Unit 6 - Corporation Tax Flashcards
(32 cards)
A company had total sales in the accounting period ending 31 March 2025 of £2,400,000. The company incurred the following costs during the accounting period:
Costs - £
Stock - 335,000
Salaries - 333,000
Electricity/gas/telephone and rates - 98,000
Rent - 19,000
Insurance - 6,000
The company sold some warehouse premises in June 2024 for £610,000. It purchased them in January 2011 for £360,000.
Which of the following best describes the company’s trading profit for the accounting period?
A) £88,779
B) £2,400,000
C) £791,000
D) £1,609,000
E) £250,000
CORRECT ANSWER D -
Option D is correct. Trading profit is calculated by subtracting deductible expenditure from sales. The sale of the warehouse is irrelevant for the purposes of calculating trading profit. Here, the listed deductible expenditure adds up to £791,000. Sales of £2.4 million less deductible expenditure of £791,000 = £1,609,000.
A large trading company has an accounting period which ends on 31 March. In May 2024
it buys brand new plant and machinery costing £1,000,000. At the start of that financial year it had a pool of plant and machinery worth £500,000. Assume that the company always claims the maximum capital allowances available.
Which ONE of the following statements best describes the capital allowance the company can claim in the accounting period ending 31 March 2025?
A) £1,000,000
B) £1,300,000
C) £90,000
D) £270,000
E) £1,090,000
CORRECT ANSWER E - In the accounting period ending 31 March 2025, the company can claim full expensing of £1,000,000 in relation to the brand new machinery. Note that it could alternatively claim the AIA, but the amount of the deduction would be the same whether it claimed full expensing or the AIA.
It can also claim 18% of the existing pool of £500,000, that is, £90,000.
This gives total capital allowances for the accounting period of £1,000,000 + £90,000 = £1,090,000.
Assume that it is April 2025. In May 2024, a client disposed of her shareholding in a company which specialises in importing and distributing food. The client resigned as a non- executive director of the company in December 2022 but retained her shareholding until May 2024. She sold all of her ordinary shares (6% of the company’s issued share capital) for £188,651 on 3 May 2024, having bought them for £133,000 in May 2014, allowing for all relevant costs of acquisition and disposal.
This is the only disposal that the client made in the 2024/25 tax year.
Which of the following best describes whether or not the disposal of the client’s shareholding attracts business asset disposal relief?
A) Yes, because the shares were in a trading company and the client held over 5% of the company’s shares.
B) Yes, because the client was a director of the company within the two years prior to the disposal and held over 5% of the company’s shares.
C) No, because the client was not an officer or employee of the company during the whole of the two years prior to disposal.
D) No, because the client held less than 10% of the company’s shares.
E) No, because the company is not a personal company.
CORRECT ANSWER C - This is because to benefit from business asset disposal relief, the individual must have:
* held over 5% of the shares in a trading company; and
* been an officer or employee of that trading company; and
* those conditions must have been satisfied for two years prior to disposal of the shares.
The client resigned nearly two years before the disposal so cannot benefit from the relief – she was not an officer or employee for the whole of the two years prior to disposal.
Lake District in February 2025 for £450,000. He purchased it in 2012 for £300,000. The initial expenditure (legal fees, valuation fees and stamp duty) amounted to £17,000 and the incidental costs of disposal were £3,000.
He has made no other disposals in the tax year and has no losses to carry forward from previous tax years.
Assumptions: the annual exemption for capital gains tax for individuals and personal representatives is £3,000, whereas for trustees it is £1,500.
Which of the following CORRECTLY states the sole trader’s liability for capital gains tax for the tax year?
A) £3,000
B) £25,400
C) £13,000
D) £30,480
E) £130,000
CORRECT ANSWER D -
Disposal value - 450,000
Costs of disposal - (3,000)
Acquisition Value - (300,000)
Initial expenditure - (17,000)
Chargeable gain - (130,000)
Chargeable gain (£130,000) less the annual exemption of £3,000 = £127,000.
If the chargeable asset is residential property which is not the taxpayer’s main residence (here, the client is selling his holiday home), the gains are subject to a surcharge of 4% because the client is a higher rate taxpayer. Therefore, the client will pay CGT at the rate of 24%.
