000.
D Carry- back relief, so that trading profit for 2021/22 is reduced to £5,000.
E Carry- across or carry- back relief, to reduce total profit for 2021/22 or 2022/23 by
£10,000.
Answer
Option E is correct. The requirements for terminal carry- back relief have not been met: the
company was clearly not in its final 12 months of trading in 2022/23 (option A is therefore
wrong). Carry- forward relief is risky as the company may not make future profits (so option B
is wrong). The client can choose between carry- back and carry- across relief to reduce total
profits from one of those years by £10,000. The fact that it can choose which relief to use
means that options C and D are wrong in stipulating that the company has only one available
form of relief to claim.
Question 12
An ordinary trading partnership has three partners: the senior partner, the managing partner, and the junior partner. The three partners share income profits equally and capital profits in accordance with their capital contributions as follows:
Senior partner: 50%
Managing partner: 30%
Junior partner: 20%
Five years ago, the firm purchased office premises. The premises have just been sold for a profit, realising a chargeable gain.
Who will be liable to pay tax on the gain realised on the sale?
A. Each partner will be liable to pay Capital Gains Tax on one third of the gain and the firm will have no liability.
B. The firm will be liable to pay Corporation Tax on the entire gain and the partners will have no liability.
C. Each partner will be liable to pay Income Tax on one third of the gain and the firm will have no liability.
D. The senior partner will be liable to pay Capital Gains Tax on 50% of the gain, the managing partner on 30% of the gain and the junior partner on 20% of the gain.
E. The senior partner will be liable to pay Income Tax on 50% of the gain, the managing partner on 30% of the gain and the junior partner on 20% of the gain.
D - The senior partner will be liable to pay Capital Gains Tax on 50% of the gain, the managing partner on 30% of the gain and the junior partner on 20% of the gain.
Question 13
A company has an accounting reference date of 31 December. It commenced trading in April, so that its first accounting period ended on 31 December of the year in which it commenced trading. During this first accounting period, the company made neither a trading profit nor a trading loss. However, the company did make a chargeable gain of £75,000 in the November, from the sale of a freehold property. The company made no capital losses during this first accounting period
In its second accounting period, which ended on 31 December the following year, the company made a trading loss of £45,000. The company made no capital gain and no capital loss during the second accounting period.
Can the trading loss of £45,000 made in the second accounting period be set off against the chargeable gain of £75,000 from the first accounting period?
A. Yes, because no trading or capital losses were incurred in the first accounting period.
B. No, because a trading loss can only be set off against trading profits from an earlier accounting period.
C. Yes, because the chargeable gain occurred within the 12 month period ending immediately before the accounting period in which the trading loss was incurred.
D. No, because the company was not carrying on business for a full 12 month period before the accounting period in which the trading loss was incurred.
E. No, because a trading loss can only be carried forward and set off against trading profits from a subsequent accounting period.
C - Yes, because the chargeable gain occurred within the 12 month period ending immediately before the accounting period in which the trading loss was incurred.
A private limited company made a trading profit and a capital loss in its current accounting period. In the previous accounting period, the company made a chargeable gain.
Which statement best describes how the capital loss can be used to reduce the company’s corporation tax liability in the current accounting period?
Select one alternative:
The capital loss cannot be set off against the trading profits in the current accounting period and it cannot be set off against the chargeable gain in the previous accounting period. It can only be set off against chargeable gains in subsequent accounting periods.
The capital loss can be set off against chargeable gains in the previous accounting period and any remainder can be carried forward and set off against chargeable gains in subsequent accounting period.
The capital loss can be set off against the trading profits in the current accounting period and any remainder can be set off against the chargeable gain in the previous accounting period.
The capital loss can be set off against any chargeable gains made in the previous accounting period and then any remainder can be set against any income profits or chargeable gains in subsequent accounting periods.
The capital loss can be set off against the trading profits in the current accounting period and any remainder can be carried forward and set off against chargeable gains in subsequent accounting periods.
