Taxation - Alan Melville

28th Edition (Finance Act 2022)

Chapter 23
Introduction to corporation
tax

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 Overview
• Scope of corporation tax
• Accounting periods
• Calculation of taxable total profits
• Trading income
• Income from property
• Loan relationships
• Dividends received
• Qualifying charitable donations
• Long periods of account
• Research and development tax relief
• Intangible fixed assets
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 Scope of corporation tax
• UK resident companies pay corporation tax on their
"taxable total profits" no matter where in the world
those profits arise.
• Non-UK resident companies are within the charge
to corporation tax only if they trade in the UK
through a permanent establishment, or carry on a
UK property business or a trade of dealing in UK
land, or have gains on the disposal of UK land.
• Broadly, taxable total profits comprise the
company's income and chargeable gains, less
qualifying charitable donations.

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 Accounting periods
• Corporation tax is charged in respect of each of a
company's "accounting periods".
• Accounting periods are not necessarily the same as
the periods for which the company prepares sets of
accounts ("periods of account").
• Accounting periods can be 12 months long (or less)
but can never be more than 12 months long.
• Therefore a period of account which is more than 12
months long is divided into two or more accounting
periods for corporation tax purposes.
• In class discussion of Textbook Example 1

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Calculation of taxable total profits

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 Trading Income
• A company's trading income is calculated in broadly the
same way as that of a sole trader.
• But there is no need to disallow the private proportion of
any of the company's expenses, since companies do not
have a private existence.
• For a company, appropriations of profit consist of
dividends and transfers to reserves.
• A company's Gift Aid donations are disallowed when
computing trading income but rank instead as "qualifying
charitable donations" and are deducted when calculating
taxable total profits.
• CT assessments are raised for accounting periods (not
tax years) so there is no need for any basis period rules.
• Please refer to Example 2
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 Capital allowances
• There is one capital allowances computation per
accounting period. WDAs are scaled down for periods of
less than 12 months. There is no need to make any
private use restrictions.
• A company may claim only one AIA, even if it carries on
more than one business. A group of companies may
claim only one AIA for the entire group.
• Companies which invest in unused main-rate plant and
machinery between 1 April 2021 and 31 March 2023
may claim an enhanced FYA of 130% (the "super-
deduction"). An enhanced 50% FYA may be claimed for
special-rate expenditure. Motor cars are not eligible.
• Please refer to example 3
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 Income from property
In general, a company's "property business profit" is
calculated in much the same way as the property income of
an individual, except that:
▪ The cash basis is not available, so a company's property
income is always calculated on the accruals basis.
▪ Interest on a loan taken out to purchase or improve let
property is dealt with under the loan relationship rules
and is ignored when computing property income.
▪ The interest relief restriction that applies to individuals
with "buy-to-let" loans does not apply to companies.
▪ Property losses are treated differently (see Ch.26).
▪ Rent-a-room relief does not apply to companies.

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 Loan relationships
• A "loan relationship" exists whenever a company
borrows or lends money.
• The treatment of income and expenditure related
to a loan relationship depends upon whether this
is a "trading" or "non-trading" loan relationship.
• Interest receivable from banks and building
societies etc. is also dealt with under the loan
relationships regime.

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 Trading loan relationships
• A trading loan relationship exists where the loan
was made for trade purposes.
• Interest payable (and any other cost relating to
the loan) is treated as a trade expense and is
dealt with on the accruals basis.
• Interest receivable (and any other income
relating to the loan) is treated as trading income
and is dealt with on the accruals basis, but this
will usually apply only if the company's trade is
that of money-lending.

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 Non-trading loan relationships
• A non-trading loan relationship exists where a loan
was not made for trade purposes.
• All of the "debits" and "credits" (costs and income)
relating to such relationships are calculated on the
accruals basis and then aggregated to give a single
figure for the accounting period.
• If total credits exceed total debits, the net credits
form part of the company's taxable total profits and
are charged to corporation tax.
• If total debits exceed total credits, various loss
reliefs are available (see Ch.26).
• In class discussion of example 5
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 Dividends received
• Dividends received from other UK companies
are paid out of profits which have already been
charged to corporation tax.
• Therefore such dividends are not included in the
taxable total profits of the receiving company.
• Most foreign dividends received by UK
companies are exempt from corporation tax and
are also excluded from taxable total profits.

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 Qualifying charitable donations
• A company's qualifying charitable donations may
include:
- donations made under the Gift Aid scheme
- gifts of listed shares and securities to charity
- gifts of land and buildings to charity
• Such donations are not allowable when
computing trading income but are deducted in
the calculation of taxable total profits.
• Accruals and prepayments are ignored.

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 Long periods of account
• The length of an accounting period for corporation tax
purposes can never exceed 12 months.
• A long period of account (of more than 12 months) is
broken down into two or more accounting periods.
• The first accounting period consists of the first 12
months of the period of account.
• The second accounting period consists of the next 12
months and so forth.
• If the period covered by the accounts is not an exact
multiple of 12 months, the final accounting period will be
of less than 12 months' duration.

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 Long periods of account (continued)

In general, the profits of a long period of account are

allocated between accounting periods as follows:
▪ Trading income is time-apportioned.
▪ Capital allowances are computed separately for each
accounting period.
▪ Income from property is also time-apportioned.
▪ A net credit on non-trading loan relationships is allocated
on the accruals basis.
▪ Chargeable gains are allocated according to the dates of
the disposals concerned.
▪ Qualifying charitable donations are allocated according
to the dates of payment.
▪ In class discussion of example 7 Copyright © 2023 Pearson Education Ltd. All Rights Reserved.
 Research and development
tax relief
• Small or medium-sized companies may claim tax
relief on 230% of the amount of qualifying research
and development expenditure.
• Relief is normally given by deduction against the
company's trading income, but a loss-making
company may claim a payable tax credit.
• Large companies may claim a 13% "above the line"
tax credit in relation to their R&D expenditure.
• The 13% tax credit is included in taxable total profits
but is then deducted from the company's corporation
tax liability.
• In class discussion pg 364 Copyright © 2023 Pearson Education Ltd. All Rights Reserved.
 Intangible fixed assets
• A special corporation tax regime applies to intangible
fixed assets (IFAs) such as patents, trademarks etc.
• Capital allowances are generally not available in relation
to IFAs but companies instead claim tax relief on the
amortisation shown in the accounts.
• Royalties payable or receivable also fall within the scope
of the IFAs regime.
• Income and expenditure on IFAs used for trade purposes
(including gains or losses on disposal) is treated as
trading income or as a trading expense.
A company which elects into the "patent box" regime pays tax at an
effective rate of only 10% on trading income derived from exploiting
the patents which the company has developed.

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