ACCA Applied Skills · Taxation (UK)

The use of exemptions and reliefs in deferring and minimising corporation tax liabilities: formula sheet

Full chapter guide

Key formulas

Chargeable gain for a company: Proceeds (or market value) − incidental costs of disposal − cost − incidental costs of acquisition − enhancement expenditure = unindexed gain; unindexed gain − indexation allowance = chargeable gain; Enhancement expenditure counts only if it is still reflected in the state of the asset when sold.
Indexation allowance: Indexation allowance = allowable cost × index factor; Index factor is rounded to three decimals and given in the exam. Calculate it on cost and on each item of enhancement expenditure separately, using the factor for its date.
Limit on indexation: Indexation allowance is capped at the amount of the unindexed gain; Indexation cannot create or increase a capital loss. If the unindexed result is a loss, ignore indexation.
Annual exempt amount for companies: Nil; The £3,000 annual exempt amount applies to individuals only.
Corporation tax rates: 19% small profits rate; 25% main rate; limits £50,000 and £250,000; Gains are part of taxable total profits and of augmented profits when testing the limits.
Marginal relief: (Upper limit − augmented profits) × 3/200 × taxable total profits ÷ augmented profits; Applies when augmented profits are between the lower and upper limits. The limits are time-apportioned for short periods and divided by the number of associated companies plus one.
Holding test: Holding ≥ 10% of ordinary share capital (plus ≥ 10% of distributable profits and ≥ 10% of assets on winding up); The selling company must meet all three parts, not just one.
Period test: Held continuously for 12 months within the 6 years before the disposal; The 12 months need not end on the date of sale. The detailed SSE rules are not covered in the ACCA documents supplied. Treat them as background outside TX-UK and check TCGA 1992 Sch 7AC or HMRC guidance for the exact wording.
Trading test: Investee is a trading company (or holding company of a trading group or sub-group) throughout the period from the start of the 12-month holding period until disposal; The test focuses on the investee's trading status. The detailed rules are outside the ACCA documents supplied, so check the legislation for the exact conditions.
Effect of SSE: Gain = exempt; loss = not allowable; If SSE applies, a loss cannot be set against other gains.
Corporation tax rates (if SSE fails): Small profits rate 19%; main rate 25%; limits £50,000 to £250,000; marginal relief fraction 3/200; These are the TX-UK rates. Use them when the gain is taxable.
Use of current-year capital losses: Current-year gains − current-year capital losses = net chargeable gains; Losses are set only against chargeable gains, never against income. For a company, this relief is automatic and cannot be restricted.
Brought-forward capital losses: Net chargeable gains for the period − brought-forward losses = gains in taxable total profits; Brought-forward losses are used against the first available gains. They can be carried forward indefinitely, provided the company remains within the charge.
No gain no loss group transfer: Deemed proceeds = original cost; The transferee takes over the transferor's original cost. Tax arises only on a later sale outside the group.
Capital gains group test: 75% subsidiary = parent holds at least 75% of the ordinary share capital, directly or indirectly; For indirect holdings, the parent must also have an effective interest of more than 50%. A company that meets both tests is in the capital gains group.
Joint election on a sale outside the group: Gain or loss on a sale outside the group by one company is treated as accruing to another group company; Both companies must jointly elect. The election can cover the whole or part of the gain or loss. It lets the group use capital losses in a suitable company. It does not move capital losses already brought forward.
Current period relief: Loss set against total profits of the loss-making accounting period; Claim needed. Made before qualifying charitable donations are deducted.
Carry back (non-terminal): Unrelieved loss → total profits of the previous 12 months, latest first; Only after a current period claim. Time-apportion the earlier period if it falls partly outside the 12 months.
Carry forward: Unrelieved loss → total profits of future accounting periods; Claim needed. Relief is delayed.
Terminal loss: Loss of final 12 months of trade → total profits of previous 3 years, latest first; Final 12 months run back from cessation. Time-apportion periods that straddle the start of this window.
Tax saved by a claim: Profits relieved × the corporation tax rate they would have borne; Rates: small profits rate 19%, main rate 25%, limits £50,000 and £250,000. Marginal relief applies between them.
Claim time limit: Within 2 years of the end of the loss-making accounting period; State this in written answers.
75% group test: Direct subsidiary: holding ≥ 75%. Indirect subsidiary: every link ≥ 75% and parent's effective interest > 50%; For an indirect holding, test each link in the chain for at least 75%. Then multiply the percentages down the chain: the effective interest need only be more than 50%. Two subsidiaries of the same parent are also grouped.
Maximum group relief claim: Lower of: (i) surrendering company's available loss, and (ii) claimant's taxable total profits before group relief; Use only the overlap of corresponding accounting periods. Time-apportion if the periods differ.
Associated company test: Control of more than 50%, or both under common control; Count the company itself. Dormant companies are ignored. Overseas companies count for the limits.
Adjusted limits: Limit ÷ number of associated companies (including the company itself); Applies to the £50,000 lower limit, the £250,000 upper limit and the £1,500,000 quarterly instalment threshold.
Marginal relief: (Upper limit − augmented profits) × 3/200 × taxable total profits ÷ augmented profits; Applies when augmented profits fall between the adjusted lower and upper limits. Use adjusted limits and the standard fraction 3/200.
Corporation tax rates: Small profits rate 19%; main rate 25%; Between the limits, tax at 25% and deduct marginal relief.
Taxable total profits (TTP): TTP = chargeable profits − non-trading deficit claimed against total profits − qualifying charitable donations; Chargeable profits include trading profit, property income, non-trading loan relationship credits and chargeable gains. Deduct any deficit claimed against total profits (and other reliefs claimed, such as trading losses) first. Deduct qualifying charitable donations last.
Non-trading loan relationship result: Net credit (taxed) or deficit = non-trading credits − non-trading debits; A net credit is taxable. A deficit can be relieved against profits by claim or carried forward.
Corporation tax rates: Small profits rate 19%; main rate 25%; limits £50,000 and £250,000; These are the rates in the tax tables for financial years 2023 to 2025. Limits are divided by the number of associated companies and time-apportioned for short periods.
Marginal relief: (Upper limit − augmented profits) × 3/200 × TTP ÷ augmented profits; Applies when augmented profits fall between the lower and upper limits.
Corporation tax rates (financial years 2023 to 2025): Small profits rate 19% (profits up to £50,000); main rate 25% (profits over £250,000); Limits are on augmented profits and are divided by the number of associated companies plus one, and time-apportioned for short periods.
Marginal relief: (£250,000 − augmented profits) × 3/200 × taxable total profits ÷ augmented profits; Applies where augmented profits are between £50,000 and £250,000. Tax is taxable total profits at 25% less marginal relief.
Quarterly instalments threshold: Large company: profits above £1,500,000 (divided by associated companies plus one); Limit is reduced for associated companies and for short periods. Profits means augmented profits.
Interest rates (assumed): Underpaid tax 8.50%; overpaid tax 3.50%; official rate 3.75%; Interest on late tax is calculated from the due date to the date of payment. The 3.75% official rate is for the beneficial loan benefit, not for late tax.
Capital allowances (companies): AIA 100% up to £1,000,000; main pool 18%; special rate pool 6%; main pool FYA 100%; special rate pool FYA 50%; Allowances are adjusted for the length of the accounting period. Choosing an earlier purchase date within a period does not change the amount, but the period it falls into does.

