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ACCA Strategic Professional · Advanced Taxation (UK)

Corporation Tax: Scope, Close Companies and Investment Companies

Corporation tax charges UK-resident companies on worldwide profits for each chargeable accounting period of up to 12 months. You compute taxable total profits, apply the small profits rate, main rate or marginal relief, then deal with payment dates and interest. Close companies and investment companies add special rules on top.

What this chapter covers

This chapter is the foundation of company taxation in ATX-UK. It covers who is within the charge to corporation tax, how accounting periods are set, how profits are built up, and which rate applies. It then moves to the special regimes: close companies, close investment-holding companies, and companies that hold investments or let property.

The core is a computation. You start with trading profit after capital allowances, add property income, loan relationship items and chargeable gains, and deduct reliefs to reach taxable total profits. Then you find the rate. For financial years 2023 to 2025 the tables give a small profits rate of 19%, a main rate of 25%, a lower limit of £50,000 and an upper limit of £250,000. Marginal relief is (Upper limit – Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits.

This chapter links to almost everything else. Group relief, chargeable gains for companies, losses, and owner-managed business advice (company or sole trader, extraction of profit) all build on these computations. Section A case studies often start from a company's corporation tax position and then ask for advice. Get this chapter secure first.

Corporation tax appears in nearly every Section A case study and often in Section B. The computations are routine, so the marks are there if your method is accurate. The professional skills marks come from applying the rules to the client's facts, for example explaining why a company is close, or why the marginal relief limits shrink with associated companies. You can't rely on being a late-stage student who has met this before. ATX-UK expects speed, correct use of the tax tables and clear written advice. This is also the base for the later chapters on groups and owner-managed businesses. June 2027 is the final sitting of the current exams, so the tables for this syllabus are the ones to learn.

Corporation tax: the scope of corporation tax, including close companies and investment companies: topics in the order to study them

  1. 1Scope of Corporation Tax and Chargeable Accounting PeriodsEverything else depends on knowing who is charged and over which period, so start here.
  2. 2Corporation Tax Rates, Marginal Relief and InstalmentsOnce you know the period, you need the rate; short periods and associated companies change the limits.
  3. 3Trading Profits and Capital Allowances for CompaniesThis is the biggest part of the computation, and capital allowances feed the profit figure that the rate is applied to.
  4. 4Investment Companies and Property IncomeIt adds the non-trading income sources and the rules for relieving expenses, building on the trading computation.
  5. 5Close Companies and Close Investment-Holding CompaniesClose company rules are a layer on top of normal computations, so learn them once the standard computation is secure.
  6. 6Interest Rates, Late Payment and Related Tax InterestFinish with payment dates and interest, which tie the whole computation to compliance and advice.

How to prepare Corporation tax: the scope of corporation tax, including close companies and investment companies

This chapter rewards a method you can repeat under time pressure. Build it in layers and practise written explanations as well as numbers.

  1. Learn the tax tables for corporation tax, capital allowances and interest first. Know where each table sits so you can find it fast in the exam, and do not memorise figures you will be given.
  2. Practise the standard layout: trading profit, property income, non-trading loan relationships, chargeable gains, then taxable total profits. Use a fixed layout every time so nothing is missed.
  3. Drill period rules. Split any period over 12 months into a 12-month period and the remainder. Time-apportion the limits for short periods. Separately, divide the limits by one plus the number of associated companies.
  4. Work marginal relief examples. For augmented profits of £200,000 with no distributions, tax at 25% is £50,000. Relief is (£250,000 – £200,000) × 3/200 × £200,000 ÷ £200,000 = £750, so the tax is £49,250.
  5. Practise capital allowances on mixed pools: annual investment allowance up to £1,000,000, 100% first year allowance on main pool, 50% on special rate pool, 18% and 6% writing down allowances, car rules by CO2, and 3% structures and buildings allowance.
  6. Write short explanations for close company tests, loans to participators and why a close investment-holding company is denied the small profits rate. Note that this last rule comes from the legislation and is not shown in the tables. Then attempt full Section A questions under timed conditions.
  7. Finish by checking interest and payment dates: 8.50% on underpaid tax and 3.50% on overpaid tax. For quarterly instalments, the tables give only the £1,500,000 profit threshold. The other rules below come from the legislation and are not in the tables. Reduce the threshold for short periods and divide it by one plus the number of associated companies. A large company (profits above £1,500,000 up to £20 million, with the limits reduced in the same way) pays in months 7, 10, 13 and 16 after the start of the period. A very large company (profits over £20 million, similarly reduced) pays in months 3, 6, 9 and 12 of the period. In its first year, a company is treated as large if its profits exceed £1,500,000 (reduced for associated companies). The £10 million figure is the first-year test for a very large company: the £20 million limit is replaced by £10 million (also reduced for associated companies).

