This article is written to assist candidates in attempting and hopefully succeeding in the 15-mark corporation tax question in 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 2024, and is based on tax legislation as it applies to the financial year 2023 (Finance Act 2023). 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.
One of the 15-mark questions in section B always focuses on corporation tax. 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 period of account.
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 income 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 profit
The first entry in the assessment is always the trading profit. 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 profits. Whereas when the terms ‘trading profits’ 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 (including any structure and buildings 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.
Losses
If after adjusting the trading results there is a loss, then that loss can be used against the total profits (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. It is not permitted to claim a restricted amount of the loss – the full amount must be used or the total profits are reduced to nil if a claim is made.
Claims to utilise the loss in the current period or previous 12 months must be made within two years of the end of the loss-making period.
If claims are not made for the current period or for the previous 12 months, or there is an amount of loss remaining, then the loss can be carried forward to future periods and relieved against total profits. In this case it is permitted to restrict the amount of the claim in order, for example, to utilise qualifying charitable donations.
Claims to use the loss in future periods must be made within two years of the end of the accounting period in which the loss is relieved.
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 profits. 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’.
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.
In practice, interest is often paid or received late, but, for each accounting period (for corporation tax purposes), both trade interest and non-trade 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.
Property business income
This includes all income from rental properties. Unlike individuals, companies must calculate property business income 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. 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. In this case, in the same way as trading losses, it is permitted to restrict the amount of the claim in order, for example, to utilise qualifying charitable donations.
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 added together 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
In the FTX-UK exam donations made by a company to a charity are always to be treated as qualifying charitable donations, unless they are small amounts donated to a local charity for business purposes (ie the company gets something related to the business in return), 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. For the purposes of the FTX-UK exam, the payment must be deducted from total profits after any other relief; it 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.
However, dividends received from non-associated companies (see below) are added to the taxable total profits to give augmented profits.
The effect of dividends received on determining whether corporation tax is payable by instalments is not examinable for FTX-UK.
Augmented profits (AP)
Augmented profits (AP) are a company’s TTP plus dividends received. Dividends from 51% group companies are excluded.
This figure determines the rate of corporation tax. However, the rate of tax is never applied to this amount. Candidates must always calculate the AP to determine the rate of tax but be careful to then apply the rate to the TTP.
Tax limits
The tax limits are given in the tax tables, which are always provided in the FTX-UK exam. If a company’s AP are £250,000 or above, then the main rate of tax (25%) is applied to the TTP to give the tax payable. If the AP are £50,000 or less, then the small profits rate of tax (19%) is applied to the TTP. Where AP are between the two limits, then the main rate is applied to the TTP and then marginal relief is deducted. The marginal relief formula is always given in the tax tables. Candidates should note that you never use the marginal relief deduction when the small profits rate of tax is used.
Adjustment of tax limits
Before the rate of tax is determined the tax limits may have to be adjusted. They are adjusted for two reasons:
Candidates should take care in checking for both situations. A company with three associated companies (ie three plus one, which will mean dividing the limit by four) and a nine-month chargeable period will have limits of £46,875 (£250,000/4 x 9/12) and £9,375 (£50,000/4 x 9/12). Candidates are reminded to check both of these situations before determining which rate of tax to apply. Please remember that if a company has (as in the example above) three associated companies, you will also have to add the company itself to this number, therefore you will be dividing the limits by four (ie three associated companies plus one), instead of three.
Associated companies
For tax purposes a company is associated with another if it is controlled by that company, or if both are under the control of the same person or persons (this may be a company or an individual). Control here means holding over 50% of the share capital or voting power, or being entitled to over 50% of the distributable profits or the net assets on a winding up. The exam question will always make it clear if there is an associated company, but candidates must be aware this may be by stating that a company holds various holdings of shares in different companies – only those where the holdings are over 50% will be classed as associated companies.
A typical question may say that A Ltd holds 70% of the shares in S Ltd and 40% of the shares in T Ltd. If this is so, then only S Ltd is an associated company and the tax limits would therefore be divided by two. Note that dividends received from S Ltd would be ignored for all tax purposes, but dividends from T Ltd would be included when calculating A Ltd’s AP.
Chargeable gains
As mentioned above, the figures for chargeable gains and losses might either be given in the question, or the question may require the candidate to calculate the gain. Candidates are reminded that for assets purchased prior to December 2017, companies get a deduction for inflation, called indexation allowance.
Indexation allowance was frozen at December 2017. Therefore, for assets purchased prior to December 2017 and subsequently sold after that date, indexation allowance will be given from the month of purchase up to December 2017 only. If an asset is purchased after December 2017, no indexation allowance will be given on disposal. In order to enable the gain to be calculated indexation factors will always be given.
EXAMPLE:
A Ltd sold a factory building on 31 March 2024 for £350,000, which had cost the company £100,000 in May 2005 and had been improved at a cost of £30,000 in June 2006.
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) |
| £30,000 x 0.390 | (11,700) |
165,100 |
Note: No indexation allowance is given for the period 1 January 2018 to 31 March 2024.
Capital losses of the current period or brought forward from previous periods would then be deducted from the gain before the net amount is included in the corporation tax assessment.
Capital allowances
Capital allowances will be treated in a similar way to chargeable gains in that the amount will either be given in the question, or they may need 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 their study materials.
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.
Structures and buildings allowance (SBA)
An allowance was introduced for buildings and structures built after 29 October 2018. The relief is given as an annual straight-line allowance of 3% over a 33 1/3 year period (33 years and four months).
The full rules for this allowance are outside the scope of this article but SBA will continue to be examined in the FTX-UK examinations.
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 a 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 2023 to 31 March 2024, then two tax calculations have to be done – one for 1 January 2023 to 31 December 2023 and another from 1 January 2024 to 31 March 2024. 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 their study materials 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 the 15-mark corporation tax question (and maybe one of the 5-mark questions) 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 2023 will therefore have a due date of 1 October 2024, not 30 September 2024. Candidates must ensure that they are accurate in their answers when providing the date for payment - simply stating October 2024 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 the months seven, 10, 13 and 16 from the start of the period. A large company is one whose augmented profits exceed the profits threshold of £1,500,000. The tax for the current 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.
The effect of dividends received on determining whether corporation tax is payable by instalments is not examinable for FTX-UK. Therefore, for the purposes of FTX-UK, a company will be large if its taxable total profits are in excess of £1,500,000.
Payment dates for very large companies (profits in excess of £20 million) are not examinable and therefore will not be explained in this article.
Candidates must prepare properly for this type of question. Practice of questions taken from study materials and 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