£127,000 x 24% = £30,480
A client, who was a basic rate taxpayer, dies owning a small office building worth £290,000. The office building was given to her as a gift by her mother several years ago, and she used it as an artist’s studio. At the time of the gift, the office building had a market value of £100,000.
Which of the following best describes the client’s CGT position with respect to the office building?
A) The client will pay CGT on the gain of £190,000 (subject to any initial expenditure and costs of disposal).
B) The client’s personal representatives will pay CGT on the gain of £190,000 (subject to any initial expenditure and costs of disposal).
C) The client’s personal representatives will pay CGT on the building’s market value of £290,000.
D) The client will not pay any CGT and her personal representatives will acquire the building at a deemed value of £100,000 as at the date of the client’s death.
E) The client will not pay any CGT and her personal representatives will acquire the building at market value as at the date of the client’s death.
CORRECT ANSWER E - . There is no charge to CGT on the death of a taxpayer, so option A is wrong. The taxpayer’s personal representatives acquire the property at market value (here, £290,000) as at the date of the taxpayer’s death, so options B, C and D are wrong. The capital gain is therefore wiped out (although there may be inheritance tax implications).
A private limited company made income profits of £600,000 in its accounting period ending 31 March 2025. In the same accounting period, it also made a chargeable gain of £1 million. It is not entitled to any tax reliefs or exemptions.
Which of the following statements best describes the company’s tax position for the accounting period ending March 2025?
A) It will have a capital gains tax liability of £200,000.
B) It will have a corporation tax liability of £400,000.
C) It can reduce its liability to tax on the chargeable gain by deducting an annual exemption of £3,000.
D) It is a company and so not required to pay any tax in respect of capital gains.
E) It will pay income tax on its trading profits and capital gains tax on its chargeable gains.
CORRECT ANSWER B - Companies pay corporation tax on their gains, not CGT or income
tax (meaning that options A, D and E are wrong) on their gains and do not benefit
from an annual exemption (meaning that option C is also wrong). It is necessary to add income profits and chargeable gains together in order to ascertain total profits and the appropriate rate of tax. This company has total profits of £1,600,000, and pays corporation tax of 25% on these profits, giving a tax liability of £400,000.
A company’s income in the accounting periods from 1 April 2022 to 31 March 2025 is set out below. The company’s accounting reference date is 31 March.
Year - Trading profit (£) - Rental income (£)
2022/23 - 25,000 - 20,000
2023/24 - 15,000 - 20,000
2024/25 - (10,000) - 20,000
Assume that it is now late 2025 and the client is still trading but anticipates making a loss again for the financial year 2025/26. Its rental properties are empty and the company is receiving no rent for them. If the company continues to trade, which of the following best describes the tax relief(s) the client should claim for its losses in the 2024/25 accounting period?
A) Terminal carry-back relief, because the company has stopped making trading profits.
B) Carry-forward relief, so that the losses can be set against future profits of the same trade.
C) Carry-across relief, so that total profit for 2024/25 is reduced to £10,000.
D) Carry-back relief, so that trading profit for 2023/24 is reduced to £5,000.
E) Carry-across or carry-back relief, to reduce total profit for 2023/24 or 2024/25 by £10,000.
CORRECT ANSWER E - The requirements for terminal carry-back relief have not been met: the company was clearly not in its final 12 months of trading in 2024/25 (option A is therefore wrong). Carry-forward relief is risky as the company may not make future profits (so option B is wrong). The client can choose between carry-back and carry-across relief to reduce total profits from one of those years by £10,000. The fact that it can choose which relief to use means that options C and D are wrong in stipulating that the company has only one available form of relief to claim.
Which of the following events will not give rise to a chargeable gain for capital gains tax purposes?
A) a sale of factory premises
B) a gift of warehouse premises
C) a sale of part of office premises
D) an acquisition of hotel premises
E) a sale of shares in a company
CORRECT ANSWER D - Disposals of chargeable assets by a chargeable person, including gifts and disposals of part of an asset, can give rise to chargeable gains for CGT purposes, but an acquisition cannot give rise to a chargeable gain.
