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.