COURSE: ACCA – TAXATION (TX)

Lecture Topic: Corporation Tax – Basics

1. The Scope of Corporation Tax

 A company pays corporation tax on its taxable total profits.

 Corporation tax is chargeable in respect of accounting periods.

2. Corporation tax – Pro Forma Computation

 To determine the corporation tax liability, a company’s taxable total profits must be calculated:

£
Trading profits 1,200,000
Interest income from non-trading loan relationships 160,000
Property business profits 85,000
Chargeable gains 90,000
Miscellaneous income (Patent Royalties) 5,000
Total profits 1,540,000
Less: qualifying charitable donations (140,000)
Taxable Total Profits 1,400,000

The ‘taxable total profits’ is then multiplied by the relevant rate of tax to give the corporation tax liability:

Corporation Tax Liability = Taxable Total Profits × the rate of tax

 The corporation tax rate is 19%

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3. Computing Taxable Total Profits
The following rules apply to the computation of the various items of income and gains that are included in a company’s
Taxable Total Profits.

3.1 Chargeable Gains

Companies do not pay capital gains tax. Instead, their chargeable gains are included in the Taxable Total Profits.

A company’s capital gains and losses are computed in a similar way to individuals but with a few differences:

(i) Companies are entitled to an allowance called the Indexation Allowance.

(ii) The annual exemption is not available for companies.
(iii) The matching rules for share disposals are different.
(iv) The only relief available for companies is rollover relief.

3.1.1 Indexation Allowance

Companies are entitled to an allowance called the indexation allowance.

An indexation allowance is calculated for each asset disposed of, and is given as a deduction when calculating the
chargeable gain:

£
Disposal consideration 100,000
Less: Incidental costs of disposal (400)
Net proceeds 99,600
Less: Allowable costs (29,500)
Unindexed gain (gain) 70,100
Less: Indexation Allowance (23,800)
Chargeable Gain 46,300

(a) The indexation allowance is calculated as follows:

Indexation allowance = Indexation factor × Allowable cost

(The indexation factors will be given in the exam).

(b) The Indexation Allowance only applies up to December 2017. Therefore, when an asset is purchased prior to
December 2017 and sold after December 2017, the indexation allowance will be given from the month of
acquisition up to December 2017.

(c) If the expenditure was incurred after December 2017 and the asset is subsequently sold, there will be no
indexation allowance on that expenditure.

(d) The indexation allowance is calculated separately for each element of allowable cost that was incurred at a
different time.

(e) The indexation allowance cannot be used to create or increase a capital loss.

(f) If rollover relief is available it is given after the indexation allowance, i.e. it is applied to the indexed gain.

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3.1.2 Disposal of shares by companies

For companies, disposals of shares are matched with purchases in the following order (i.e. matching rules for companies):

(a) Shares acquired on the same day as the disposal

(b) Shares acquired in the nine days prior to the disposal
(c) Shares from the Share Pool

At any one time, we will only be concerned with shares or securities of the same class in the same company. Therefore,
shares in different companies or different classes of shares in the same company are dealt with entirely separately.

3.1.2.1 The Share Pool

o For companies, the share pool keeps track of:

(a) the number of shares

(b) the cost of those shares
(c) the indexed cost of the shares (i.e. the original cost plus indexation)

o Shares are added to the pool when a purchase is made and removed from it on a sale. These are known as
‘operative events’.

o An indexation allowance (known as an ‘indexed rise’) is added to the indexed cost column immediately before
each operative event. The indexed rise is computed as follows:

Indexation Factor × Indexed Cost

o On disposal, the proportion of the cost and indexed cost attributable to the shares disposed of are deducted from
the amounts within the pool. This is done using the number of shares.

3.1.2.2 Bonus issues

When a company acquires shares via a bonus issue, all that happens is that the size of the original holding is increased. A
bonus issue is not an operative event and therefore, no indexation allowance needs to be calculated.

3.1.2.3 Rights issues

A rights issue is treated as a normal acquisition for indexation allowance purposes.

3.1.2.4 Takeovers and reorganisations

Similar treatment as for individuals, i.e. the cost and the indexed cost of the original holding is passed onto the new
holding which take the place of the original holding.

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3.2 Trading Income
Just as for individuals, the taxable trading income of a company is derived from the net profit figure in the accounts:

£ £

Net profit per accounts 140,000

Add: (i) Expenditure charged in the accounts

which is not allowable (not deductible) for tax purposes 50,000

(ii) Income taxable as trading income

which has not been included in the accounts 30,000
80,000
220,000
Less: (i) Income included in the accounts
which is not taxable trading income 40,000

(ii) Expenditure that is deductible (allowable) for tax purposes,

but which has not been charged in the accounts 20,000

(iii) Capital allowances 10,000

(70,000)
Trading Profits adjusted for tax purposes
150,000

Trading profit adjustments for companies broadly follow the same rules as for individuals, except that there are no
adjustments for personal expenses included in the accounts.

3.2.1 Capital Allowances

The calculation of capital allowances for companies also follows the same rules as for individuals, with the following
differences.

(a) Companies can benefit from enhanced capital allowances when they purchase new plant and machinery:

- For expenditure which would fall into the main pool, there is a 130% super deduction. This means that for every
£100 of expenditure, a first-year allowance of £130 is available.

- For expenditure which would fall into the special rate pool, there is a 50% first year allowance, instead of the 6%
WDA.

