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

Key formulas

Small profits rate

19% on taxable total profits where augmented profits ≤ lower limit (£50,000)

Limits are divided by (associated companies + 1) and time-apportioned for short periods.

Main rate

25% on taxable total profits where augmented profits ≥ upper limit (£250,000)

Compare augmented profits, not taxable total profits, with the limits.

Augmented profits

Taxable total profits + exempt distributions received from non-group companies

Distributions from 51% group companies are left out.

Marginal relief

(Upper limit – Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits

Applies only when augmented profits fall between the limits. Deduct it from tax at 25%.

Adjusted limits

Limit ÷ (number of associated companies + 1) × months in period ÷ 12

Applies to lower limit, upper limit and the £1,500,000 instalment threshold.

Quarterly instalment threshold

Augmented profits > £1,500,000 (adjusted) means the company is large

Given in the tax tables. Generally not large in its first year.

Trading loss

Trading loss = allowable expenses and capital allowances − trading income (when the result is negative)

Capital allowances are part of the computation, so they can create or increase a loss.

Current year claim

Loss set against total profits of the same accounting period

Made first. The loss comes off total profits before qualifying charitable donations, so those donations can be wasted.

Carry back (general)

Loss left after current year claim → total profits of the previous 12 months, latest first

Needs a current year claim first. Where the previous accounting period only partly falls within the 12 months before the loss period, its total profits are time-apportioned to find the profits available.

Carry forward

Unrelieved loss → total profits of later periods, subject to deduction allowance

Trade must continue. Losses carried forward can be set against total profits, not only trading profits.

Deduction allowance

Relief = first £5,000,000 of profits + 50% × (profits − £5,000,000)

Applies to carried-forward losses. The allowance is shared across a group and is time-apportioned for short periods.

Terminal loss

Terminal loss = loss of the last 12 months of trading, carried back 3 years, latest period first

Applies only on cessation. Loss periods are time-apportioned, and any overlap with earlier periods is apportioned too.

Corporation tax rates (given)

Small profits rate 19% (profits up to £50,000); main rate 25% (over £250,000); marginal relief = (£250,000 − augmented profits) × 3/200 × taxable total profits ÷ augmented profits

Use these to value a relief. Relief at the 25% or marginal band saves more than relief at 19%.

Group relief group test

Parent holds ≥ 75% of ordinary share capital, and is entitled to ≥ 75% of profits available for distribution and ≥ 75% of assets on a winding up

For indirect holdings, multiply the percentages through the chain. All three tests must be met.

Maximum group relief claim

Lower of (surrendering company's loss for the overlap) and (claimant's taxable total profits for the overlap)

Overlap = months common to both accounting periods. Apportion each figure by months ÷ length of its own period.

Consortium relief limit

Relief ≤ member's % holding × loss of the consortium company, and ≤ claimant's profits

The same percentage limit applies in the other direction when a member's loss is surrendered to the consortium company.

Gains group test

Principal company + its 75% subsidiaries + 75% subsidiaries of those, if principal company's effective interest in them is > 50%

This is not the same as the group relief test. A company can be in one group but not the other.

No gain no loss transfer

Transferee's cost = transferor's original cost (no gain, no loss arises)

Applies to intra-group transfers of chargeable assets, so the gain is deferred until an outside sale.

Degrouping charge

Gain = market value at date of intra-group transfer − transferor's cost (adjusted as the transferor's base cost)

Arises if the company leaves the group within 6 years of the transfer while holding the asset. Usually added to the proceeds of the share sale.

Election to reallocate a gain or loss

Joint election by the two companies within 2 years of the end of the accounting period of the outside disposal

Moves a gain or loss to another group member, for example to use losses or lower tax rates.

Corporation tax rates and marginal relief

Small profits rate 19%; main rate 25%; marginal relief = (Upper limit − Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits

Limits are £50,000 and £250,000, divided by the number of associated companies. Effective marginal rate in the band is 26.5%.

Company chargeable gain

Proceeds − allowable costs − indexation allowance (frozen to December 2017) = chargeable gain

Indexation can reduce a gain to nil but cannot create or increase a loss. Indexation after December 2017 is not given.

Indexation allowance

Indexation factor × cost (and enhancement expenditure, from its own date)

The factor is given in the question. Calculate to three decimal places if you work it out. The factor runs only up to December 2017.

