chapter 20 computing taxable total profits(1) -...

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ACCA P6 Advanced Taxation(uk) (AT uk)

⾼高级税务（英国）

ACCA Lecturer: Shelley Song

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Chapter 20 Computing Taxable Total Profits

1 The Scope of Corporation Tax

2 Taxable Total Profits

3 Loan Relationships

4 Intangible Fixed Assets

5 Transfer Pricing

6 Research and Development

7 Enhanced Capital Allowances (ECAs)


1 The Scope of Corporation Tax

➢ Corporation tax is paid by companies. It is charged on the taxable total profits of each accounting period. !

➢ A 'company' is any corporate body (limited or unlimited) or unincorporated association eg sports clubs.


The Residence of Companies

A company incorporated in the UK is resident in the UK. A company incorporated abroad is resident in the UK if its central management and control are exercised here.


Accounting Periods

Corporation tax is chargeable in respect of accounting periods. It is important to understand the difference between an accounting period and a period of account. !A period of account is any period for which a company prepares accounts; usually this will be 12 months in length but it may be longer or shorter than this. ! An accounting period starts when a company starts to trade, or otherwise becomes liable to corporation tax, or immediately after the previous accounting period finishes.


An Accounting Period Finishes

An accounting period finishes on the earliest of: ■ 12 months after its start ■ The end of the company's period of account ■ The company starting or ceasing to trade ■ The company entering/ceasing to be in

administration ■ The commencement of a company’s winding

up ■ The company ceasing to be resident in the UK ■ The company ceasing to be liable to

corporation tax


2 Taxable Total Profits

Taxable total profits are the total profits (income and gains) less some losses and qualifying charitable donations. !The taxable total profits for an accounting period are derived as follows. £ Trading income X Property business income X Interest income from non-trading loan relationships X Miscellaneous income X Chargeable gains X Total profits X Less losses relieved by deduction from total profits (X) Less qualifying charitable donations (X) Taxable total profits for an accounting period X


2.1 Trading Income

The trading income of companies is derived from the profit before taxation shown in the accounts. !Qualifying charitable donations are added back into calculation of adjusted profit. They are instead deducted from total profits. !Interest received on a trading loan relationship is included within trading profits on an accruals basis. Similarly, interest paid on a trading loan relationship is deducted at arriving at trading profits. !


Trading Income (Cont.)

Pre-trading expenditure incurred by the company within the seven years before trade commences is treated as an allowable expense incurred on the first day of trading provided it would have been allowable had the company been trading when the expense was actually incurred. !Trading income also includes post cessation receipts arising from a trade which would not otherwise be chargeable to tax. !The calculation of capital allowances follows income tax principles. However, for companies, there is never any restriction of allowances to take account of any private use of an asset. The director or employee suffers a taxable benefit instead.


2.2 Property Business Income

The taxation of UK property business income follows similar rules to those for income tax. In summary:

➢ (a) All UK rental activities are treated as a single source of income calculated in the same way as trading profits.

➢ (b) Capital allowances on plant and machinery (but not furniture) are taken into account when computing property income or losses.

➢ (c) However interest paid by a company on a loan to buy or improve property is not a property income expense. The loan relationship rules apply instead.


2.3 Interest Income

UK companies normally receive interest gross. Interest relating to non-trading loan relationships is taxed separately as interest income on an accruals basis.


2.4 Miscellaneous Income

Income and expenditure relating to intellectual property, which is not used in the trade nor in a property business, are dealt with as miscellaneous income. We consider intellectual property in more detail later in this chapter.


2.5 Chargeable Gains

Companies do not pay capital gains tax. Instead their chargeable gains are included in the taxable total profits. We look at companies’ chargeable gains in the next chapter.


2.6 Qualifying Charitable Donations

Almost all donations of money to charity by a company can be qualifying charitable donations whether they are single donations or regular donations. There is no need for a claim to be made in order for a payment to be treated as a qualifying charitable donation (compare with gift aid donations where a declaration is required). !Donations to local charities which are incurred wholly and exclusively for the purposes of a trade are deducted in the calculation of the tax adjusted trading profits.


Example: The Calculation of Taxable Total Profits

The following is a summary of the statement of profit or loss of A Ltd for the year to 31 March 2016. £ £ Gross profit 180,000 Other income Treasury stock interest (non-trading investment) 700 Dividends from UK companies (net) 3,600 Loan interest from UK company (non-trading investment) 4,000 Building society interest received (non-trading investment) 292 Expenses Trade expenses (all allowable) 62,000 Qualifying charitable donation paid 1,100 (63,100) Profit before taxation 125,492 The capital allowances for the period total £5,500. There was also a chargeable gain of £13,867. Compute the taxable total profits.


