ACCA F6 FA09 Study Text 2010
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Paper F6 (UK)
Taxation FA2009
CHAPTER
17
Profits chargeable to
corporation tax
Contents
1 Trading income
2 Interest income
3 UK property income
4 Foreign income
5 Chargeable gains
6 Gift aid payments
7 Long periods of account
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Trading income
Overview of the PCTCT statement
Trading income: overview
Detailed proforma adjustment of profit computation
1 Trading income
1.1 Overview of the PCTCT statement
The proforma PCTCT statement, shown in the previous chapter, starts by listing
taxable income from all sources. Each source of income has different rules for
determining the amount that is chargeable to corporation tax.
This chapter begins by explaining the rules for each source of income and the
workings that are usually required for each to prepare a corporation tax
computation.
1.2 Trading income: overview
Trading income is usually the primary source of income for a company. It is
computed in the same way as for income tax purposes. However, the following
differences should be noted:
(1) There is no adjustment for private expenditure. Thus if the company provides
a car for the use of a director or employee all of the expenditure, including
that relating to private mileage, is deductible.
(2) Capital expenditure specifically includes any costs incurred in issuing share
capital. Costs of share issues are therefore not allowable. Any such costs, if
deducted in arriving at the figure for profit before tax, must be added back as
an adjustment of profit.
(3) As an exception to the general rule relating to capital expenditure, any
incidental costs incurred in raising long-term finance such as debentures and
loan stock are specifically allowable for trading purposes in the tax
legislation. No adjustment for this expenditure is therefore required. These
costs are allowable even if the long-term finance is not actually raised.
(4) Although the write off of non-trade debts such as a loan to a customer,
supplier or an employee, must be adjusted for by adding back to the figure of
profit before taxation, relief is given for any loss in respect of the write off of
non-trade loans against interest income under the loan relationship rules.
(5) When calculating capital allowances, the full WDA/AIA is available for a
company even if there is an element of private use of an asset by a director or
employee (for example, a company car used for both business and private
Chapter 17: Profits chargeable to corporation tax
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mileage). The benefit of private use will be assessed on the individual as a
benefit of employment; but this is irrelevant for calculating the corporation tax
of the company.
1.3 Detailed proforma adjustment of profit computation
To calculate the adjusted profit before capital allowances figure in a trading income
assessment, it is often necessary to produce a separate working. The proforma
below sets out some of the adjustments that may be required.
(W1) Proforma computation: Adjustment of profit £
Profit before taxation X
Add Items of expenditure charged in the accounts that are not
allowable for tax under the trading income rules
Capital expenditure (may be eligible for capital allowances) X
Legal or professional fees relating to capital expenditure
(including leases, except fees relating to the renewal of a short lease)
X
Depreciation/amortisation charges for non-current assets X
Loss on the disposal of a non-current asset X
Non-trade debt written off X
Political donations and subscriptions X
Charitable donations under Gift Aid X
Interest on overdue tax X
Interest on loans to purchase shares or property X
Professional fees in relation to tax advice X
Disallowable portion of lease rental on a car with CO
2
emissions over
160 g/km
X
Gifts to customers
(if > £50 and no advertisement, or if a gift of alcohol, food or tobacco)
X
Fines and penalties X
Entertaining expenses (except entertainment of employees) X
X
Minus Amounts credited in the accounts that are not taxable as trading
income
Income taxed under other assessment rules
(e.g. income taxed as property income, interest income)
(X)
Exempt income (e.g. dividends) (X)
Capital profits (may be assessed as a chargeable gain instead)
(e.g. profit on the disposal of a non-current asset, profit on the sale of
shares etc)
(X)
Minus Amounts not credited in the accounts that are allowable for
trading income purposes
Allowable deduction for short leases (X)
Adjusted profits before capital allowances
X
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Interest income
Loan relationships
Interest receivable
Interest payable
Proforma interest income computation
2 Interest income
2.1 Loan relationships
A loan relationship occurs where the company is either:
lending money
(for example, purchases a debt instrument such as debentures or loan stock in
another company, or purchases gilt-edged securities from the Government such
as Treasury stock or Exchequer stock), or
borrowing money
(for example, borrows from a bank or building society, or issues its own
corporate debt instruments such as debentures or loan stock).
