Calculating the taxable profits for corporation tax purposes

In my last post I looked back at the basic administration of  the UK corporation tax regime.  Thankfully not much seems to have changed since I have been out of practice.  In this post I'm going to look a bit more closely at the calculation of taxable profits.

The starting point

As ever the starting point for calculating taxable profits is the net profit before tax from the statutory accounts.

Adjustments

The first adjustment to be made is to add to the net profit figure any expenditure not allowable for tax purposes.  This can be a long list of items but the major items to look out for are:

1. Depreciation
2. Capital expenditure
3. Entertainment expenses
4. Personal expenditure
5. Gift aid donations (relief is given by deduction from total profits)
6. Dividend payments

Next, we can deduct non-taxable income, including

1. Profit on sale of capital assets (will be taxed as a capital gain)
2. Dividend income

Having taken capital assets out of the calculation it is important to give some relief for the cost of capital investment, and this is done with a deduction for capital allowances.  Now the capital allowances regime was changed substantially after I left practice and so I shall be posting on capital allowances in more detail.

We then also need to include and capital gains.

Finally losses (current year and those from previous years) may be used to reduce the taxable profits  (in a group of companies losses from other group companies may also be available).  Again the rules on losses are a bit complicated so I'll post on these separately.

Having done all the above, you arrive at taxable profits.  You can then apply the appropriate corporation tax rate and calculate the company's tax liability for the period. EASY!

Next up it will be capital allowances and then  the use of losses.

Corporation tax basics

This week, I 'ave been mostly looking at UK corporation tax (as the chap from the fast show might say).

So here are the basics:

Corporation tax is a tax on the "taxable profits" of limited companies (and some other clubs and organisations).

Taxable profits for a UK resident company, include worldwide profits from trading income, investment income (excluding dividends) and capital gains.

Overseas companies trading in the UK through a branch (permanent establishment) are subject to UKCT on profits arising from UK activities.

Current rates of UKCT

There are currently two rates of UKCT:  for the financial year starting 1 April 2014,  where profits do not exceed £300,000 the rate is 20%.  Where profits exceed £1,500,000 the main rate of 21% applies.  Marginal rate relief applies on profits between those figures.

How tax payable is calculated

UKCT is paid on taxable profits for each corporation tax accounting period.  This is usually the same as the period for which the accounts are drawn up but cannot exceed 12 months so that is the company's accounts are for a period longer than 12 months the period is split into two CT accounting periods - the first of 12 months and the second covering the remainder of the period of account (e.g. 3 months)  and separate UKCT tax returns must be filed for each of these CT accounting periods.

When UKCT is paid

UKCT liabilities are due for payment 9 months after the end of the company's corporation tax accounting period, however, if the company's profits exceed £1.5 million p.a (and reduced for the number of (world wide) associated companies)  then corporation tax is paid in quarterly instalments.

When UK corporation tax returns should be filed

A company's corporation tax return is due 12 months after the end of the CT accounting period.

Other than rates of tax not much seems to have changed here since the old days.  There is now a requirement for almost all payments and returns to be made electronically: The march of technology.

In the next post I'll look in more detail at how the taxable profits of a company are calculated.

UK taxes, inspected

So, a new blog, all about UK taxes. First let me explain something.  I'm not currently a tax professional.  I was:  Until 2006 I worked in a variety of roles in UK accountancy practices as a tax advisor  specialising in UK corporation tax and business taxation.  For the last 8 years I have been looking after my kids (3 boys at the last count), trying my hand at being a business owner and, every now and then, wondering whether to return to practice.

And now, as you might have guessed, those thoughts have got a bit more serious.  So I thought I would start re-familiarising myself with the current state of UK taxation legislation and this, the tax, inspected blog is my way of recording what I've been looking at each week.

I guess I should add a word of warning to anyone reading this blog in future weeks.  Please don't use anything written here as professional advice.  One thing I DO remember from being a tax advisor is that tax is COMPLICATED, and advice needs to be tailored to your specific situation, so my advice would be seek professional help from a firm of accountants or tax advisors.  It may not be cheap but it will be good value if it avoids a massive pitfall or even saves you a bit of money off your tax bill.

So to start with I'll be looking at UK corporation tax, starting with some nice simple stuff and then moving on to look at a few more complicated bits and bobs. Hopefully it will all come flooding back, I'll update myself with the significant changes in legislation in the past few weeks and I may even pass on a few nuggets of information to a wider audience.