Rollover relief, full claim

Gain rolled over = chargeable gain; new asset base cost = cost − gain rolled over

Applies if all the proceeds are reinvested. Reinvestment window: one year before to three years after the disposal.

Rollover relief, partial reinvestment

Gain immediately chargeable = lower of (proceeds not reinvested) and (total gain)

The balance of the gain is rolled over and deducted from the new asset's cost.

Substantial shareholding exemption

Holding ≥ 10% of ordinary share capital, held for a continuous 12-month period beginning not more than 6 years before the day of disposal

If all conditions are met, the gain is exempt and a loss is not allowable.

Corporation tax on gains

Gain added to taxable total profits; rates and marginal relief from the tax tables

Main rate 25%, small profits rate 19%, limits £50,000 and £250,000, standard fraction 3/200. No annual exempt amount for companies.

Corporation tax rates (from tables)

Profits up to £50,000: small profits rate 19%. Profits over £250,000: main rate 25%. Profits between £50,000 and £250,000: 25% less marginal relief, where marginal relief = (£250,000 − augmented profits) × 3/200 × taxable total profits ÷ augmented profits. The £50,000 and £250,000 limits are divided by (1 + the number of associated companies).

Taken from the ACCA tax tables. Use them to choose the rate when valuing R&D credits and patent box deductions. Check augmented profits and associated companies before you pick the rate.

Merged scheme R&D credit

Credit = qualifying R&D expenditure × credit rate given in the question

The credit is taxable trading income. It is first set against the company's corporation tax liability.

Net benefit of the credit

Net benefit = credit × (1 − corporation tax rate)

Equals tax without the credit less tax payable with the credit, when the whole credit is set against the liability. Check the rate that applies to the company's profits. The qualifying expenditure is already deducted in the normal way.

Patent box deduction

Deduction = relevant IP profits × (main rate − patent box rate) ÷ main rate

The patent box rate is not in the tax tables. Take it from the question (10% in the example). Reduce IP profits by the nexus fraction first if the question gives one.

Nexus fraction

Nexus fraction = qualifying R&D expenditure ÷ overall R&D expenditure

Restricts patent box relief where R&D is outsourced to connected parties or the IP is acquired.

Employer pension deduction

Deduction = contribution paid in the accounting period (if wholly and exclusively for the trade)

Accrued but unpaid amounts are not deductible until paid. No NIC and no benefit in kind for the employee.

Corporation tax saving from a deduction

Saving = deduction × marginal rate (25% main rate; 26.5% in the marginal relief band)

The marginal rate in the band is 25% + 1.5% from the marginal relief fraction of 3/200. It applies to profits between £50,000 and £250,000 (for a 12-month period with no associated companies).

Marginal relief

(£250,000 – augmented profits) × 3/200 × taxable total profits ÷ augmented profits

Deducted from tax at 25%. Limits are reduced for short periods and associated companies.

Company deduction for share acquisition

Deduction = market value of shares at acquisition – amount paid by employee

A Part 12 CTA 2009 deduction, available subject to the share and company conditions. Follow the question facts for the amount and the period.

Unapproved option income

Taxable employment income = market value at exercise – exercise price paid

Taxed as employment income at the employee's rate. NIC may arise only if the shares are readily convertible assets, which unlisted private company shares usually are not. Ignore NIC if the question tells you to.

EMI/CGT gain

Gain = sale proceeds – exercise price paid (– annual exempt amount £3,000 – then 14% with BADR, otherwise 18% or 24%)

BADR rate and lifetime limit £1,000,000 are in the tax tables. The rule that, for EMI shares, the two-year BADR period runs from the grant date of the option comes from the legislation, not the tax tables. Check it against current ACCA guidance. Higher rate is 24%.

Pension annual allowance

Annual allowance £60,000; tapering where income exceeds the threshold income limit of £200,000 and the income limit of £260,000; minimum allowance £10,000

Employer contributions count towards the employee's annual allowance.

Corporation tax rates

Small profits rate 19% (profits up to £50,000); main rate 25% (profits over £250,000)

Limits are for a single company with no associates and a 12-month period. Divide the limits by 1 + number of associates, and time-apportion for short periods.

Marginal relief

(Upper limit − Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits

Deduct from corporation tax at 25%. Applies where augmented profits fall between £50,000 and £250,000. Augmented profits include dividends received from non-group companies.

