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Summary Business Law and Practice - Corporation tax revision template
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Complete exam template for corporation tax - steps 1-4
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Corporation tax revision documentStep 1 – Rent
calculate Interest
income Trading income
profits
Distinguish between income and capital transactions
Income
Chargeable receipts (how much it has received from trading)
Ie money received for sale of goods and services
receipts of the business must derive from its trade and be income rather than capital in
nature (ITTOIA 2005; CTA 2009, part 3, ch 6)
trade
Receipts of trade = derive from trading activity rather than circumstances not directly
connected with the trade
Examples
- Money received from sales of goods and services
- Sum received on cancellation of a trading contract as compensation
- NOT EXAMPLE – gratuitous sum received on termination of a trading relationship as
a token of personal appreciation
Income
General rule = something purchased for purpose of re-sale at a profit (ie stock) money
received from the re-sale will be of an income nature
Receipts of capital nature = derive from sale of an asset which was purchased for benefit
or use of the business on a more or less permanent bases (not for re-sale)
Less deductible expenditure
income in nature, wholly and exclusively incurred for purpose of trade, must not be
prohibited by statue ie rent on premises, electricity bills
Expenditure of an income nature
1- Expenditure on item incurred for purpose of enabling trader to sell item at profit =
income in nature ie expense of trader of buying their stock = income nature.
2- Recurrence rather than one off ie overheads, telephone charges, staff salaries, rent,
interest paid on borrowing (overdraft)
Wholly and exclusively for the purpose of trade
ITTOIA 2005, s34, CTA 2009, s54
Expenditure with dual purpose CANNOT be wholly and exclusively for one purpose
Ie taxpayer paying for a meal when away for work. DUAL purpose as meal also satisfies
human need to eat
HOWEVER
Where tax payer works from home, part of heating and lighting will be deductible for tax
, purposes
Common examples of deductible expenditure
1- Salaries (There may be a problem over deductibility if director is paid an
excessive salary for their work If salary paid for personal reasons and not wholly
and exclusively for the purposes of trade = it is NOT deductible)
2- Rent on premises
3- Utility charges (gas, electricity, telephone bills)
4- Stock
5- Business rates
6- Stationary/ postage
7- Contributions to an approved pension scheme for directors/ employees
8- Payment to a director/ employee on termination of employment (Payment to
director/ employee by way of compensation for loss of office or employment =
deductible expense.Payment made in return for directors/ employees
undertaking not to compete with the company’s business following termination
of their office or employment = deductible under specific provisions (Income Tax
(Earnings and Pensions) Act 2003 (ITEPA, s225))
9- Interest payments on borrowings
Less capital allowances
Writing down allowance (CAA 2001 – ss52-59)
18% writing down allowance of total value of plant and machinery
examples of plant and machinery
- Office equipment
- Computers
- Tools
- Manufacturing equipment
Reduced balance of the cost at the end of each accounting period is also known as the
‘written down value’
When item of plant or machinery is sold = need to compare the written-down value of the
asset at the time of sale with the actual sale price in order to assess whether the sale
produces a profit or loss when comparing these figures
If there is a profit, it may be subject to a balancing charge and form a chargeable receipt in
the accounting period in which the sale takes place
If a ‘loss’ results, there may be a balancing allowance (deduction from chargeable receipts
in that period)
Pooling
All expenditure on plant and machinery is pooled together and the writing down allowance
is given each year on the balance of expenditure within the whole pool
S55 CAA 2001 – allowance on the amount by which the ‘available qualifying espenditure’
AQE – exceeds the ‘total of any disposal’ TDR
If asset sold, the sale proceeds are deducted from the value of the pool
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