Note that disposals of all ‘forms of property’ as defined in the Taxation of Chargeable Gains Act 1992 can give rise to chargeable gains. Therefore, although land is the asset in practice most likely to be sold for more than its purchase price and therefore give rise to a chargeable gain, disposals of assets other than land can trigger a CGT liability. Shares are the other asset type which are often sold for higher than their acquisition price.
The disposal of a chargeable asset at a gain may give rise to a chargeable gain under the CGT regime if made by which of the following?
Select as many answers as are correct.
A) a sole trader
B) a company
C) an individual not in business
D) an individual who is a partner in a partnership
E) the personal representative of a deceased person
CORRECT ANSWERS A, C, D & E - All the options listed are subject to the CGT regime, save for companies. If a company makes a chargeable gain, it will be taken into account in calculating its liability for corporation tax.
n September 2020, an individual, A, sold her holiday cottage for £320,000. She didn’t take proper advice and could have sold it for £360,000. She purchased it in May 2001 for £130,000. During her ownership she added a conservatory in June 2002 costing £42,000. Redecoration over the years amounts to £17,000. Assume there are no incidental costs of acquisition or disposal costs.
Which of the following represents A’s chargeable gain on the disposal?
A) £188,000
B) £131,000
C) £190,000
D) £360,000
E) £148,000
CORRECT ANSWER E - The chargeable proceeds are £320,000, from which A can deduct the acquisition cost and the cost of the conservatory. Redecoration costs are ignored for these purposes; whilst expenditure wholly and exclusively incurred to enhance the value of the property (building the conservatory) is deductible, the cost of normal maintenance, repairs and insurance (redecorating) is not deductible.
A made a bad bargain in terms of the potential market value of the holiday home, but the amount she could have sold the property for with proper advice is irrelevant for CGT purposes.
In March 1993, a woman bought a painting at an auction. She paid £20,000 for the painting and £258 in fees to the auctioneers.
In December 2023 the woman decides to give the painting to her niece. The market value of the painting at the date of the gift is £100,000.
What is the woman’s capital gains tax bill for the tax year 2023/24 assuming she did not make any other disposals and is a higher rate taxpayer for income tax purposes?
A) nil
B) £14,748.40
C) £14,800
D) £16,000
E) £20,000.00
CORRECT ANSWER B - The calculation is as follows:
Step 1: Identify the chargeable disposal
The woman, as an individual, is a chargeable person. She is giving a painting to her niece and therefore is disposing of a chargeable asset.
Step 2: Calculate gain or loss
£
Proceeds of disposal (Sale price/value at disposal) - 100,000
Less
Incidental costs of disposal -
Net proceeds of disposal
Less
Initial expenditure
Acquisition cost - (20,000)
Incidental costs of acquisition - (258)
Subsequent expenditure -
GAIN - 79,742
Step 3: Apply reliefs
Although this a chattel, it is not a wasting asset and its value exceeds £6,000. Although it is a gift it is not a business asset so hold-over relief is not applicable. Therefore, there is no relief or exemption available.
Step 4: Aggregate gains/losses & deduct annual exemption
No other disposals in the tax year
Gain - 79,742
Less Annual Exemption - (6,000)
Taxable amount - 73,742
Step 5: Apply correct rate of tax
As the woman is a higher rate taxpayer for income tax purposes, all of the gain is taxed at 20%.
£73,742 x 20% = £14,748.40
CGT PAYABLE = £14,748.40
A company makes trading profits of £600,000 in its accounting period ending 31 March 2024. Assume that in the same period the company also made a chargeable gain of £1m.
Which of the following statements is correct in relation to its accounting period?
A) The company will have a CGT liability of £248,500
B) The company will have a corporation tax liability of £400,000
C) The company will have a corporation tax liability of £150,000
D) The company can reduce its liability to tax on the gain on the premises by deducting an annual exemption of £6,000
E) Companies do not pay tax on capital gains
CORRECT ANSWER B - A, D and E are wrong because companies pay corporation tax, not CGT, on their gains and so do not benefit from an annual exemption.