Dividend tax rates

Basic 8.75%; higher 33.75%; additional 39.35%. Dividend nil rate band £500

The £500 band is taxed at 0% but still uses up part of the basic or higher rate band. Dividends are taxed as the top slice of income.

Income tax normal rates

Basic 20% (£1–£37,700); higher 40% (£37,701–£125,140); additional 45% (over £125,140)

Use for salary, trading profit and benefits. Take the personal allowance, NIC rates and thresholds from the tax tables you are given.

CGT rates and annual exempt amount

Lower rate 18%; higher rate 24%; annual exempt amount £3,000

The rate depends on how much of the basic rate band is left after taxable income.

BADR

Gains taxed at 14% up to a lifetime limit of £1,000,000

Gains above the limit are taxed at the normal CGT rates. Check the qualifying conditions in the question, including the ownership period.

Incorporation relief: base cost of shares

Base cost of shares = Market value of shares received − Gain deferred

If part of the consideration is cash or loan, only the proportion of the gain matching the shares is deferred: Gain × Shares ÷ Total consideration.

Cost of employing through salary

Company cost = Salary + employer NIC; the company gets corporation tax relief on both

Dividends carry no NIC and no corporation tax relief. Use the NIC rates provided in the exam.

Quick revision

• Corporation tax rates: small profits rate 19%, main rate 25%, with limits of £50,000 and £250,000.
• Marginal relief = (Upper limit − Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits.
• Limits are divided by the number of associated companies and time-apportioned for short periods.
• Quarterly instalments apply to large companies, with a profit threshold of £1,500,000 in the tables.
• Check loss relief order: current period, carry back, then carry forward, and state the claim time limits.
• Terminal loss relief lets you carry back losses of the final period, subject to the rules for that relief.
• Group relief needs the right group connection, and the surrendering and claimant companies must be in the same period.
• Check conditions before applying rollover relief or the substantial shareholding exemption.
• Employer deductions reduce profit, so link them to the employee's income tax and NIC.
• Compare salary, bonus and dividends for extraction using both company and personal tax.
• End every answer with a clear recommendation and the reason for it.

Common mistakes

• Using taxable total profits instead of augmented profits when comparing with the limits. Fix: Always write an augmented profits line first, even if the answer is the same as taxable total profits.
• Not dividing the limits by the number of associated companies plus one. Fix: Scan the scenario for companies under common control and count them before looking at the limits.
• Carrying a loss back without making a current year claim first. Fix: State the current year claim first, even if the amount is small. Carry back is only for the loss left over.
• Using the terminal loss 3-year carry back when the company has not ceased to trade. Fix: Terminal relief applies only when the trade ends. For a continuing trade, the carry back is 12 months.
• Using the same group definition for losses and gains. Fix: Test the group relief group on ordinary shares, profits and assets. For gains, add the effective interest above 50% test for indirect subsidiaries.
• Surrendering a full-year loss when accounting periods do not match. Fix: Time-apportion both the loss and the claimant's profits to the overlap by months. Unrelieved loss may be carried forward or used in another overlap period.
• Giving indexation allowance after December 2017. Fix: Apply the indexation factor given in the question only. Do not extend it to the disposal date.
• Letting indexation allowance create or increase a loss. Fix: Cap indexation at the amount that reduces the gain to nil.
• Treating the merged scheme credit as tax-free. Fix: Add the credit to trading profits first, then compute corporation tax. Show the net benefit after tax.
• Mixing up the SME relief and the merged scheme. Fix: Read the question for which scheme applies. Use the merged credit for normal claims and the extra deduction only for loss-making R&D-intensive companies.

Exam tips

• Write augmented profits and the adjusted limits as the first lines of every answer. Markers award these marks even if later arithmetic slips.
• The tax tables give the formula, the limits and the £1,500,000 threshold, so do not waste time memorising them. Learn how to apply them.
• Look for hidden associated companies in the scenario, such as companies controlled by the same shareholder. They change every limit.
• In planning questions, point out the high effective marginal rate in the marginal band and suggest timing profits or dividends to manage it.
• Show every working. The supplementary instructions say workings need only be to the nearest £.
• Read whether the company is continuing or ceasing. That one fact changes whether you use carry forward or terminal relief.
• Use the tax tables for rates and the marginal relief formula. Do not quote rates from memory when the tables give them.
• Show the order of relief in a short table of periods: profit, relief used, profit left. It is easy to mark and keeps you clear under pressure.