7,8 CT

Question 1

Define the period of account and the accounting period.

Answer 1

A period of account is the period for which a company prepares its accounts. This can be any period up to 18 months.

The accounting period (or chargeable accounting period) is the period for which a charge to corporation tax is made. This cannot be longer than 12 months.

Question 2

There are two rules for deciding when a chargeable accounting period (CAP) begins:

Answer 2

When a company first comes into charge to corporation tax, either by acquiring a source of income, becoming resident in the UK, or starting to trade.

When the previous CAP ends and the company is still within the charge to corporation tax.

Question 3

End of a Chargeable Accounting Period (CAP)

Answer 3

• CAP cannot exceed 12 months.
• Ends 12 months after the CAP begins.
• Ends on the company’s accounting date (the date to which accounts are made up).
• Ends when a company begins or ceases to trade.

Question 4

Should you include dividends recieved in calculation of total taxable profits

Answer 4

NEVER

Question 5

Rates for CT

Answer 5

19 % small-profits rate on profits up to £50 000.

25 % main rate on profits over £250 000.

Profits between these limits receive marginal relief calculated with the marginal-relief fraction. (3/200)

Question 6

Is Accounting profit the same as Tax‑Adjusted Trading Profit?

Answer 6

Accounting profit ≠ taxable trading profit, so prepare an adjustments‑to‑profit statement to convert accounts net profit to taxable trading profit (method similar to a sole trader’s).

Exception: no private‑use adjustments are required; companies may allow all expenses and asset use by directors/employees, who are instead assessed to income tax on those benefits (e.g., under the BIK rules).

Question 7

Tax-Adjusted Trading Profit for Long Period of Account

Answer 7

a company has a long period of account, the adjustment to profit statement must be prepared for the whole period.

The tax-adjusted trading profit should be allocated to chargeable accounting periods on a time basis:

The first twelve months of the period, and then the remainder.

Question 8

Capital Allowances on Private Use Assets

Answer 8

No need to limit capital allowances for private-use assets in a company.

Full capital allowances are given to the company, but the individual will be assessed to income tax on any benefits in kind received from using the private-use assets.

Question 9

Capital Allowances for Long Period of Account rules

Answer 9

If a company has a long period of account (more than 12 months), there will be two chargeable accounting periods:

The first 12 months.

The remaining period.

Two separate capital allowance computations will be required for each chargeable accounting period.

For a chargeable accounting period less than 12 months, writing down allowances and the annual investment allowance should be reduced proportionately.

Full expensing may apply for NEW (not second-hand) plant and equipment, which is treated as a First Year Allowance (FYA). However, individuals cannot make this claim.

Question 10

Interest Receivable and Payable - Loan Relationship Rules

Answer 10

Interest receivable is not considered trading income and must be deducted from the accounting profit.

Interest paid or payable on loans taken out for trading purposes is deductible on an accruals basis as a trading expense.

Loans taken for trading purposes include:
* Overdrafts to fund working capital
* Loans to buy plant and machinery
* Loans to fund future operations.

Question 11

Non-Trading Interest Payable Rules

Answer 11

Non-trading interest payable (on an accruals basis) should be deducted from interest receivable to arrive at the net interest income.

This may sometimes result in a negative figure (known as a deficit), but deficits are not examinable in this module.

Non-trading interest payable includes interest on loans taken for:

Purchasing shares in another company.

Purchasing investment property.

For long periods of account, the accrued interest income must be calculated separately for each chargeable accounting period.

Question 12

Property Income and Chargeable Gains Rules

Answer 12

Property income is assessed for a company on an accruals basis for the chargeable accounting period.

For long periods of account, the accrued property income may need to be calculated separately for each chargeable accounting period, or it may be time-apportioned depending on the circumstances.

Chargeable gains are included in the corporation tax computation for a company, and for long periods of account, the chargeable gains will be included according to the date of sale.

Question 13

Qualifying Charitable Donations Rules

Answer 13

Donations to charity made by a company are deductible in the calculation of total profits chargeable to corporation tax, if not allowed as a trading deduction.

The company pays the donation gross and can claim a deduction in the chargeable accounting period in which the donation is paid.

For long periods of account, qualifying charitable donations are deducted in the period in which they are paid.

