Company income and taxable total profits

1 Trading profit

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

1.2 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).

Otherwise allowable revenue expenditure in the seven years before commencement is treated as incurred on the first day of trade. Use accruals for company profits; apply the individual ordinary adjustment principles but there is no proprietor private-use restriction.

2 Company capital allowances and enhanced disposals

Capital allowances

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

However.....

A disposal of plant and machinery on which the historical 130% super-deduction was claimed can be examined. The disposal will be in an accounting period commencing on or after 1 April 2023; the relief is not available on current purchases.

•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.

• Company employees’ private use does not restrict capital allowances.

• New qualifying main-pool machinery may get 100% full expensing; new qualifying special-rate expenditure may get 50% FYA on the excess not relieved by AIA.

• After 50% FYA, the remaining cost enters the special-rate pool for WDA in the next accounting period.

• On disposal split value 50/50 between immediate balancing charge and pool deduction.

3 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:

• Use accruals for company property income; no cash basis or rent-a-room relief.

• Interest on a property-investment loan is a non-trading loan-relationship debit, not a property-expense deduction.

• Property losses use the current/future total-profit relief rules in chapter 18.

4 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.

5 Charitable donations and taxable total profits

Use the corporation tax proforma in chapter 15: add trading profit, interest income, property income and net chargeable gains, then deduct qualifying charitable donations to obtain taxable total profits.

5.1 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.

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.

Prepare one company computation: trade profit+net non-trade interest+property profit+net gains−qualifying donations=TTP. Keep income categories separate until aggregation. Donations are the actual gross amount paid: never use personal Gift Aid gross-up.