Corporation tax: scope, periods and rates

1 Scope and accounting periods

In this TX lecture: The overseas-income discussion is not examined in FTX.

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1.1 Scope of corporation tax

Companies within the FTX scope pay corporation tax on income and chargeable gains. Foreign income/double tax relief computations are excluded.

• A company incorporated in the UK is normally UK resident.

• Identify the company and accounting period before computing taxable income and gains; foreign income relief is outside FTX.

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

Compute company income and chargeable gains for each accounting period. No personal allowance or CGT annual exemption applies. An accounting period cannot exceed 12 months; a long period of accounts needs two separate computations.

3 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.

For financial years 2023, 2024 and 2025, the supplied small-profits rate is 19% and main rate 25%, with marginal relief between the appropriate limits.

• 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.

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.

In this TX lecture: Dividend and associated-company adjustments to the instalment threshold, and instalment calculations for short periods, are not examined in FTX. For FTX, use taxable total profits and the threshold stated in these notes rather than the TX augmented-profits test.

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4 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.