Question 14

Dividends Rules

Answer 14

Dividends Paid: Are an appropriation of profit, and no deduction is allowed in calculating taxable profits.

Dividends Received: These are not taxable and should not be included in taxable profits. They are needed only for determining when corporation tax is to be paid or what rate to pay.

Dividends from 51% group companies are ignored.

For long periods of account, dividends should be allocated to chargeable accounting periods based on when they are received.

Question 15

When calculating tax liability what to do to the limits if there are other associated firms?

Answer 15

Divide limit by number of associated firms

Question 16

What is the Marginal Relief Fraction formula and its components?

Answer 16

The Marginal Relief Fraction formula is:

Where:

U = Upper Limit (£250,000)

A = Augmented profits

N = Taxable total profits

The Marginal Relief Fraction = 3/200.

Question 17

What are Augmented Profits in relation to corporation tax?

Answer 17

Augmented Profits are taxable total profits plus franked investment income (FII), which includes dividends received from companies in which the investing company does not have control (i.e., owns 50% or less).

Question 18

What is Franked Investment Income (FII)?

Answer 18

FII includes dividends received from companies where the investing company does not have control (owns 50% or less).

Dividends received from associated companies (where the parent owns at least 51%) are not considered FII.

Question 19

What defines associated companies for corporation tax purposes?

Answer 19

Two companies are associated if:

1. One company is under the control of the other, or
2. Both are under the control of the same person (individual, company, or partnership).

Control means owning more than 50% of the company’s ordinary shares.

Question 20

How does ownership of associated companies affect corporation tax limits?

Answer 20

If a company has associated companies, the lower and upper tax limits are divided by the number of associated companies plus 1.

Question 21

What is the general definition of an associated company?

Answer 21

An associated company is any non-dormant company, wherever it is located.

Question 22

What does control mean in the context of associated companies?

Answer 22

Control means owning more than 50% of a company’s ordinary shares.

Question 23

If dividends from a controlling shareholding are they ignored?

Answer 23

Yes as they are not FII

Question 24

When is Corporation Tax paid for small and large companies?

Answer 24

• For SMALL companies: Paid 9 months and a day after the year-end.
• For LARGE companies: Paid in 4 quarterly instalments.

Question 25

How do augmented profits determine when a company pays its Corporation Tax?

Answer 25

Augmented profits ≤ (adjusted) £1.5 m “profit threshold” → treated as a small company → pays its entire Corporation Tax 9 months + 1 day after the end of the accounting period. Augmented profits > (adjusted) £1.5 m → treated as a large company → pays Corporation Tax in four quarterly instalments straddling the accounting period.

Question 25

Which three adjustments must you apply when testing profits against the profit threshold?

Answer 25

Number of associated companies – divide the £1.5 m limit by (1 + number of associates). Length of the accounting period – pro-rate the limit for periods shorter/longer than 12 months. Augmented profits – use taxable total profits + franked investment income as the figure to compare. (These are the same adjustments you make for the £50k/£250k marginal-relief limits, but the threshold is for payment scheduling rather than the tax rate.)

Question 26

What is the £1.5 million “profit threshold” and how is it used for corporation-tax payment timing?

Answer 26

It’s the baseline limit of augmented profits that determines how corporation tax is paid. At or below the (adjusted) threshold → pay the whole bill 9 months + 1 day after the year-end. Above the threshold → pay in four quarterly instalments during the accounting period.

Question 27

What adjustments are made to the £1.5 m profit threshold when testing payment dates?

Answer 27

Associated companies – divide the £1.5 m by (1 + number of associates). Length of accounting period – apportion the threshold if the period is shorter or longer than 12 months. (The resulting figure is the company’s bespoke threshold for deciding “small” vs “large” payment timetable.)

Question 28

What are the rules for payment dates for companies becoming large?

Answer 28

A company that becomes large does not have to pay Corporation Tax (CT) by instalments if: It has augmented profits of not more than £10 million. It was not a large company in the previous accounting period. The £10 million limit is reduced by the number of associated group companies +1.

Question 29

How are chargeable (capital) gains taxed for companies under corporation tax?