The capital loss cannot be set off against the trading profits in the current accounting period and it cannot be set off against the chargeable gain in the previous accounting period. It can only be set off against chargeable gains in subsequent accounting periods.
This is a BLP question. This question concerns the use of capital losses to offset trading profits and/or chargeable gains due to corporation tax. Capital losses can generally be set off against chargeable gains only. If there are unused capital losses in the current accounting period, these losses can be carried forward and set off against chargeable gains in subsequent accounting periods.
A private company has four shareholders who each own 25% of the shares. The shareholders are also the directors of the company. Last year, the company loaned £25,000 to one of the shareholders. The company has now decided to write off that loan.
Which one of the following statements best explains the tax position for both the company and the shareholder?
Select one alternative:
When the loan is written off, the shareholder must reimburse the company for the amount of tax paid by the company to HMRC.
When the loan is written off there will be no tax implications for the company or the shareholder.
When the loan is written off, the shareholder will be deemed to have received a dividend equal to the amount of the loan written off.
When the loan is written off, the tax paid by the company to HMRC will be refunded to the company. The shareholder will be deemed to have received a dividend equal to the amount of the loan written off.
When the loan is written off, the tax paid by the company to HMRC will be refunded to the company.
When the loan is written off, the tax paid by the company to HMRC will be refunded to the company. The shareholder will be deemed to have received a dividend equal to the amount of the loan written off.
This is a BLP question. The company falls within the definition of a close company since it is under the control of five or fewer participators (or any number of participators who are also directors). It will therefore be subject to the special tax avoidance rules, which will mean that when the loan is written off, the tax paid by the company to HMRC will be refunded to the company. The shareholder will be deemed to have received a dividend equal to the amount of the loan written off.
A director of a private company, which is currently trading, sells their shares in the company and makes a taxable chargeable gain. They owned 6% of the ordinary voting shares in the company which they bought 18 months ago. The director is a higher rate taxpayer.
Which one of the following statements correctly describes the director’s capital gains tax liability?
Select one alternative:
The taxable chargeable gain will be taxed at 10% because the director will benefit from investors’ relief.
The taxable chargeable gain will be taxed at 20% because the director is a higher rate taxpayer and the sale does not satisfy the criteria for business asset disposal relief.
The taxable chargeable gain will be taxed at 20% because, although the director satisfies the criteria for business asset disposal relief, they are a higher rate taxpayer.
The taxable chargeable gain will be taxed at 10% because the director will benefit from business asset disposal relief.
The taxable chargeable gain will be taxed at 10% because the director is a higher rate taxpayer.
The taxable chargeable gain will be taxed at 20% because the director is a higher rate taxpayer and the sale does not satisfy the criteria for business asset disposal relief.
This is a BLP question. This question concerns the capital gains tax on the sale of shares in a private company. The taxable chargeable gain will be taxed at 20% because the director is a higher rate taxpayer and the sale does not satisfy the criteria for business asset disposal relief.
XYZ Ltd, a manufacturer of scientific equipment, intends to update its production line facilities this year and will shortly pay £345,000 to a supplier of used machine tools.
XYZ Ltd has asked you to advise on how capital allowances can apply in calculating its tax liability in coming years. XYZ Ltd has already used the whole of its annual investment allowance for this year. Its accounting year matches the financial year (1 April - 31 March).
Taking the current financial year as “Year 1”, and assuming that the applicable rates remain the same, which of the following figures is the capital allowance available to XYZ in Year 3?
* £50,922
* £62,100
* £231,978
* £41,756
* £190,222
- £41,756
- The calculation works out as follows:
- Year 1 Down/Capital Allowance (WDA/CA) = (18% x £345,000) = £62,100 Written Down Value (WDV) = (£345,000 - £62,100) = £282,900
- Year 2 WDA / CA = (18% x £282,900) = £50,922 WDV = (£282,900 - £50,922) = £231,978
- Year 3 WDA / CA = (18% x £231,978) = £41,756 WDV = (£231,978 - £41,756) = £190,222
