ACCA F6 FA09 Study Text 2010
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Chapter 16: Introduction to corporation tax
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Notes
(1) Both the French and the UK dividends are exempt from corporation tax and are
therefore not included in the computation of PCTCT.
(2) The dividends paid by A Ltd are not deductible in calculating PCTCT.
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The corporation tax liability
The rate of corporation tax
The Financial Year
The level of profits
Determining the appropriate rate of corporation tax
Marginal relief
4 The corporation tax liability
4.1 The rate of corporation tax
A company pays corporation tax on its PCTCT for a CAP.
The rate of corporation tax applicable to a company depends on two factors:
the Financial Year(s) into which the CAP falls, and
the amount of the company’s profits.
4.2 The Financial Year
The government fixes the corporation tax rate for each Financial Year. A Financial
Year (FY) runs from 1 April in one year to the following 31 March.
Financial Years are stated using the calendar year in which they start. For example,
FY2008 means the period from 1 April 2008 to 31 March 2009. FY2009 runs from 1
April 2009 to 31 March 2010.
If a company has a chargeable accounting period (CAP) that falls entirely within a
Financial Year, only one rate of tax applies to the chargeable profits for the CAP.
However, if a company has a CAP that falls into more than one Financial Year (i.e.
the CAP straddles 31 March), the PCTCT of the company needs to be time-
apportioned between the two Financial Years, and the appropriate rates of tax are
applied to each time-apportioned part separately.
4.3 The level of profits
The rate of tax applied to the PCTCT is determined according to the level of the
company’s profits. Profits are defined as follows:
£
PCTCT X
Franked Investment Income (FII) X
= (dividends received × 100/90)
Profits X
Chapter 16: Introduction to corporation tax
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The definition of profits for the purpose of establishing the rate of corporation tax
includes Franked Investment Income (FII). This means that the amount of dividends
received by a company can affect the rate of tax that it pays on its PCTCT.
A company is deemed to receive dividends after the deduction of 10% tax at source.
This deemed deduction applies irrespective of whether the dividend is received
from a UK company or an overseas company. If the dividend is paid by an overseas
company, any tax deducted at source in the overseas country is ignored.
FII is the term used for the grossed up amount of dividends received. In other
words, FII is the amount of dividends received multiplied by a factor 100/90 (i.e.
FII = dividends received × 100/90).
In an examination question, the amount of cash dividends received will probably
be given. This cash amount should be grossed up to calculate the FII for inclusion in
the profits computation.
Intra-group dividends are not FII. Therefore, where a company receives dividends
from a subsidiary (i.e. where it owns more than 50% of the shares in the company
paying the dividend), these dividends are ignored and are not treated as FII. The
group implications of corporation tax are considered in more detail in a later
chapter.
Example
For the year ended 31 March 2010 B Ltd has trading income of £200,000 and
property income of £6,000. It received net dividends of £3,150 from a foreign
company. Overseas tax at the rate of 15% was withheld from this dividend. B Ltd
also received cash dividends of £7,200 from a non-associated UK company.
Required
Calculate the profits of B Ltd for the purpose of determining the appropriate rate of
corporation tax.
Answer
B Ltd - Corporation tax computation – year ended 31 March 2010
£
Trading income 200,000
UK property income 6,000
PCTCT 206,000
FII (£7,200 + £3,150) × 100/90 11,500
Profits for determining the rate of corporation tax 217,500
Note
UK and overseas dividends are ignored in calculating PCTCT as they are not
taxable. However, they are grossed up at the rate of 100/90 and brought into the
calculation of profits.
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4.4 Determining the appropriate rate of corporation tax
To determine the appropriate rate of tax to apply to the PCTCT, the profits (for a 12-
month period) are compared to annual statutory limits. The rules are set out in the
table below.
If the profits of the company are…
Statutory limits
Corporation tax
rate
At or below the small companies rate
lower limit
£300,000
Small
companies
Between the small companies rate
lower and upper limits
£300,000 – £1,500,000
Full rate minus
marginal relief
Above the small companies rate upper
limit
£1,500,000 + Full rate
The following rates of corporation tax will be provided in the examination (within a
list of tax rates and allowances).
Financial year 2007
2008
2009
Small companies rate 20%
21%
21%
Full rate 30%
28%
28%
Example
Continuing with the above example, state the rate of tax applicable for B Ltd in the
year ended 31 March 2010.
Answer
The profits of the company lie below the small companies rate lower limit.
Therefore the appropriate rate of corporation tax for B Ltd = 21%.
Note that this rate is applied to PCTCT. Therefore, the corporation tax liability of B
Ltd for the year ended 31 March 2010 is £43,260 (= £206,000 × 21%).
Do not make the mistake of applying the rate of tax to the profits figure. Remember
that a company does not pay tax on the dividends it receives. FII is only included in
the computation to determine the rate of tax applicable to the PCTCT.
4.5 Marginal relief
If profits fall into the marginal band of £300,000 – £1,500,000, the corporation tax on
the PCTCT is initially calculated at the full rate, currently 28%. Marginal relief
(sometimes referred to as tapering relief) is then calculated and deducted.
Chapter 16: Introduction to corporation tax
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Marginal relief is calculated using the following statutory formula:
(M - P) ×
I
P
× (Marginal relief fraction)
Where
M =
Upper limit of £1,500,000
P =
Profits
I =
PCTCT
This formula will be provided in the examination, together with the following
information:
Financial year 2007
2008
2009
Small companies rate:
lower limit 300,000
300,000
300,000
upper limit 1,500,000
1,500,000
1,500,000
Marginal relief fraction:
Small companies rate 1/40
7/400
7/400
Example
The following information relates to three different companies, each with a 31
March 2010 year end:
E Ltd F Ltd G Ltd
£ £ £
PCTCT 228,000 750,000 1,405,000
Dividends received 54,000 63,000 90,000
Required
Calculate the corporation tax liability for each company.