Answer 29

Chargeable gains are added to a company’s other income and taxed at the corporation tax rate. The gain is taxed in the accounting period in which it arises. Indexation allowance is used to adjust the gain for inflation (based on RPI) up until December 2017. No indexation is allowed for assets acquired after 1 January 2018. Companies do not have an annual exemption and are taxed on the full amount of their gains.

Question 30

What is indexation allowance (IA) and how is it calculated for chargeable gains?

Answer 30

Indexation allowance (IA) is used to adjust chargeable gains for inflation, excluding notional or inflationary gains. IA is calculated by using the Retail Prices Index (RPI), with the formula: ​ This helps account for inflation during the period the asset was held, making sure only the real gain is taxed.

Question 31

How is the indexation allowance (IA) fraction calculated for chargeable gains?

Answer 31

The fraction for calculating IA is computed to three decimal places. It is applied to each element of allowable expenditure (except for incidental costs of disposal).

Question 32

Indexation allowance only applies to companies or does it apply to an individual when calculation chargable gain? Also, is Anual exemption allowance only for individuals?

Answer 32

Only companies and yes

Question 33

What is Rollover Relief for companies, and what are its key conditions? (5)

Answer 33

Applies when a company disposes of a qualifying business asset (e.g., factory, warehouse, office). The gain on disposal can be rolled over (deferred) against the cost of a new qualifying asset if all conditions are met. For depreciating assets, a modified rollover applies where the gain is frozen or held over, similar to individuals. Rollover relief is the only capital gains relief available to companies as well as individuals. Companies cannot claim rollover relief on goodwill or on individual-specific quotas.

Question 34

How is the trading loss for a chargeable accounting period calculated and used?

Answer 34

Calculate trading loss as: Tax-adjusted net profit/(loss)-Capital allowances=Adjusted trading loss The corporation tax computation shows trading profit as nil if a loss exists. The adjusted trading loss can be used by the company in the most tax-efficient way (e.g., carried forward, carried back, group relief).

Question 35

What are the main options for relief of trading losses for companies under Corporation Tax?

Answer 35

Current period relief: Set off loss against total profits of the current year before qualifying charitable donations (QCDs). Loss carry back: If current period relief claimed, carry loss back 12 months and offset against total profits before QCDs. Loss carry forward: Carry remaining losses forward to offset against future total profits. Can restrict loss relief to preserve QCDs or choose not to offset losses at all. Loss relief options affect unrelieved qualifying charitable donations (QCDs).

Question 36

What are the rules for current year and carry back relief of trading losses under Corporation Tax?

Answer 36

Losses can be offset against current year total profits before qualifying charitable donations (QCDs). A current year claim must be made first before making a carry back claim; you cannot just make a carry back claim alone. Losses can be carried back and offset against total profits of the previous 12 months, also before deducting QCDs, on a LIFO basis. Whole loss must be set off; partial claims are not allowed. The company must have been carrying on the trade in the previous accounting period. Note: QCDs may be wasted due to loss relief claims.

Question 37

What key considerations should be borne in mind when claiming current year and carry back relief for trading losses?

Answer 37

oss relief uses the loss as early as possible, providing a cash flow advantage (refunds any tax already paid and reduces current tax due to nil). Losses can also be carried forward but may be restricted to preserve qualifying charitable donations (QCDs); however, carry-forward relief is subject to delays. With changing corporation tax rates (19% decreasing to 25% or 26.5% for some), it may be tax-efficient to choose the timing of loss relief to maximize benefits at higher rates. This strategic choice affects when and how losses are utilized to save tax most effectively.

Question 38

Example of corp tax loss relieved as quickly as possible

Answer 38

Question 39

What are the key rules for carrying back trading losses for Corporation Tax purposes?

Answer 39

A trading loss can be carried back up to 12 months. If the preceding accounting period is less than 12 months (e.g., 3 months), losses can be carried back against total profits of that period plus profits of the accounting period before it, to a maximum of 12 months in total. Total profits for loss relief must be time-apportioned to reflect only the portion within the 12-month carry back window.

Question 40

Example of corp tax carry back

Answer 40

Question 41

How do capital allowances impact trading losses and qualifying charitable donations (QCDs) in a loss year?