It is necessary to add income and gains together in order to ascertain the total profits and therefore the appropriate rate of tax. This company has total profits of £1,600,000. This will all be taxed at 25% giving a tax liability of £400,000 – Option B. Option C is wrong because in calculating the corporation tax liability it fails to include the chargeable gain.
A company is a large trading company and its accounting period ends on March 31 each year.
In February 2023 the company buys plant and machinery costing £1,400,000. In February 2024 it buys plant and machinery costing £20,000. It has no other plant and machinery. For the purposes of this question the plant and machinery purchased in both cases either do not qualify for or the company decided not to use the “full expensing” allowance and will rely on the AIA.
Refer to the Corporation Tax template for the rates and bands applicable to capital allowances, assume that they remain the same in future years as they were this year, and that the company always claims the maximum capital allowances available.
Which one of the following statements correctly states the capital allowance the company can claim in the accounting period ending 31 March 2024?
A) £1,000,000
B) £59,800
C) £79,040
D) £20,000
E) Nil
CORRECT ANSWER C - E is wrong because companies can claim capital allowances in the same way as individuals in calculating their trading profits for tax purposes.
In the accounting period ending 31 March 2023, the company can claim the full £1,000,000 AIA and a writing down allowance of 18% on the balance of £400,000, leaving assets in the pool with a written down value of £328,000 (i.e. 400,000 – 72,000 = 328,000). In the year ending 31 March 2024, the company can claim the AIA on the £20,000 of new expenditure plus a writing down allowance of 18% on the £328,000 pool (£59,040) giving a total capital allowance in that period of £79,040.
A company’s accounting reference date is on 30 September. The rate of Corporation Tax is increased on 1 April – in other words, the Corporation Tax rate before 1 April was lower and the rate after 1 April was higher.
What rate of Corporation Tax will the company be taxed at on its profits for its financial year ending 30 September?
A) At the lower rate
B) At the higher rate
C) 50% at the lower rate, 50% at the higher rate.
CORRECT ANSWER C - The corporation tax financial year runs from 1 April to 31 March. If a company’s financial year is different from the corporation tax financial year, it will pay tax at one rate on the relevant proportion of its profits, and at the new rate on the remainder.
TRUE OR FALSE: A company in receipt of dividends will always be subject to corporation tax on the amount received.
FALSE - In most cases dividends received are exempt from corporation tax. The rationale behind the exemption is to avoid double taxation. The paying company has already been taxed on its profits prior to payment of the dividend, it would amount to double taxation if those dividends were then to be taxed in the hands of the recipient company.
Which of the following will attract business property relief for inheritance tax purposes?
A) A 75% holding in an unquoted company owned for one year.
B) A 50% holding in an unquoted company owned for one year.
C) A 10% holding in an unquoted company owned for three years.
D) A 75% holding in a quoted company owned for one year.
E) A 20% holding in a quoted company owned for five years.
CORRECT ANSWER C - Unquoted shares qualify for BPR. Quoted shares only qualify if they give control of the company. In addition, to qualify for BPR the shares must have been owned for at least two years.
A man owns 7% of the voting shares in a company which is listed on a recognised stock exchange. The company manufactures office furniture. The man’s daughter is getting married next month and the man intends to give his entire shareholding in the company to her as a wedding present.
Which one of the following statements is correct?
A) The gift will not qualify for Hold-Over Relief because the company is listed.
B) If the gift qualifies for Hold-Over Relief the daughter will pay the same amount of CGT which otherwise the man would have paid.
C) The gift will only qualify for Hold-Over Relief if the man is a director or employee of the company.
D) The gift will qualify for Hold-Over Relief provided the daughter agrees.
E) If the gift qualifies for Hold-Over Relief the man will be able to set his annual exemption against the gain.
CORRECT ANSWER D - The shares qualify for Hold-Over Relief irrespective of the company being listed because it is the man’s personal company - i.e. he owns more than 5% of the voting shares (there is no additional requirement that he also needs to be a director/employee). However, the daughter has to agree to the Hold-Over Relief. The effect of Hold-Over Relief is that the daughter is deemed to have acquired the shares at her father’s acquisition value, not that she pays the amount which he would otherwise have paid. The amount of CGT that the daughter pays will be determined by her personal circumstances at the time she disposes of the shares. The donor is not able to apply their annual exemption to the gain before Hold-Over Relief is applied.