Lending and borrowing money can be undertaken either:
for the purposes of the trade, for example to provide working capital for the
business or to buy plant and machinery, or
for non-trading purposes, for example investing surplus cash in a bank deposit
account.
2.2 Interest receivable
In the examination, all interest receivable should be treated as non-trading income.
It is therefore taxed as interest income, rather than as a part of trading income.
All interest received by companies, such as bank interest, building society interest,
debenture interest and interest received from HMRC on overpaid tax, is received
gross. This means that no tax has been deducted at source.
Interest income is taxed on an accruals basis. This means that the gross amounts of
interest income credited in the financial accounts for the CAP (i.e. amounts received
and receivable) must be brought into the PCTCT statement.
2.3 Interest payable
Non-trading interest payable and trading interest payable are both allowable
expenses, but they are treated differently.
Chapter 17: Profits chargeable to corporation tax
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Non-trading interest payable includes items such as interest payable in respect of a
loan to purchase an investment property or an investment in shares in another
company, and interest payable to HMRC on underpaid tax. Non-trading interest
payable is an allowable deduction against interest income.
Trading interest payable is treated as an allowable trading expense against trading
income and is not deducted against interest income.
In the examination, interest payable on the company’s debentures and loan stock,
hire purchase interest payable and interest payable on a loan to purchase plant and
machinery, are all deemed to be interest payable for a trading purpose. These items
of interest are therefore allowable against trading income for the PCTCT statement,
and are not deducted from interest income.
2.4 Proforma interest income computation
To calculate the interest income assessment for a PCTCT statement, it is often
necessary to prepare a separate working, as follows:
Interest income £
Interest receivable X
Minus: Interest payable to purchase investment property (X)
Interest payable to purchase shares (X)
Interest on underpaid corporation tax (X)
Non-trade loan written off (X)
Interest income X
Notes
(1) Debenture and loan stock interest payable is usually treated as allowable
trading interest and is therefore not deducted in this working.
(2) If this working produces a negative figure, the interest income assessment in
the PCTCT statement is £0. Knowledge of how to utilise any such loss is not
required for the examination.
Example
K plc has given you the following information in respect of the year ended 31
December 2009:
Received/paid
Credited/charged
in the accounts
£ £
Bank interest received / receivable 4,800 5,500
Interest received / receivable on £100,000
10% loan stock purchased in X Ltd
12,000 10,000
Interest paid / payable on £50,000 12%
debentures K plc issued last year
6,600 6,000
Interest paid / payable on a loan taken out to
buy shares in a Z Inc, a foreign company
2,300 2,300
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Required
Calculate the interest income assessment to be included in K plc’s PCTCT statement
for the year ended 31 December 2009.
Answer
K plc – Interest income £
Bank interest receivable
5,500
Loan stock interest receivable 10,000
–––––––––––––––––––––––––––––––––––
15,500
Minus: Interest payable to purchase shares
(2,300)
–––––––––––––––––––––––––––––––––––
Interest income 13,200
–––––––––––––––––––––––––––––––––––
Note: The debenture interest payable of £6,000 is treated as allowable deduction
against trading income and is therefore not deducted from interest income.
Chapter 17: Profits chargeable to corporation tax
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UK property income
Rental income
Premiums received on the granting of a short lease
UK property income losses
3 UK property income
3.1 Rental income
Rental income is assessed on an accruals basis for the company’s CAP as follows:
All income accrued (i.e. earned in the CAP) from any rental property is pooled,
and
All allowable revenue expenditure incurred in relation to the rental properties
is deducted.
The actual dates of receipt of rent and the payment of expenses are not relevant as
rental income assesses the rents and expenses incurred in the CAP.
In contrast to the position for income tax purposes, interest payable on any loan
taken out to purchase the property is not an allowable deduction in calculating
property income. Instead, it is treated as non-trading loan interest payable under the
loan relationship rules and is deducted from interest income.
Example
L Ltd rented out two properties in the year ended 31 December 2009: Nos. 3 and 4
Belgravia Avenue.
No.3 is a furnished property which L Ltd purchased several years ago. It was let all
year at a rent of £1,500 per month.
No. 4 was purchased on 1 October 2009. It was immediately let on a six-month
agreement as unfurnished property at a rent of £800 per month. In order to
purchase the property, L Ltd took out a £100,000 loan with a bank on 1 October
2009, with a fixed mortgage interest rate of 11%.
