Step 1 Income Profits

Corporation tax

Tax paid by companies on their taxable total profits.

Taxable total profits

TTP = income profits + chargeable gains - loss relief.

Corporation tax exam order

Income profits → capital allowances → chargeable gains → losses → tax rate → payment date.

Step 1 corporation tax

Calculate income profits from the company’s trade.

Income receipts

Money coming from everyday trade, e.g. sale of stock, services income, interest received, rent received.

Capital receipts

Money/gains from selling company assets.

Income receipts memory

Normal business income = income receipt.

Capital receipts memory

Sale of asset = capital receipt.

Deductible expenditure

Expenses incurred for the purposes of the trade.

Main deductible expenses

Commercial loan interest, rent, wages, heating and electricity.

Deductible expense test

Was the expense incurred for the company’s trade? If yes, deduct.

Income profit formula

Income receipts - deductible expenditure - capital allowances = income profits.

Capital allowances

Tax reliefs for plant and machinery expenditure.

Plant and machinery

P&M = business equipment/assets used in the trade.

Capital allowances purpose

They reduce the company’s income profits.

Full expensing

Company can deduct 100% of qualifying new P&M expenditure in the year incurred.

Full expensing applies to

New qualifying plant and machinery, e.g. vans, office equipment, IT equipment, tools.

Full expensing effect

100% of the cost is deducted from income profits immediately.

Full expensing limit

No limit mentioned in these notes; deduct the full qualifying amount.

Full expensing memory

New normal P&M = deduct all now.

50% first-year allowance

Company can deduct 50% of the cost of special rate P&M in the year of purchase.

50% FYA applies to

Special rate assets, e.g. renewable assets like solar panels.

50% FYA effect

Deduct half now, then put the remaining balance into the special rate pool.

Special rate pool writing down allowance

Remaining balance gets 6% writing down allowance.

AIA meaning

Annual Investment Allowance.

AIA rule

Deduct 100% of qualifying P&M expenditure up to £1 million each year.

AIA limit

£1 million per year.

AIA effect

Reduces corporation tax by deducting qualifying expenditure from profits.

AIA memory

First £1m qualifying P&M = deduct 100%.

AIA strategy

Use AIA first where possible because it gives 100% relief instead of writing down allowance.

Writing down allowance

Annual deduction for P&M not fully relieved by full expensing, FYA, or AIA.

Writing down basis

Deduct a percentage each year from the remaining balance.

Main writing down allowance

18% reducing balance.

Special rate writing down allowance

6% reducing balance.

Reducing balance meaning

Each year, apply the percentage to the remaining value, not the original cost.

Reducing balance memory

The pool shrinks each year, so the allowance gets smaller.

Writing down formula

Pool balance × WDA percentage = allowance.

New pool balance formula

Old pool balance - allowance = new pool balance.

Example WDA

£500,000 × 18% = £90,000 allowance.

Capital allowance exam trap

MCQ may simply give the total capital allowance figure, so deduct it and move on.