This article is written to assist candidates in approaching and succeeding in Question 2 of section B of the Foundations in Taxation (FTX) (UK) exam. It is relevant to those of you taking the FTX (UK) exam in either June or December 2017, and is based on tax legislation as it applies to the tax year 2016–17 (Finance Act 2016). It will cover the common areas of corporation tax and will highlight the common errors and pitfalls made by those taking the exam. It will not cover any area outside of the FTX (UK) syllabus.
Question 2 of section B of the FTX (UK) exam is always a 15-mark corporation tax question. It will normally require candidates to compute the corporation tax payable by a UK-registered company based on given information. Much of the information given will be standard detail that most UK companies will have to deal with in every accounting period.
The first problem is that some candidates confuse a company assessment and that of an individual. This may be due to exam pressure; however, the question will always make it clear that it is a company (plc or Ltd) – there should never be a doubt. When doing a company assessment all income and gains are assessed in one total column, the breakdown of income into the three categories of non-savings, savings and dividend relates to individuals only, never companies. On a similar note, companies do not get personal allowances or the annual exempt amount for capital gains tax.
Trading income
The first entry in the assessment is always the trading income. This figure comes from the trading activities of the company and may be given as ‘adjusted’ or ‘unadjusted’. It is vital that candidates ensure that they check whether the figure given in the question is before or after adjustments – many candidates adjust the figure given when it does not require adjusting.
When the term ‘trading profits after the deduction of…’ is used, then this indicates that the profit figure needs adjusting to arrive at the taxable trading income. Whereas when the terms ‘trading income’ or ‘adjusted trading profits’ are used, then this indicates that no adjustment to the figure is required. Occasionally, the question will state ‘adjusted trading profit before interest and capital allowances’ – this term will mean that the profit has been partially adjusted but will need further adjustment for the interest and capital allowances given.
If capital allowances are not already deducted from the trading income figure given, but are given separately, then these must be deducted from the trading profit and not from any other income. If they are deducted elsewhere in the assessment no mark will be awarded for the deduction.
If the question contains detail of a trading loss brought forward from a previous period, then this loss must be deducted from the trading income figure (after capital allowances), and nowhere else in the assessment. Once again, failure to deduct the figure in the correct place will result in no mark being awarded.
Losses
If after adjusting the trading results there is a loss then that loss can be used against the taxable profit (before qualifying charitable donations) of the same period and the previous 12 months.
Separate claims are required for each use and it is emphasised that a current year claim MUST be made first (if there is any other income in that period) before a prior year claim is allowed.
Any remaining loss is carried forward against future trading profits of the same trade (as described above).
Interest
Candidates must decide whether the interest figures given are for trade purposes or for non-trade purposes. In the FTX (UK) exam all interest received should be treated as non-trade. Interest payable, however, may be either. Either the question will state that the interest paid is trade or non-trade, or it will give enough information to enable the candidate to make the correct decision.
If the interest payable is trade interest, then it must be included in the calculation of trading income. Non-trade interest payable, however, must be pooled with interest received to give one net figure. This is then included in the corporation tax assessment as ‘interest income’. Failure to net the figures together and, thus, show two separate figures in the assessment will result in the loss of marks.
The netting of interest receipts and payments will not, in the FTX (UK) exam, ever result in a deficit, as this area is outside the syllabus.
Both trade interest and non-interest must be calculated on the accruals basis. Candidates must check the information given and calculate the correct amount to be included in the chargeable period given in the question.
Companies pay and receive interest gross to/from other companies or UK banks and, therefore, the figures given in the question will not need grossing up. Many candidates mistakenly gross up all interest by 100/80. Only that income paid or received to/from individuals will need grossing up. The question will clearly state if interest is paid or received to/from individuals – if it is does not say, then candidates should assume it is from other UK companies and should not, therefore, gross up the interest.
Property business income
This includes all income from rental properties. It must be calculated on the accruals basis and, therefore, candidates should ensure that they include any rent outstanding for the period – the actual date of payment is irrelevant, it is taxed in the year that it is due. The calculation is identical to that for individuals with the exception that interest payable is not a deductible expense, but is treated as non-trade interest as described in the previous paragraphs.
If the calculation results in a property business loss, then that loss must be deducted in the same year against the total profits before qualifying charitable donations. If all of the loss cannot be used in this manner, then it can be carried forward to the following year, against total profits before qualifying charitable donations. If the loss is deducted in the wrong place – for example, against next year’s property business income – then full marks will not be given.
Chargeable gains
Chargeable gains of a company are treated like any other income of a company and are included in the corporation tax assessment – companies do not pay capital gains tax. The question will normally give the actual amount of the chargeable gain but may sometimes require the candidate to calculate the figure (see below). All gains must be aggregated. If capital losses are given, either for the same period or carried forward from an earlier period, then these losses must be deducted from the aggregated gains to give a net chargeable gains figure. Once again if capital losses are deducted from the wrong income full marks cannot be awarded. Candidates should note that companies are not entitled to the annual exempt amount.