The following additional expenses relate to the year ended 31 December 2009:
No. 3 No. 4
£ £
Advertising for new tenants Nil 420
Estate agent management fees 1,440 240
Council tax 360 50
Insurance 900 60
Repairs 3,200 Nil
New double garage 5,000 Nil
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Required
Calculate L Ltd’s property income assessment for the year ended 31 December 2009.
Answer
Property income – year ended 31 December 2009
£ £
Rents accrued in y/e 31 December 2009
(£1,500 × 12) + (£800 × 3)
20,400
Minus Allowable expenses
Advertising
420
Agents’ management fees
1,680
Council tax
410
Insurance
960
Repairs
3,200
–––––––––––––––––––––––––––––––––––
(6,670)
Wear and tear allowance (furnished property only)
10% × [Rents – Council tax]
= 10% × [(£1,500 × 12) – (360)]
(1,764)
–––––––––––––––––––––––––––––––––––
Property income assessment
11,966
–––––––––––––––––––––––––––––––––––
Notes
(1) Interest payable on the bank loan to purchase No. 4 is not an allowable
expense against property income. It is treated as non-trading interest payable
and is an allowable deduction from interest income.
(2) The cost of the new garage is capital expenditure and therefore not an
allowable expense against property income.
3.2 Premiums received on the granting of a short lease
The treatment of a premium is the same as for income tax purposes (see chapter 3).
Example
M plc owns a warehouse which is surplus to its requirements. Rather than selling
the warehouse, M plc granted a 40 year short lease on the property to Q Ltd on 1
November 2009 for a premium of £75,000. It charges rent of £6,000 p.a payable in
advance on a quarterly basis starting on 1 November 2009.
Required
Calculate the property income assessment of M plc for the year ended 31 March
2010.
Chapter 17: Profits chargeable to corporation tax
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Answer
£
Premium received
75,000
Minus 2% × £75,000 × 39 (58,500)
–––––––––––––––––––––––––––––––––––
Property income assessment on the premium received 16,500
Rental income accrued in CAP (£6,000 × 5/12)
2,500
–––––––––––––––––––––––––––––––––––
Total UK property income assessment 19,000
–––––––––––––––––––––––––––––––––––
3.3 UK property income losses
If several properties are let, income and expenses are pooled.
Therefore any losses arising on a property are automatically set off against the
profits of the other properties in this single pooled computation.
If this computation produces an overall negative result (i.e. there is an overall
net loss arising on all of the property lettings), the property income assessment
in the PCTCT statement is technically £0 and a property business loss arises.
However, the tax rules state that a property business loss must, if possible, be set
against the other total profits (i.e. income and chargeable gains) of the company
in that CAP.
The inclusion of the negative property assessment figure in the PCTCT
statement will automatically set off the property business loss against the other
total profits. This is an acceptable method in the examination.
Any excess property business loss (= any property income loss exceeding the total
profits of the company in that CAP) can be:
group relieved to 75% subsidiaries (this is explained in a later chapter), and/or
carried forward and set off against the first available total profits (i.e. income
and chargeable gains) in a future CAP.
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Foreign income
Foreign income in the PCTCT statement
Double taxation relief (DTR): overview
4 Foreign income
4.1 Foreign income in the PCTCT statement
If a company is UK resident, it is liable to UK corporation tax on its worldwide
profits. Therefore any foreign income, such as overseas rental income, must be
brought into the PCTCT statement and taxed.
Foreign income must be brought into the PCTCT statement gross of any foreign tax
suffered in the foreign country.
Example
N Ltd received rental income of £46,750 from a property in Spain, after overseas tax
of 15% had been deducted at source.
Required
Calculate the foreign income to include in the PCTCT statement for N Ltd.
Answer
£
Net income received 46,750
Overseas tax suffered (= £46,750 × 15/85) 8,250
Gross foreign income 55,000
Alternative calculation: £46,750 × 100/85 = £55,000
4.2 Double taxation relief (DTR): overview
Foreign income may be subjected to both UK corporation tax and foreign tax. If so,
double taxation relief (DTR) is available in the corporation tax computation. Double
taxation relief prevents the same profits being taxed twice.
The detailed computation of DTR is considered in a later chapter.