Quick revision

A company's chargeable gains are taxed as part of its profits at corporation tax rates, not at CGT rates.
Indexation allowance for a company runs from acquisition to the earlier of disposal and December 2017, so it is frozen and no longer grows. It cannot create or increase a loss.
Rollover relief: the new asset must be bought within one year before or three years after the disposal.
If only part of the proceeds is reinvested, the gain is taxed up to the amount not reinvested.
Capital losses go against gains only, in the same period or carried forward. They cannot be set against income.
Trading losses: first set against total profits of the current period. A carry back of 12 months against total profits needs that current-period claim to be made first. Any unrelieved loss carried forward can be used against total profits. A terminating loss can be carried back 36 months.
Group relief needs a 75% group and covers the overlapping period of group membership only.
Corporation tax limits of £50,000 and £250,000 are divided by the number of associated companies.
The marginal relief fraction is 3/200 and the small profits rate is 19%, with a main rate of 25%.
Quarterly instalments apply to large companies, with a profit threshold of £1,500,000 that is also shared among associated companies.
In planning questions, calculate the tax under each option and then advise.

Common mistakes

Deducting the £3,000 annual exempt amount from a company's gain. Fix: Remember that companies pay corporation tax on gains and have no annual exempt amount. Write 'no AEA' next to your working.
Using the 18% or 24% CGT rates on a company's gain. Fix: Add the gain to taxable total profits and apply the corporation tax rates (19%, 25% and marginal relief).
Applying SSE to a holding of less than 10%. Fix: Check the percentage first. Even 9.9% fails the test.
Counting less than 12 months, or counting the wrong months. Fix: List the purchase date and sale date and count whole months. Then check that the 12 months falls within the six years before sale.
Setting a capital loss against trading profit or other income. Fix: Remember that a capital loss can only be set against chargeable gains. Check the loss type before using it.
Carrying a current-year capital loss back to an earlier period. Fix: Capital losses are used against current gains first and then carried forward only.
Carrying back before making a current period claim. Fix: Always show current period relief first. The carry back only takes what is left.
Using the carry back for more than 12 months on an ordinary loss. Fix: Ordinary carry back is 12 months. Only the final 12 months of a ceased trade go back 3 years.
Using 75% to decide whether companies are associated. Fix: Use over 50% control for associated companies and limits. Use at least 75% for group relief only.
Forgetting to count the company itself when dividing the limits. Fix: Divide by the total number of associated companies including the one you are computing. A company with two associates has three in total.

Exam tips

Look for the word 'company' in the scenario. If you see it, use corporation tax and ignore the annual exempt amount and the CGT rates.
Show the unindexed gain as a separate line. If indexation is capped, the examiner can see you understood the rule.
The index factor is given. Do not spend time calculating it. Just apply it to the right cost items and round if told to.
Use the order of loss relief: current-year losses first, then losses brought forward. Only the excess loss is carried forward.
In OT questions on tax payable, add the gain to the other profits before choosing the rate. Check whether marginal relief could apply.
SSE is not in the TX-UK examinable documents. Do not spend TX-UK revision time on it.
If a TX-UK question has a company selling shares, compute the chargeable gain in the normal way and include it in taxable total profits.
Use the corporation tax rates and marginal relief formula given in the TX-UK exam when a gain is taxable.