Qualifying charitable donations
Donations made by a company to a charity in the FTX (UK) exam are always to be treated as qualifying charitable donations unless they are small amounts to a local charity, in which case they should be included as a deduction in the trading income figure. Donations are always made gross and, therefore, candidates must not gross the payment up as they would for an individual. The payment must be deducted from total profits (after current year trade and property business losses); they should not be deducted elsewhere in the assessment otherwise full marks cannot be awarded.
Taxable total profits (TTP)
This is the term used for the total of all of a company’s income and gains less losses and qualifying charitable donations. This figure is the figure that the relevant tax rate will be applied to.
Dividends
Dividends payable are not allowable deductions and should always be ignored when calculating tax payable. Dividends received are not taxable.
If dividends are included in the trading profit figure then they must be removed in the adjusting process by either adding back dividends paid or deducting dividends received.
Dividends received are no longer grossed up to give franked investment income (FII) but are used to give the 'profits' to determine the size of the company for dates of payment of corporation tax (see later).
Chargeable gains
As mentioned above, the figures for chargeable gains and losses will usually be given in the question. On occasion, however, the question may require the candidate to calculate the gain. In a typical question this calculation will be a basic gain – technical calculations will be examined in a separate question. Candidates are reminded that companies get a deduction for inflation, called indexation allowance. In order to enable the gain to be calculated indexation factors will always be given – not retail price indexes.
Example:
A Ltd sold a factory building in December 2016 for £350,000, which had cost the company £100,000 in May 2004 and had been improved at a cost of £30,000 in June 2005.
Indexation factors are:
The resulting gain would then be:
| £ | ||
|---|---|---|
| Proceeds | 350,000 | |
| Cost | (100,000) | |
| Improvement | (30,000) | |
| 220,000 | ||
| Less indexation allowance: | ||
| £100,000 x 0.432 | (43,200) | |
| £20,000 x 0.390 | (7,800) | |
169,000 |
Capital losses, of this year or brought forward from previous periods, would then be deducted from the gain before the net amount is included in the corporation tax assessment. No reliefs such as rollover relief will be examined in the question – rollover relief and any other reliefs may be examined in a separate question.
Capital allowances
Capital allowances will be treated in a similar way to chargeable gains in that the amount will usually be given, but on occasions they may have to be calculated. The full calculation of capital allowances is outside the scope of this article but candidates must ensure they are aware of all the rules as shown in the recommended text.
A common mistake made by candidates is to deduct capital allowances from capital gains – this is wrong as they are totally different areas. Chargeable gains are the profits on the sale of capital assets, whereas capital allowances are ‘tax depreciation’ on capital assets held by a company– they should not be mixed together.
Periods exceeding 12 months
A UK company can never have a corporation tax assessment for a period in excess of 12 months. If a company has an period of account of more than 12 months, then corporation tax must be calculated as if there were two separate periods – the first of 12 months and the second of the balance. As an example: if a company makes up accounts for the period 1 January 2016 to 31 March 2017, then two tax calculations have to be done – one for 1 January 2016 to 31 December 2016 and another from 1 January 2017 to 31 March 2017. No other split of the period is allowed – you cannot do a calculation, for instance, of the first three months and then the remaining 12 – it has to be the first 12 and then the remaining period – three months in this example.
The calculations should be done with the two periods side by side in columnar format and a calculation for each period shown – the totals should not be added together. Care must be taken to ensure that income and expenditure goes into the correct period, especially when it relates to amounts that are in arrears or advance. Candidates are advised to check the recommended text to ensure they are aware of the correct method of allocating the different types of income and expenditure to the correct period.
Date of payment
Often Question 2 will ask for the date(s) of payment of the corporation tax calculated. For any company which is not large, the due date of payment is not later than nine months and one day after the period end (remember for long periods there are two separate periods and, therefore, two separate tax payment dates). A company preparing accounts to 31 December 2016 will therefore have a due date of 1 October 2017 not 30 September 2017. Candidates must ensure that they are accurate in their answers when providing the date for payment – simply stating October 2017 is not sufficient.
Large companies pay tax under the quarterly instalment payment system whereby the company has to pay its tax quarterly on the 14th day of month seven, 10, 13 and 16 from the start of the period. A large company is one whose 'profits' exceed the profits threshold of £1,500,000. The tax for the year is simply divided by four and equal amounts are paid on each of the above dates. Quarterly instalment payment dates for short periods will not be examined.
As mentioned before FII is no longer examinable and 'profits' are now only used to determine whether a company is large or not for determining the correct payment dates.
Candidates must prepare properly for this type of question. Practice of questions taken from the recommended exam kits will give candidates the required experience and practice of dealing with this type of question.
Written by a member of the FTX (UK) examining team