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ACCA Strategic Professional · Advanced Taxation (UK) · Taxation effects of the financial decisions made by businesses and individuals

Gamma Ltd, a UK company, pays a dividend to individual shareholders. Which statement is correct about the corporation tax effect of financing by shares rather than loans?

Dividends are distributions of profit and are not deductible in computing a company's taxable total profits, so equity finance gives no corporation tax relief. Loan interest on trade borrowing is deductible, which is a key tax reason for preferring debt.

  1. ADividends paid are deductible in computing taxable total profits
  2. BDividends paid are deductible only if paid to higher rate taxpayers
  3. CDividends paid are not deductible, so equity finance gives no corporation tax reliefCorrect
  4. DDividends are deductible as charges on income

Explanation

Dividends are distributions out of post-tax profits and are not deductible. Loan interest, by contrast, is deductible if the loan is for trade purposes.

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