The corporation tax financial year runs from the 1st of April until the 31st of March.
Companies pay Corporation Tax on profit and capital gains.
A calculation involves the following steps:
1) Calculate income profits
2) Calculate chargeable gains
3) Calculate total profits and apply available reliefs
4) Calculate tax at the appropriate rates.
Income profits of companies are calculated according to income tax principles that we discussed above.
The main rate for Corportation Tax is 19 percent. CT is calculated by applying the appropriate rate to the profits made in each of the company’s accounting periods.
Income profits are caclculated according to the usual principles of chargeable receipts, less deductible expenses and capital allowances.
To calculate chargeable gains, first identify a chargeable disposal, then calculate the gain or loss, apply reliefs and aggregate the remaining gains or losses. A chargeable disposal is the disposal of any chargeable asset. Calculate the proceeds of that disposal, minus the costs of disposal and any other allowable expenditure, then apply the indexation allowance to the balance. The chargeable gain is then added to the income profits to provide the total profit.
Relief can be applied where the proceeds of a qualifying asset are used to buy another qualifying asset (not including company shares). Goodwill and other intellectual property do not qualify, since separate rollover relief is available for these. Nevertheless, the asset acquired does not have to be of the same type as the one sold. The company must acquire or have acquired the replacement asset within one year before or within three years after the sale, unless HMRC grants an extension.
The next step is to add up the chargeable gains and trading profits, giving the total profit. Relief can then be claimed on the overall profit regardless of the reliefs already applied to chargeable gains.
Once those reliefs have been applied, corporation tax is calculated on the final figure. The current rate is 19%.
Example
A company PQR Ltd has taxable profits of £1,200,000 for the year ended 31 December 2021. However, it has also incurred a trading loss of £200,000 in the previous year which it has carried forward. The corporation tax rate for the year is 19%.
- First, we need to adjust the taxable profits by the amount of carried forward trading loss:
Taxable profits: £1,200,000 Less carried forward trading loss: £200,000 Adjusted taxable profits: £1,000,000
- Next, we need to calculate the corporation tax liability on the adjusted taxable profits:
Adjusted taxable profits: £1,000,000 Corporation tax rate: 19% Corporation tax liability: £190,000
Therefore, the corporation tax liability for PQR Ltd for the year ended 31 December 2021 is £190,000, taking into account the carried forward trading loss.
Example
Paul Mason Limited brought land in 2004 and paid a total of £500,000 (including solicitors fees and site investigation costs). The company also spent £200,000 in 2007 on doubling the size of the property and is now selling for £2 million. The relevant multiplier for 2004 is 0.519 and the relevant multiplier in 2007 is 0.379 and the incidental costs of disposal are 5k.
Sale price – 2,000,000
Less – acqutision costs and incidental costs of acquisition – 500,000
Incidential costs of disposal – £5,000
Subsequent expenditure – £200,000
Equals 1,295,000 – before indexation.
Less 500,000 x 0.519 (acquisition cost and incidental cost of acquisition x relevant multiplier
Less 200,000x 0.379 (subsequent expenditure x relevant multiplier)
= 959,700 gain after indexation.
Trading losses
A trading loss made within any of the first four tax years of trading can be carried back and set against income from any source (except capital gains) in the previous three tax years. Losses must be set against income from the earliest available year.
For example, a business started in January 2021 that makes a loss in the 24/25 tax year can set that loss off against income from the tax years 21/22, 22/23 and 23/24 in that order.
This relief must be claimed within one year of the 31 January following the tax year of the loss.
There are a number of reliefs that may apply and alhtought the company may choose which relief works for them, the same oss cannot be claimed for twice. The key reliefs are set out below.
Carry-across and carry-back relief (also called Trade Loss Relief against general income)
Losses can also be ‘carried across’ and set against other income and capital gains in the year of the loss, reducing the income tax or capital gains tax payable on other income. ‘Carrying back’ means the loss is deducted from the total income and capital gains of the preceding tax year, amounting to a tax refund for the previous tax year. The loss must be set against total income first and then any excess loss set against capital gains.
This relief must be claimed within one year of the 31 January following the tax year of the loss.
Carry-forward relief
A trading loss can also be ‘carried forward’, which means it is deducted from profits produced in future accounting periods. This relief only provides for the loss to be set against profits, not other sources of income or capital gains. The company can continue to set losses against total profits until the loss is absorbed.
The carry forward relief must be applied for within two years from the end of the accounting period where losses will be applied.
Carry-back of terminal trading loss
A trading loss incurred in the final 12 months of a business can also be carried back, which means it is deducted from the trading profit in the three tax years before the last year of trading, taking the later years before the earlier years. Tax that has already been paid can then be repaid from the Inland Revenue. Losses cannot be set against capital gains or income from sources other than the business itself.
This relief must be claimed within four years of the end of the tax year of the loss.
Let’s say a company ABC Ltd has made a trading loss of £200,000 in the year ended 31 December 2021, which is its final year of trading. The company has taxable profits of £400,000 in the previous year ended 31 December 2020. The corporation tax rate for both years is 19%.
- First, we need to adjust the taxable profits of the previous year by the amount of the terminal trading loss:
Taxable profits of previous year: £400,000 Add terminal trading loss: £200,000 Adjusted taxable profits: £600,000
- Next, we need to calculate the corporation tax liability for the previous year, taking into account the adjusted taxable profits:
Adjusted taxable profits: £600,000 Corporation tax rate: 19% Corporation tax liability: £114,000
- Finally, we need to calculate the terminal loss relief:
Terminal loss: £200,000 Terminal loss relief: £38,000 (i.e., 19% of the terminal loss)
Therefore, ABC Ltd can carry back the terminal trading loss of £200,000 and claim terminal loss relief of £38,000, reducing the corporation tax liability for the previous year to £76,000.
Example 2: Let’s say a company XYZ Ltd has made a trading loss of £100,000 in the year ended 31 March 2022, which is its final year of trading. The company has taxable profits of £200,000 in the previous year ended 31 March 2021. The corporation tax rate for both years is 19%.
- First, we need to adjust the taxable profits of the previous year by the amount of the terminal trading loss:
Taxable profits of previous year: £200,000 Add terminal trading loss: £100,000 Adjusted taxable profits: £300,000
- Next, we need to calculate the corporation tax liability for the previous year, taking into account the adjusted taxable profits:
Adjusted taxable profits: £300,000 Corporation tax rate: 19% Corporation tax liability: £57,000
- Finally, we need to calculate the terminal loss relief:
Terminal loss: £100,000 Terminal loss relief: £19,000 (i.e., 19% of the terminal loss)
Therefore, XYZ Ltd can carry back the terminal trading loss of £100,000 and claim terminal loss relief of £19,000, reducing the corporation tax liability for the previous year to £38,000.