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ACCA Applied Skills · Taxation (UK)

The Comprehensive Computation of Corporation Tax Liability

The corporation tax computation takes a company's income and gains for an accounting period, deducts qualifying charitable donations to reach taxable total profits, then applies the 19% or 25% rate, or marginal relief between the limits. Exempt dividends are left out of taxable profits but count in augmented profits. You then work out when the tax is due.

What this chapter covers

This chapter pulls together everything you know about company profits into one computation. You start with the adjusted trading profit, add property income, interest income and chargeable gains, deduct qualifying charitable donations and arrive at taxable total profits (TTP). Then you apply the rates, and you finish by stating when the tax is paid.

The chapter also covers the points that change the answer: long periods of account, which must be split into two accounting periods, dividends received, which are exempt but affect the rate, and associated companies, which reduce the limits. Large companies pay by quarterly instalments. Late payment carries interest.

It connects to the rest of the paper in both directions. You need adjustment of profits, capital allowances and chargeable gains for companies as inputs. The output feeds the later chapters on groups, losses and VAT-style administration questions. It can appear in the objective test sections as short calculations, and in the constructed response section as a full computation.

Corporation tax appears in objective test questions on rates, limits, dates and interest, and it is a favourite for a full constructed response computation. The method is mechanical, so well-prepared students collect most of the marks. The traps are the limits, the dividends and the dates. Each one is a small, learnable rule that costs you an entire objective test answer if you miss it, because those questions are marked all or nothing.

The comprehensive computation of corporation tax liability: topics in the order to study them

  1. 1Corporation Tax Computation Format and Chargeable ProfitsThis is the skeleton of the whole chapter, so learn the layout and what goes in each line first.
  2. 2Accounting Periods and Long Periods of AccountYou must know which period you are computing before you can compute anything, and a long period splits the profits.
  3. 3Loan Relationships and Qualifying Charitable DonationsThese fill in the interest income and deduction lines of the computation.
  4. 4Dividends Received and Taxable Total ProfitsOnce the layout is secure, you need to see why dividends sit outside TTP but inside augmented profits.
  5. 5Corporation Tax Rates and Marginal ReliefRates need TTP and augmented profits, so they come after the profit lines are clear.
  6. 6Associated Companies and Limit AdjustmentsThis adjusts the limits used in the rates step, so learn it right after the basic marginal relief calculation.
  7. 7Quarterly Instalment Payments for Large CompaniesThe large company test uses augmented profits and the adjusted limits, so it follows the earlier topics.
  8. 8Corporation Tax Payment Dates and Interest on Late TaxThis closes the chapter, because dates and interest only make sense once you know the liability and whether the company is large.

How to prepare The comprehensive computation of corporation tax liability

Treat this chapter as one fixed routine that you practise until you can write it without thinking. Then add the exceptions one at a time.

  1. Write out the computation layout from memory: trading profit, property income, interest income, chargeable gains, total profits, less qualifying charitable donations, taxable total profits. Check it against your notes and repeat until it is automatic.
  2. Learn the rates and limits in the Tax Rates and Allowances provided in the exam: 19% small profits rate, 25% main rate, lower limit £50,000, upper limit £250,000, standard fraction 3/200. Practise finding them quickly, but know how they are used.
  3. Practise marginal relief with one full example. Take TTP of £120,000 and exempt dividends of £10,000. Augmented profits are £130,000. Tax at 25% is £30,000. Marginal relief is (£250,000 − £130,000) × 3/200 × £120,000 ÷ £130,000 = £1,661.54. Liability is £28,338.46.
  4. Do a set of questions where you must adjust the limits: divide by the number of associated companies plus one, and time-apportion for a period shorter than 12 months. Write the adjusted limits at the top of your answer each time.
  5. Practise long periods of account. Split the period into 12 months and the remainder, apportion the trading profit by time, and deal with capital allowances, gains and donations in the correct period.
  6. Memorise the payment rules: the normal due date, the instalment test using the £1,500,000 profit threshold (adjusted for associates and short periods), the instalment months and the interest rates in the tables. Then do mixed objective test questions to practise speed.
  7. Finish with full constructed response computations under timed conditions. Lay out the answer with headings, a clear working for each figure and a final tax line so the marker can award marks for method.

Common mistakes in The comprehensive computation of corporation tax liability

  • Including exempt dividends in taxable total profits.

    Fix: Keep dividends out of the TTP computation. Add them only when you compute augmented profits for the limits.

  • Using the unadjusted limits of £50,000 and £250,000 when the company has associates or a short period.

    Fix: Before you do anything else, count the associated companies and check the length of the period. Write the adjusted limits at the top of your answer.

  • Using TTP instead of augmented profits to decide the rate or to find marginal relief.

    Fix: Use augmented profits to compare against the limits. Use TTP only for the tax at 25% and in the TTP ÷ augmented profits fraction.

  • Treating a long period of account as a single period.

    Fix: Split the period into two accounting periods. Apportion trading profit by months, and allocate gains and donations to the period in which they occur.

  • Getting the instalment test wrong, or applying instalments to a company that is not large.

    Fix: Adjust the £1,500,000 threshold first, then compare it with augmented profits. Only then set out the instalment dates and amounts.

  • Deducting charitable donations on an accruals basis or after applying the rate.

    Fix: Deduct qualifying charitable donations paid in the period from total profits to reach TTP, before any rate is applied.

Last-day revision: The comprehensive computation of corporation tax liability

  • TTP = total profits less qualifying charitable donations.
  • Augmented profits = TTP plus exempt dividends from non-group companies.
  • UK dividends received by a company are exempt and are not in TTP.
  • The rates are 19% for small profits and 25% for the main rate. Marginal relief applies between the lower limit of £50,000 and the upper limit of £250,000.
  • Marginal relief = (upper limit − augmented profits) × 3/200 × TTP ÷ augmented profits.
  • Divide both limits by the number of associated companies plus one, and time-apportion them for short periods.
  • An accounting period cannot exceed 12 months. A long period is split into the first 12 months and the remainder.
  • Qualifying charitable donations are deducted when paid, not when accrued.
  • The large company instalment threshold is £1,500,000 of augmented profits, adjusted for associates and short periods.
  • Instalments are 25% each of the estimated liability, normally due in months 7, 10, 13 and 16 from the start of the period.
  • Interest on underpaid tax is 8.5% and on overpaid tax is 3.5% (the assumed rates in the tables).
  • Always show your workings so you earn method marks.

The comprehensive computation of corporation tax liability practice questions

The comprehensive computation of corporation tax liability in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

The comprehensive computation of corporation tax liability: frequently asked questions

What is the difference between taxable total profits and augmented profits?

Taxable total profits are total profits less qualifying charitable donations. Augmented profits are TTP plus exempt dividends from non-group companies. You use augmented profits to test the limits and TTP to calculate the tax.

When does marginal relief apply?

It applies when augmented profits are between the lower and upper limits, after adjusting both for associated companies and short periods. Below the lower limit the 19% rate applies, and above the upper limit the 25% main rate applies. The formula is in the tax tables provided, so focus on applying it correctly.

How are long periods of account taxed?

A company cannot have an accounting period longer than 12 months. A long period is split into a first period of 12 months and a second period of the remainder, and a separate computation is done for each. Trading profits are time-apportioned, but other items go into the period where they arise.

Which interest rates will I use for late or overpaid corporation tax?

The tax tables provided give assumed rates of 8.5% for underpaid tax and 3.5% for overpaid tax. You use them as given and apply them for the number of months or days the tax is late or overpaid, as the question requires.