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ACCA Strategic Professional · Advanced Taxation (UK) · Corporation tax: taxable total profits

Alpha Ltd, a UK resident trading company, receives a dividend of £40,000 from an unconnected UK resident company in which it holds a 3% shareholding. Assuming no anti-avoidance rules apply, how is the dividend treated in computing Alpha Ltd's taxable total profits?

The dividend is exempt from corporation tax. A UK resident company generally does not pay tax on dividends received, because the distribution falls within an exempt class. The 8.75% dividend ordinary rate applies to individuals under income tax, not to companies, so the £40,000 is excluded from taxable total profits.

  1. AIt is exempt from corporation tax and excluded from taxable total profitsCorrect
  2. BIt is taxed at the dividend ordinary rate of 8.75%
  3. CIt is taxed as part of taxable total profits at the main rate of 25%
  4. DIt is taxed at the small profits rate of 19% regardless of the level of profits

Explanation

UK resident companies are generally not taxed on dividends received from UK or overseas companies, because most distributions fall within an exempt class (for example, small shareholdings or portfolio holdings). The 8.75% rate applies only to individuals under income tax, not companies. So the £40,000 is excluded from taxable total profits.

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