Corporation Tax Calculation Overview

Overview of Corporation Tax

  • All companies are legally subject to corporation tax on their profits, which are defined as the company's income profits and chargeable gains.

  • While corporation tax shares similarities with individual income tax and capital gains tax, it has distinct differences, particularly in how profits and gains are calculated and the applicable tax rates.

  • The calculation process involves accurately measuring a company's income and profits derived from various activities before applying the prevailing corporation tax rate.

Steps in Calculating Corporation Tax

  1. Calculate Income Profits

    • Aggregate all sources of income that contribute to the company's financial performance:

      • Trading income serves as the primary source, derived from the sale of goods or services.

      • Additional income may come from property rental, investment income, dividends, etc.

      • This aggregation is similar to individual income tax calculations, wherein all income sources are combined to determine taxable income.

  2. Calculate Chargeable Gains

    • Assess gains that arise from the disposal of chargeable assets, which could include physical assets such as land and equipment.

    • The process for computing chargeable gains is akin to calculating individual capital gains tax, factoring in the sale price and costs of acquisition and disposal.

  3. Combine Income Profits and Chargeable Gains

    • The total amount of income profits and chargeable gains is summed together to reach the overall profits for the company, which will be subjected to corporation tax.

Detailed Calculation of Income Profits

  • Income Profits as per Corporation Tax Act of 02/2009:

    • Income from various sources must be added together for trading companies, detailing all relevant business operations.

  • Example of Trading Income Calculation:

    • For a bike manufacturing company, income (chargeable receipts) is generated from bike sales, with expenses deducted to determine net income:

      • This deductible expenditure comprises raw materials used in production, wages for employees, utilities like electricity, rent for business premises, and general overhead costs necessary to operate the business.

    • In addition to regular expenses, capital allowances can also be claimed for specific capital items such as machinery at a rate of 18% of their written down value, which aids in reducing taxable profits.

  • Trade Profit Calculation Example:

    • Speedy Cycles’ total sales: £865,000

    • Deductible expenditure totals: £549,000

    • Capital allowances on machinery claimed: £17,100

    • Result: This leads to a calculated trading profit of £298,900 (£865,000 - £549,000 - £17,100).

Calculation of Chargeable Gains

  • Gains from selling chargeable assets necessitate careful computation to determine the profit or loss realized.

  • Gain Calculation Steps:

    1. The gain is computed as the sale price minus the purchase price, including associated disposal costs (e.g., solicitor's fees, costs related to asset enhancements).

    2. It's important to note that companies do not benefit from an annual exemption like individuals; however, they can access indexation allowances that adjust the base cost for inflation (this concept may extend beyond the scope of this overview).

Example of Chargeable Gain Calculation:

  • Speedy Cycles sold a storage unit for £80,000.

  • Associated costs that were incurred include:

    • Purchase fees amounting to £1,800 and selling fees of £2,500.

  • Result: This results in a computed gain of £16,700 after deducting associated costs (£80,000 - (£1,800 + £2,500)).

Total Corporation Tax Calculation

  • In Step 3, once the income profits (£298,900) and chargeable gains (£16,700) are combined, the total profits amount to £315,600, which serves as the base for the corporation tax calculation.

  • Step 4 involves applying the relevant corporation tax rates (19% or 25%, depending on the level of profits) to compute the total tax owed by the company.

  • For Speedy Cycles, this would mean the corporation tax owed equals £315,600 multiplied by 25%, leading to a total tax liability of £78,900.

Payment Due:

  • The corporation tax payment is due within 9 months and 1 day from the end of the accounting period.

  • Additionally, companies with taxable profits exceeding £1.5 million are required to pay their corporation tax in installments rather than a lump sum.

Summary of Corporation Tax Calculation Steps:

  1. Calculate income profits from all sources.

  2. Calculate chargeable gains from asset disposals.

  3. Combine both figures to attain total profits.

  4. Apply the relevant corporation tax rate (either 19% or 25%).