An individual, X, set up a food delivery business in the tax year 2018/2019. During that year, the business made a trading loss, but in the following two tax years, the business makes a trading profit. From the tax year 2015/16 onwards, X also received rental income as landlord of a property.
Which of the following best describes the how the trading loss might be used to reduce X’s liability to income tax?
A. The trading loss is deducted from X’s rental income to calculate his total income for the tax year 2018/19
B. X would have the option of setting the loss off against his total income for the tax year 2018/2019 and/or the preceding tax year
C. X would have the option of setting the loss off against total income, but must apply the loss against earlier years before later years
D. X would have the option of setting the loss off against subsequent profits of the food delivery business, taking earlier years first
E. X could choose to utilise any of the offsets described in b), c) and d) above in combination until the loss is wiped out
CORRECT ANSWER E - A is wrong because a trading loss is not deducted from other income in calculating trading income; an individual’s total income is the aggregate of NSNDI, dividend and saving income, not taking into account any trading losses. Option B describes carry across/carry back relief; Option C describes start-up loss relief and Option D describes carry forward relief. Income Taxpayers can use these reliefs in combination, at their discretion.
An individual sells a 10% holding of ordinary voting shares in a company, which runs an IT services business. The individual acquired the shares five years ago, when the individual was also appointed as a director of the company. The individual resigned as a director 18 months ago.
Does the disposal of the individual’s shares qualify for business asset disposal relief?
A. Yes, because the company is the individual’s personal company
B. Yes, because the shareholding gave the individual the right to vote
C. Yes, because the company is a trading company
D. No, because the individual resigned as a director 18 months ago
E. No, because the individual was not a partner or sole trader
CORRECT ANSWER D - E is incorrect because whilst business asset disposal relief is available to a sole trader or partner disposing of the whole or part of a business, it is also available where an individual disposes of shares. Options A, B and C all describe certain conditions that must be satisfied for a disposal of shares to qualify for the relief. However, the conditions must be satisfied for the period of two years ending with the date of disposal, and since the individual ceased to be a director 18 months ago that requirement was not satisfied for the 2-year period.
A company’s accounting period recently ended, during which it made a trading profit, acquired new plant and machinery and sold its warehouse premises for a significant premium over the original acquisition price. It sold the warehouse premises because it had acquired a new manufacturing facility with warehousing space 18 months previously. It made a trading loss in the prior accounting period.
What advice would you give the company to assist it in calculating its liability for corporation tax arising during its last accounting period?
A. Some or all of the cost of the new plant and machinery can be deducted from chargeable receipts in calculating trading profit
B. Corporation tax is charged at a single rate – unlike income tax which is charged at different rates depending on the amount of total profits
C. The company cannot offset the historic trading loss against its profits
D. The gain made on the sale of the warehouse is not included in the tax calculation
E. The liability for corporation tax arising from the sale of the warehouse can be postponed by rolling over the gain into the acquisition cost of the new manufacturing facility
CORRECT ANSWER A - Option A describes a capital allowance; capital allowances are available to companies to reduce their corporation tax liability on the same basis that they are available to individuals to reduce their income tax liability. Option B does not apply because corporation tax is charged at different rates depending on the amount of total profits (like income tax). Option C does not apply because companies may use carry-forward relief to offset a loss in a prior accounting period against subsequent profits of the same trade. Options D and E are wrong because chargeable gains are included in calculating corporation tax, and rollover relief is only available where a replacement asset is acquired within 1 year before or 3 years after the sale of the original property.
A company finished its first year of trading 13 months ago. It notified HMRC of the beginning of its first accounting period within three months after the start of that accounting period, and filed its first self-assessment return within 12 months after the end of the accounting period.
What advice would you give it in relation to its tax reporting and payment obligations?