- For expenditure falling into the main pool, the 130% super deduction should be claimed rather than the 100%
annual investment allowance.

- However, for expenditure falling into the special rate pool, the 100% annual investment allowance should be
claimed in preference to the 50% first year allowance.

- Enhanced capital allowances are not available to sole traders or partnerships. Only expenditure on new plant and
machinery qualifies, not expenditure on second-hand assets. Motor cars do not qualify.

(b) For companies there is never any reduction of allowances to take account of any private use of an asset.

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3.3 Property business income
The calculation of property business income follows income tax principles. The main differences being:

(a) Property business losses are first set off against non-property business income and gains of the company for the
current period; and any excess is carried forward for set off against future income of all descriptions.

(b) Interest paid by a company on a loan to buy or improve property is not a property business expense. Instead it is
netted off against interest income.

3.4 Investment Income (Interest income)

If a company borrows or lends money, including issuing or investing in debentures or buying gilts, it has a loan
relationship. In order to apply the loan relationship rules, all interest paid/received must first be distinguished as either
‘trading’ or ‘non-trading’.

3.4.1 Trading interest

 If the company is a party to a loan relationship for trade purposes, any interest paid or other debt costs are
allowed as a trading expense and are therefore allowable in computing taxable trading income. Examples of
trading interest payable are:

- Interest on a loan taken out to purchase plant and machinery for the business.

- Loan or overdraft interest to fund daily trading operations (i.e. working capital).

 Similarly any interest income arising on a trading loan is taxable as trading income. This will only occur if it is
the company’s trade to lend money (e.g. a bank).

3.4.2 Non-trading interest

 If the loan relationship is not for trade purposes, then any interest receivable is taxable as (interest) income.

Any interest payable on borrowings for non-trading purposes is deducted from interest income. Examples of
this include:

- Interest payable on a loan to purchase or improve a commercially let property.

- Interest payable on a loan to purchase investments or acquire investment property.

3.4.3 Other rules regarding interest

 Interest charged on underpaid tax is allowable and interest received on overpaid tax is assessable under the rules
for non-trading loan relationships.

 Interest is taxed on an accruals basis.

3.5 Miscellaneous Income

o Patent royalties received which do not relate to the trade are taxed as miscellaneous income.

o Patent royalties received which relate to the trade are included in trading income on an accruals basis.

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Questions
1.
Com Tech Ltd has the following results for the year ended 31 March 2022.
£
Trading income 1,020,000
Chargeable gains 15,000
Interest Income 20,000
Qualifying charitable donation 55,000

Calculate the corporation tax liability.

2.
Solaris Ltd sold a building for £500,000 in January 2020. It had bought the building in June 2011 for £320,000.

The Indexation Factor from June 2011 to December 2017 is 0.375

The Indexation Factor from June 2011 to January 2020 is 0.420

Calculate the chargeable gain on this disposal.

3.
Pye Ltd bought a factory for £250,000 on 1 April 1993. On 15 July 1996 the company spent £70,000 on an extension to the
factory. The factory was sold on 30 September 2018 for £800,000.

Indexation Factors are as follows:

April 1993 to September 2018 0.415

April 1993 to December 2017 0.395
July 1996 to September 2018 0.392
July 1996 to December 2017 0.350

Calculate the chargeable gain on the disposal of the factory.

4.
Delta Ltd sold a factory on 15 February 2019 for £420,000. The factory was purchased on 24 October 1995 for £164,000
and was extended at a cost of £100,000 during May 2015. The factory was further extended at a cost of £37,000 during
March 2018.

Delta Ltd incurred legal fees of £3,600 in connection with the purchase of the factory, and legal fees of £6,200 in
connection with the disposal. Indexation Factors are as follows:

October 1995 to December 2017 0.524

October 1995 to February 2019 0.623
May 2015 to December 2017 0.110
May 2015 to February 2019 0.155
March 2018 to February 2019 0.029

Calculate the chargeable gain on this disposal.

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5.
On 15 February 2020, Fair Ltd sold 70,000 £1 ordinary shares in Gong plc for £430,000. Fair Ltd had originally purchased
40,000 shares in Gong plc on 10 June 1995 for £110,000 and purchased a further 60,000 shares on 20 August 1999 for
£180,000.

Indexation Factors are as follows:

June 1995 to August 1999 0.105

August 1999 to December 2017 0.680

Calculate the chargeable on this disposal.

6.
Hance Ltd has an accounting reference date of 31 March each year. On 1 April 2021, the tax written down value of plant
and machinery in the company’s main pool and special rate pool is £0.

During the year ended 31 March 2022, Hance Ltd purchased new equipment for £1,650,000, of which £350,000 is main
pool expenditure and £1,300,000 is special rate pool expenditure.

Calculate the capital allowances for the year ended 31 March 2022.

7.
Green Ltd, a clothing manufacturer, is a UK resident company. The company had the following results for the year ended
31 March 2020.
£
Income:
Adjusted trading profit 982,000
Debenture interest received (note 1) 7,500
Chargeable gain 15,000

Expenditure:
Bank interest paid (note 2) 3,000
Qualifying charitable donation 4,000

Notes:

1. The debenture interest received was in respect of £100,000 debentures purchased on 16 May 2018 at an interest
rate of 10% per annum. The amount of debenture interest outstanding at 31 March 2020 will be received in April
2020.

2. The bank interest paid is the full amount due on a loan used to purchase investments.

Required

Calculate the company’s corporation tax liability for the year ended 31 March 2020.