Corporation Tax

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1 Introduction

1.1 Scope of corporation tax

Companies resident in the UK are chargeable to corporation tax on their worldwide income and gains.

A company is UK resident if it is either;

1. incorporated in UK, e.g. A Ltd or V plc, or

2. incorporated overseas, but is centrally managed and controlled from UK, e.g. A Inc., which is incorporated overseas, but the majority of its directors are resident in UK and board meetings are held in UK.

1.2 Definitions

• A period of account is the period for which a company prepares its accounts; i.e. the period covered by the profit and loss account. Usually a company will prepare accounts for a period of 12 months, but a period of account may be for a shorter or longer period than this. This may occur when a company either commences or ceases trading, or if it changes its accounting date.

• Corporation tax is charged in respect of (chargeable) accounting periods. Normally a company’s accounting period (AP) will be the same as its period of account. This is the period for which the Corporation Tax computation is prepared and for which the Taxable Total Profit (TTP) is computed. If the period of account exceeds 12 months then 2 corporation tax computations will be required, one for the first for 12 months and another for the remainder of the period.

1.3 Accounting periods

• Start:

  • An AP will normally start immediately after the end of the preceding AP.

  • An AP will also start when a company commences to trade, or when its profits otherwise become liable to corporation tax.

• End:

  • An AP will normally end twelve months after the beginning of the period or at the end of a company’s period of account.

  • An AP will also end when a company ceases to trade, or when its profits otherwise cease being liable to corporation tax.

2 Taxable Total Profits (TTP)

A company’s corporation tax liability for an accounting period is calculated by computing profits (income + gains) from all sources and deducting qualifying charitable donations. This figure is known as Taxable Total Profits (TTP) and is then charged to tax at the relevant corporation tax rates.

Pro forma corporation tax computation

2.1 Notes

1. Dividends received from other UK and overseas companies are not taxable, dividends paid are not deductible.

2. Companies pay corporation tax (not capital gains tax) on chargeable gains.

3 Trading profit

3.1 The calculation of trading profit is similar to that for unincorporated business:

3.2 Adjusted profit

The rules discussed in the chapter for unincorporated business are similar for incorporated businesses and should now be revised.

The main differences in the adjustment of profit for corporation tax are:

1. The profits are calculated on the ACCRUALS BASIS.

2. There is no CASH BASIS for companies.

3. There are never any private use adjustments/assets as everyone who works for the company is an employee.

4. Drawings (cash or goods) are not relevant for companies as there is no proprietor. Any salaries or benefits provided to the company's owners (shareholders) who work in the company are assessed as employment income on the individual and will be allowable deductions for the company. Any distributions (dividends paid to shareholders) are not allowable deductions as they are paid out of post tax profit.

5. Legal fees regarding the issue of share capital are an expense only for companies and as they are capital in nature. The expense is disallowed and added back in the adjustment of profit.

6. Legal fees with regard to registering patents and trademarks are allowable by statute.

7. Interest payable on a non-trading loans is added back, but the expense is deductible instead against interest income under the non-trade loan relationship (NTLR) rules.

8. Interest payable to HMRC is treated as non-trading and so is added back, but is deductible against interest income (interest receivable from HMRC is taxable as interest income).

Capital allowances

The basic capital allowance rules for an unincorporated business apply to companies with the exception that there are NO private use assets.

Note that only one AIA is allowable to a group of associated companies, but they can choose how to allocate it between them (see later for an explanation of associated companies).

For a two year period up to 31 March 2023, companies (not individuals) could have benefitted from an enhanced capital allowance of 130% (known as the 'super-deduction') when they purchased NEW main pool plant and machinery. THIS WILL NO LONGER BE EXAMINED.

However.....

A disposal of plant and machinery on which the 130% super deduction have been claimed could be examined. Any disposal will be set in an accounting period commencing on or after 1 April 2023.

•When plant and machinery on which the 130% super deduction was claimed is subsequently sold after 31 March 2023, the sale proceeds are not deducted from the main pool. Instead, the disposal value (the lower of proceeds and original cost) is brought in as a balancing charge.

From 1 April 2023, new main pool plant and machinery (not cars) is entitled to a 100% FYA (known as 'full expensing'). When plant and machinery on which full expensing has been claimed is subsequently sold, the sale proceeds are not deducted from the main pool. Instead, the disposal value (the lower of proceeds and original cost) is brought in as a balancing charge.

For expenditure which falls into the special rate pool, an enhanced capital allowance, being a 50% first year allowance, has been available since 1 April 2021. This is given on any expenditure in excess of the AIA. When plant and machinery (on which the 50% first year allowance has been claimed) is subsequently sold, 50% of the disposal value is deducted from the special rate pool, with the other 50% brought in as a balancing charge.

The relevant rate(s) of allowance will be given in any exam question where there is a disposal of plant and machinery on which enhanced capital allowances have been claimed.