A. The company should have notified HMRC of the beginning of its first accounting period immediately upon commencing trading and made a payment on account of tax at the same time
B. The company should have filed its tax return and paid its tax six months its first accounting period ended
C. The company should have filed its tax return and paid its tax nine months and one day after its first accounting period ended
D. The company has discharged its reporting obligations to HMRC correctly and should have made a payment on account of tax nine months and one day after its first accounting period ended
E. The company has discharged its reporting obligations to HMRC correctly and should have paid its tax in full when it filed its tax return
CORRECT ANSWER D - HMRC must be notified within three months after the start of an accounting period, so option A is incorrect. A company must file a self-assessment return 12 months after the end of each accounting period, but the deadline for paying corporation tax is 9 months and 1 day after the end of the accounting period. Companies therefore make a payment on account of their anticipated corporation tax liability on this date then make a balancing payment or receive a rebate once the final figure is established.
A sole trader has operated an IT business as a sole trader since 2015. The sole trader’s customers are small local businesses. The sole trader generates receipts from the sale of IT equipment and the provision of repair services. However, due to difficult trading conditions, he made a trading loss in the last 12 months. The sole trader makes taxable supplies of over £90,000.
What advice would you give the sole trader about payments he may have to make to HMRC?
A. The sole trader would need to charge VAT to customers on all his receipts, and pay the VAT collected to HMRC.
B. The sole trader would not need to charge VAT, because his customers are businesses, not consumers.
C. The sole trader would need to charge VAT to customers, and pay the VAT collected to HMRC, but only in respect of the supply of IT equipment.
D. The sole trader would need to charge VAT to customers, and pay the VAT collected to HMRC, but only in respect of the supply of repair services.
E. The sole trader would not need to charge VAT, because he has made a trading loss.
CORRECT ANSWER A - VAT must be charged whenever a business supplies goods or services, unless an exemption applies.
The only exemption which might apply here is that VAT need not be charged if the value of their taxable supplies in the preceding 12 months did not exceed a prescribed threshold (currently £90,000). Note that the exemption depends on the value of supplies – not profitability – which is why Option E is incorrect.
An individual is employed and earns a salary; owns a property which is let to tenants; has significant savings in bank accounts from which he receives annual interest payments; and regularly receives dividends from shareholdings he owns in various companies.
What advice would you give him as to his liability to income tax?
A) The salary is included in the individual’s total income for tax purposes, but the rent, interest and dividend are not.
B) The salary and rent are included in the individual’s total income for tax purposes, but the interest and dividends are not.
C) The salary, rent, interest and dividends are all included in the individual’s total income for tax purposes
D) The salary, rent, interest and dividends are all included in the individual’s total income for tax purposes, but savings and dividend income are taxed at rates which are different from those which apply the individual’s other income
E) The salary, rent, interest and dividends are all included in the individual’s total income for tax purposes, but separate allowances are available for the interest and dividends to reduce the individual’s taxable income
CORRECT ANSWER D - Salary, rent, interest and dividends all form part of an individual’s total income for tax purposes, so A and B are wrong. C has some merit but does not take into account the availability of the personal savings allowance and the dividend allowance.
E mentions the allowances but describes them incorrectly. They do not operate to reduce taxable income, but rather to reduce the rate applicable to a limited amount of savings and dividend income to 0%, so D is correct.
A sole trader runs a furniture making business. In the last tax year, the sole trader acquired new workshop premises for £2m, a new hi-tech lathe for £1.5m, and a quantity of hardwoods used to manufacture tables for £300,000.
Under current capital allowances rules the Annual Investment Allowance is £1m and the Writing Down Allowance is 18%.
The cost of which of these acquisitions can be deducted from chargeable receipts in calculating the sole trader’s trading profit for income tax purposes?
A) A proportion of the cost of the new premises
B) A proportion of the cost of the lathe
C) The cost of the hardwoods
D) A proportion of the cost of the new premises and the lathe
E) The cost of the hardwoods and a proportion of the cost of the lathe
CORRECT ANSWER E - The cost of acquisition of hardwoods is deductible expenditure, being of an income nature, wholly and exclusively for the trade. The new premises and the lathe are both acquisitions of capital assets, the cost of which does not qualify as deductible expenditure. However, a proportion of the cost of plant and machinery – i.e. the lathe - can be deducted from receipts under the capital allowances rules. The cost of land/premises acquired by a business does not fall within the capital allowance regime.