Example: The Calculation of Taxable Total Profits (Cont.)

£ £ Profit before taxation 125,492 Less Treasury stock interest 700 dividends received 3,600 building society interest 292 loan interest received 4,000 (8,592) 116,900 Add qualifying charitable donation 1,100 118,000 Less capital allowances (5,500) Trading income 112,500 Interest income £(700 + 292 + 4,000) 4,992 Chargeable gain 13,867 Total profits 131,359 Less: qualifying charitable donation (1,100) Taxable total profits 130,259


2.7 Long Periods of Account

If a company has a long period of account, exceeding 12 months, it is split into two accounting periods: the first 12 months and the remainder. Where the period of account differs from the corporation tax accounting periods, profits are allocated to the relevant periods as follows: ● Trading income before capital allowances and property

income are apportioned on a time basis. ● Capital allowances and balancing charges are calculated

for each accounting period. ● Other income is allocated to the period to which it relates

(eg interest to the period when accrued). Miscellaneous income, however, is apportioned on a time basis.

● Chargeable gains and losses are allocated to the period in which they are realised.

● Qualifying charitable donations are deducted in the accounting period in which they are paid.


Example: Long Periods of Account

Xenon Ltd makes up an 18 month set of accounts to 30 June 2016 with the following results. £ Trading profits 180,000 Interest income 18 months @ £500 accruing per month 9,000 Capital gain (1 May 2016 disposal) 250,000 Less qualifying charitable donation (paid 31 December 2015) (50,000) 389,000 What are the taxable total profits for each of the accounting periods?


Example: Long Periods of Account (Cont.)

The 18 month period of account is divided into: Year ending 31 December 2015 6 months to 30 June 2016 Results are allocated: Y/e 31.12.15 6m to 30.6.16 £ £ Trading profits 12:6 120,000 60,000 Interest income 12×£500 6,000 6×£500 3,000 Capital gain (1.5.16) 250,000 Total profits 126,000 313,000 Less qualifying charitable donation (31.12.15) (50,000) Taxable total profits 76,000 313,000


3 Loan Relationships

A loan relationship arises when a company lends or borrows money. Trading loan relationships are dealt with as trading income. Non-trading loan relationships are dealt with as interest income.


Example: Loan Relationships

During its year ended 31 December 2015 Jello Ltd received bank interest of £13,500 and loan stock interest from Wobble Ltd of £45,400. It also paid loan stock interest of £40,000 to Shaker Ltd on a loan of £1,000,000. The loan stock was issued to Shaker Ltd in May 2014 to raise £700,000 for the purchase of a factory to use in the trade and £250,000 for the purchase of an investment property. The balance was used as working capital. All figures are stated gross and are the amounts shown in the accounts. !The loan stock interest payable to Shaker Ltd was used partly for trade purposes, and partly for non trade purposes and must be apportioned: £ Non-trade purposes 250,000×£40,000/1,000,000 10,000 Trade purposes (700,000 + 50,000 (bal)) = 750,000× 40,000/1,000,000 30,000 Total interest payable 40,000


Example: Loan Relationships (Cont.)

The £10,000 of interest paid for non-trade purposes is deducted from non-trading interest received. The amount taxable as a non-trading loan relationship credit is: £ Bank interest (received gross) 13,500 Debenture interest receivable from Wobble Ltd 45,400 58,900 Less: Non-trade loan stock interest paid to Shaker Ltd (10,000) Non-trading loan relationship credit 48,900


Incidental Costs of Loan Finance

Under the loan relationship rules expenses ('debits') are allowed if incurred directly: (a) Bringing a loan relationship into existence (eg loan arrangement fees) (b) Entering into or giving effect to any related transactions (c) Making payment under a loan relationship or related transactions, or (d) Taking steps to ensure the receipt of payments under the loan relationship or related transaction. !The above categories of incidental costs are also allowable even if the company does not enter into the loan relationship (ie abortive costs). Cost directly incurred in varying the terms of a loan relationship are also allowed.


Other Matters

It is not only the interest costs of borrowing that are allowable or taxable. The capital costs are treated similarly. Thus if a company issues a loan at a discount and repays it eventually at par, the capital cost is allowed over the life of the loan. !Relief for pre-trading expenditure extends to expenses incurred on trading loan relationships in accounting periods ending within seven years of the company starting to trade. An expense that would have been a trading debit if it was incurred after the trade had commenced, is treated as a trading debit of the first trading period. An election has to be made within two years of the end of the first trading period. !Interest charged on underpaid tax is deductible and interest received on overpaid tax is assessable under the loan relationship rules as interest income.

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chapter 20 computing taxable total profits(1) -...

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