4 Property income

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As per individuals (see previous chapters) with some notable exceptions:

1. The property income is always calculated on the ACCRUALS BASIS for the accounting period:

1. There is no CASH BASIS for companies.

2. There is no rent a room relief for companies.

3. Interest payable on a loan to buy a rental property is deductible against interest income not property income under the non-trading loan relationship (NTLR) rules. The restriction that applies to individuals on finance expenses relating to residential properties does not apply to companies.

4. If a company makes a property business loss on its let properties it must be offset in full against total profits before deduction of qualifying charitable donations of the current accounting period - any unused donations paid are wasted. Any excess property business loss is carried forward and set off against any part of the future total profits of the company - partial claims may be made and therefore avoid wasting any donations paid.

5 Interest income (Loan Relationship rules)

1. All interest receivable is assessed as interest income on the accruals basis.

2. Companies receive all interest gross.

3. Interest payable is deductible against tax adjusted trading profit if the loan is used for trading purposes; e.g. bank overdraft interest, interest payable to acquire property or plant & machinery to use in the trade, or to increase working capital.

4. If the loan is used for non-trading purposes, then interest payable is deductible against interest income. It is relievable on an accruals basis. The main examples of non-trading loans are those taken out to acquire a rental/investment property, as stated above, or to acquire shares in another company.

6 Qualifying Charitable Donations (QCDs)

For companies, tax relief is given on charitable donations by deducting them against total profits under the qualifying charitable donations system.

The payment is GROSS and deductible on a paid basis.

Thus in the adjustment of trading profit any such payments should be added back (on the accruals basis) and instead included as a separate deduction (on the paid basis) against total profits in the Corporation Tax computation.

7 Dividends

Dividends received from UK and overseas companies are generally exempt from corporation tax and are therefore not included as part of Taxable Total Profits.

8 Rates of Corporation Tax

Rates of corporation tax are set for financial years, which run from 1 April to the following 31 March and are identified by the calendar year in which they start.

Up to the financial year 2022 (1 April 2022 to 31 March 2023) the rate of corporation tax was 19%. This single rate applied regardless of the level of a company’s profits. From the financial year 2023 to the financial year 2025 (which runs from 1 April 2025 to 31 March 2026), there are two rates of corporation tax:

• A small profits rate of 19% which applies where a company’s augmented profits do not exceed a lower limit of £50,000; and

• A main rate of 25% which applies where a company’s augmented profits are £250,000 or more (the upper limit).

The lower and upper limits are proportionately reduced for short accounting periods and also according to the number of associated companies (see later for an explanation of associated companies).

Augmented profits are a company’s taxable total profits (TTP) plus dividends received. However, dividends from associated companies are excluded. Augmented profits determine the rate of corporation tax, and once determined, the rate is applied to TTP.

Marginal relief

Marginal relief eases the transition from the small profits rate to the main rate of corporation tax where augmented profits fall between £50,000 and £250,000.

Corporation tax is calculated at the main rate of 25% but this figure is then reduced by marginal relief. The formula for calculating marginal relief is:

The standard fraction for the financial year 2025 is 3/200.

If no dividends are received, the final part of the formula (Taxable total profits/Augmented profits) can be omitted since both taxable total profits and augmented profits are the same amount.

A company usually has to pay its CT liability 9 months and 1 day after the end of its AP, but large companies are required to make quarterly instalment payments to settle their corporation tax liability.

The rates of Corporation Tax are given to you in the tax tables in your exam:

Short accounting periods

The lower and upper limits are proportionately reduced if a company’s accounting period is less than 12 months in length (remember that it can never be longer than 12 months).

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Associated companies

The lower and upper corporation tax limits are effectively shared if a company has associated companies.

• Companies are associated if they are under the same control. This basically means a shareholding of more than 50%.

• Companies that are only associated for part of an accounting period count as associated companies for the whole of that period.

• Dormant companies (not carrying on a trade or business) do not count as associated companies.

• For associated company purposes, it is irrelevant where a company is resident. Therefore, companies which are resident overseas are included.

Do not forget to include the parent company in the number of associated companies.

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Quarterly instalment payments

A company is required to make quarterly instalment payments in respect of its Corporation Tax liability if augmented profits exceed a threshold of £1,500,000. Such companies are classed as 'large'.

The profit threshold is divided by the number of associated companies at the end of the preceding accounting period. For any exam question involving quarterly instalment payments, the number of associated companies will be given.

A company does not have to pay in quarterly instalments in the accounting period that it becomes large, unless its augmented profits exceed £10 million.

For a company that is not large  (augmented profits no more than the upper limit of £1,500,000 (reduced for short periods/associated companies)), the corporation tax liability is due nine months and one day after the end of the accounting period; e.g. the corporation tax liability for a company with the year ended 31 December 2025 is due on 1 October 2026.

9 Long period of account

Apportioning income and expenditure

1. If a company has a period of account longer than 12 months it must be split into two accounting periods:

• the first 12 months

• the remaining months

1. The income and expenditure of the period of account is divided between the APs as follows:

1. Two corporation tax returns are required for the two accounting periods.

2. Two separate corporation tax liabilities will arise, each with their own due dates.