Answer
E Ltd
F Ltd
G Ltd
£
£
£
PCTCT
228,000
750,000
1,405,000
FII
60,000
70,000
100,000
Profits
288,000
820,000
1,505,000
Note:
FII = dividends × 100/90.
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E Ltd F Ltd G Ltd
Decision: tax rate
21%
28% less
marginal
relief (MR)
28%
£ £ £
Corporation tax liability on PCTCT
£228,000
× 21% 47,880
–
––––––––––––––––––––––––––––––––––
£750,000
× 28%
210,000
Minus MR (see below)
(10,884)
–
––––––––––––––––––––––––––––––––––
199,116
–
––––––––––––––––––––––––––––––––––
£1,405,000
× 28%
393,400
–––––––––––––––––––––––––––––––––––
Marginal relief: working
(1,500,000 – 820,000) × 750,000/820,000 × 7/400
Chapter 16: Introduction to corporation tax
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Special rules applying to the corporation tax liability
Short chargeable accounting periods
Associated companies
Accounting periods straddling 31 March
5 Special rules applying to the corporation tax liability
5.1 Short chargeable accounting periods
The statutory limits are annual limits. Therefore if a company has a CAP of less than
12 months (i.e. a short CAP) the annual statutory limits must be time-apportioned
before comparing with the profits of the CAP, to determine the appropriate rate of
corporation tax.
Example
H Ltd produced accounts for the 7-month period ended 31 October 2009. Its PCTCT
totalled £268,500 and it received dividends of £2,700 from a non-associated
company on 14 June 2009.
Required
Calculate the corporation tax liability of H Ltd for the 7-month period.
Answer
H Ltd – corporation tax liability computation – 7-month period ending 31 October
2009
£
PCTCT 268,500
FII: (£2,700 × 100/90) 3,000
Profits 271,500
Small companies rate
Lower limit
Upper limit
300,000 × 7/12
1,500,000 × 7/12
175,000
875,000
Decision: 28% minus marginal relief
Corporation tax liability £
£268,500 × 28%
75,180
Minus Marginal relief (875,000 – 271,500) × 268,500/271,500 × 7/400 (10,445)
–––––––––––––––––––––––––––––––––––
Corporation tax liability 64,735
–––––––––––––––––––––––––––––––––––
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5.2 Associated companies
The statutory annual limits apply to a single company operating on its own.
If the company has associated companies, the statutory annual limits must be
divided equally between the number of associated companies.
Companies are associated if:
one company is under the control of another, or
two or more companies are under the common control of another person; this
other person may be another company, an individual or a partnership.
A person has control of a company if they have an interest in the company’s shares
exceeding 50%. The full definition of these terms and the consequences for
corporation tax are dealt with in more detail in a later chapter.
5.3 Accounting periods straddling 31 March
When a company’s CAP straddles 31 March, it falls into two financial years. The
corporationtaxliabilitymustthereforebecalculatedintwopartsbytime‐apportioning
thePCTCT andthefigur eofprofi tsintotheapprop riatefinancialyears.
Note thatit is only the corporation tax liability that is affected. The calcu
lation of the
PCTCTandthefigureofprofitsremainunchanged.
Example
JLtdhasthefollowingresultsfortheyearended31December2008:
£
Tradingincome 400,000
Interestincome 40,000
GiftAidpaid 3,000
Dividendsreceivedfromnon‐associatedcompanies 72,000
Therates, limitsandfractionforFY2007andFY2008ar easfollows:
FY2007 FY2008
Fullrateofcorporationtax 30% 28%
Smallcompaniesrate 20% 21%
Lowerlimit £300
,000 £300,000
Upperlimit £1,500,000 £1,500,000
Marginalrelieffraction
40
1
400
7
Required
Calculatethecorporationtaxliabilityfortheyear.
Chapter 16: Introduction to corporation tax
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Answer
J Ltd – corporation tax liability computation – year ended 31 December 2008
Step1 CalculatethePCTCTand‘profits’fortheyear.
£
Trading income 400,000
Interest income 40,000
――――
440,000
Less: Gift aid payment (3,000)
――――
PCTCT 437,000
FII (£72,000 × 100/90) 80,000
――――
‘Profits’ 517,000
――――
Step2 The‘profits’figurefallsbetweentheupperandlowerlimits,therefor e
marginalreliefapplies.
Step3 Thechargeableaccounting periodistheyearended31December2008;
threemonthsfallsintoFY2007,andninemonths intoFY2008.
Step4 Calculatethecorporationtaxpayable:
£
FY 2007 (3 months)
Corporation tax at 30% on £437,000 ×
12
3
32,775
Less: Marginal relief:
40
1
× (£1,500,000 − 517,000) ×
000,517
000,437
×
12
3
(5,193)
――――
27,582
FY 2008 (9 months)
Corporation tax at 28% on £437,000 ×
12
9
91,770
Less: Marginal relief:
400
7
× (1,500,000 − 517,000) ×
000,517
000
,
437
×
12
9
(10,905)
――――
Corporation tax payable 108,447
――――
Asanalternativeitispossibletoarriveatthesameresultbytime‐apportioningthe
statutory limits, the PCTCT and the figure of profits into the respective financial
years and then calculating the corporation tax (i.e. as if there were two separate
shortaccountingperiods).
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