Common mistakes in Corporation tax: the scope of corporation tax, including close companies and investment companies

  • Applying £50,000 and £250,000 limits without adjusting them

    Fix: Before any rate calculation, ask two questions: is the period shorter than 12 months, and are there associated companies? Adjust the limits before you calculate.

  • Using the wrong profit figure in marginal relief

    Fix: Use augmented profits (taxable total profits plus exempt distributions) in the limit test and as the divisor. Use taxable total profits as the numerator.

  • Mishandling capital allowances in short periods

    Fix: Time-apportion the AIA limit and writing down allowances for short chargeable accounting periods, and state your workings clearly. A period of account over 12 months is split into two accounting periods first, so work on each period separately.

  • Giving the close company tests without applying them

    Fix: Name the participators, state who controls the company and conclude. Then explain the consequences, such as the loan to participators charge.

  • Treating all investment companies like trading companies

    Fix: Separate trading income from property income and non-trading loan relationships. Remember management expenses are dealt with differently from trading expenses.

  • Writing numbers with no advice

    Fix: Plan a short, clear conclusion for each requirement and explain the effect on the client in plain language.

Last-day revision: Corporation tax: the scope of corporation tax, including close companies and investment companies

  • Companies are charged on worldwide profits if UK resident; a chargeable accounting period never exceeds 12 months.
  • A period over 12 months splits into a first 12 months and the remainder.
  • Rates for financial years 2023 to 2025: small profits rate 19%, main rate 25%.
  • Limits: lower £50,000, upper £250,000. Reduce for short periods and divide by one plus associated companies.
  • Marginal relief = (Upper limit – Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits.
  • Quarterly instalments apply to large companies with profits above £1,500,000. The tables give only this threshold; the rest of this point comes from the legislation. Reduce the threshold for short periods and divide by one plus associated companies. Large companies (£1.5m to £20m, limits similarly reduced) pay in months 7, 10, 13 and 16 after the period starts. Very large companies (over £20m, similarly reduced) pay in months 3, 6, 9 and 12. In its first year a company is large if profits exceed £1.5m (reduced for associates), but is very large only if profits exceed £10m (also reduced for associates).
  • Capital allowances: AIA £1,000,000 at 100%, main pool 18%, special rate pool 6%, SBA 3% straight line.
  • First year allowances for companies: 100% main pool, 50% special rate pool; new zero-emission cars 100%.
  • Cars: 1 to 50 g/km 18%; over 50 g/km 6%; second-hand zero-emission 18%.
  • A close company is generally controlled by five or fewer participators, or by any number of participators who are directors. There is also an alternative test based on entitlement to assets on a winding up.
  • Under the legislation (not shown in the tables), a close investment-holding company is not entitled to the small profits rate.
  • Interest rates in the tables: 8.50% on underpaid tax, 3.50% on overpaid tax, 3.75% official rate.

Corporation tax: the scope of corporation tax, including close companies and investment companies practice questions

Corporation tax: the scope of corporation tax, including close companies and investment companies in other exams

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

Corporation tax: the scope of corporation tax, including close companies and investment companies: frequently asked questions

Do I need to learn the corporation tax rates for ATX-UK?

No. The tax tables are provided in the exam. You must know how to use them: when the limits change, how marginal relief works and which rate applies. Practise with the tables open so you can find each figure quickly.

What is a close company and why does it matter?

A close company is broadly one controlled by five or fewer participators, or by any number of participators who are directors. There is also an alternative test based on entitlement to assets on a winding up. It matters because special rules apply, such as a tax charge on loans to participators. Under the legislation, close investment-holding companies also lose access to the small profits rate.

How is marginal relief calculated?

Use (Upper limit – Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits. Deduct the result from tax at the main rate. For example, with augmented profits and taxable total profits both £200,000, the relief is £750.

When are quarterly instalments needed?

They apply to large companies whose profits exceed £1,500,000. The tables give only this threshold; the other rules here come from the legislation. The threshold is reduced for short periods and divided by one plus the number of associated companies. Large companies pay in months 7, 10, 13 and 16 after the period starts. Very large companies (profits over £20 million, similarly reduced) pay in months 3, 6, 9 and 12. In its first year a company is large if profits exceed £1,500,000, but is very large only if profits exceed £10 million (both reduced for associates).