Answer 41

Capital allowances can be claimed or not in a loss year. If claimed, they increase the trading loss. Losses (including capital allowances) are deducted from total profits before QCDs, which may cause QCDs to be wasted. To avoid wasting QCDs, a company may choose not to claim capital allowances in the loss year. Unclaimed capital allowances increase capital allowance pools, allowing for larger deductions in future profitable years.

Question 42

What are the key rules for carry forward of trading losses under corporation tax?

Answer 42

Trading losses can be carried forward to offset against future total profits. Use of losses may be restricted to preserve qualifying charitable donations (QCDs). The company can choose to use the loss or continue to carry it forward. May have to wait until the business becomes profitable to use the losses. There is a restriction on the amount of carry-forward losses that can be relieved if profits exceed £5 million, but this is often ignored in examples.

Question 43

Example for trading loss carried forward

Answer 43

Question 44

What are the benefits of being in an eligible group for corporation tax purposes?

Answer 44

Companies in an eligible group can surrender or claim losses (Group Relief) between group members, including: Trading losses Excess (unrelieved) property business losses Excess (unrelieved) qualifying charitable donations Eligible groups can also: Transfer assets between members without immediate tax consequences Match capital gains and losses across group members Make rollover claims between different group companies

Question 45

What is the definition of a group for Group Relief purposes in corporation tax?

Answer 45

Requires at least 75% direct holding between companies. Also requires 75% indirect (effective) interest. Two companies are in a group if one is at least 75% subsidiary of the other, or both are 75% subsidiaries of another company. For sub-subsidiaries, the effective interest must be at least 75%. Sub-subsidiaries may form separate groups with their subsidiaries if the effective interest is above 75%.

Question 46

How does Group Relief work for trading losses?

Answer 46

Companies in an eligible group can transfer trading losses, unrelieved qualifying charitable donations, and unrelieved property business losses between each other. Each company must prepare its own corporation tax computation. Group relief helps minimize the corporation tax liability across the group by efficiently using losses arising in different members.

Question 47

What are the rules for Group Relief regarding surrendering current period trading losses?

Answer 47

A company that has made a current period trading loss can surrender all or part of that loss (including any unrelieved qualifying charitable donations) to another company in the eligible group. The surrendering company does not need to make a current year claim or carry back claim to surrender losses. Losses carried forward can also be surrendered as group relief (rules changed in 2017), but the treatment differs from current period losses. Important to know if dealing with current period loss or brought forward loss for correct treatment.

Question 48

What provisions are available for companies within an eligible group to take advantage of chargeable gains?

Answer 48

Transfer of assets within a group – Allows the transfer of assets without immediate tax consequences, within an eligible group of companies. Efficient use of capital losses – Companies can match gains and losses within the group to optimize tax treatment. Rollover relief – Allows deferring tax on capital gains when assets are transferred between group companies. Group members can be resident anywhere, but the provisions only apply if the assets are within the UK corporation tax charge on capital gains.

Question 49

What are the rules for surrendering brought forward losses in Group Relief?

Answer 49

Brought forward losses can be surrendered to the group but are subject to restrictions. The surrendering company must use the loss brought forward itself as far as possible. Unlike current period losses, a brought forward loss can be surrendered in part or full, and it does not have to be used by the surrendering company. This allows flexibility in how the loss is allocated within the group.

Question 50

How does Jones Ltd handle capital gains and losses when disposing of an asset outside the group?

Answer 50

Jones Ltd had capital losses of £162,000. Its subsidiary, Dixon Ltd, sells an asset outside the group for a chargeable gain of £148,500. Jones Ltd can elect to treat the gain as if it was disposed of by them (not Dixon Ltd). There’s no need to transfer the asset between companies. Jones Ltd can use its capital losses to offset the gain.

Question 50

How does the definition of a group for chargeable gains purposes differ from the definition for group relief?

Answer 50

A chargeable gains group can have subsidiaries where the parent has a smaller interest (over 50% but less than 75%). Group relief requires 75% ownership directly in all companies within the group.

Question 51

What are the benefits and rules for making an election regarding the transfer of capital gains and losses within a group?

Answer 51

An election must be made within two years from the end of the accounting period in which the asset was disposed of outside the group. Benefits of the election: Crystallizes gains in the company with losses or QCDs. Helps to use capital losses by matching them with gains. Provides a two-year window for retroactive tax planning with capital gains and losses.