5 Extended Diploma in Accounting - Corporation Tax

This presentation discusses the implications of UK tax law for incorporated and unincorporated businesses, including the determination of capital gain taxes payable and chargeable gains subject to corporation taxes. It covers topics such as the UK tax system, corporation tax for incorporated businesses, tax law for unincorporated businesses, and the calculation of adjusted profit for corporation tax purposes.

5 EXTENDED DIPLOMA IN
ACCOUNTING
TASK 2: CORPORATION TAX

TABLE OF CONTENT
• Discussion of UK Tax Law and its implications for unincorporated and incorporated businesses.
• Implication of UK Tax law for incorporated businesses
• Implication of Tax Law for UN-incorporated businesses.
• Determination of capital gain taxes payable and chargeable gains subject to corporation taxes.
• Determination of Capital Gain Tax :
• Determination of Chargeable gain subject to Corporation tax
• Calculation of Adjusted profit for corporation tax purposes.
• Calculation of corporation tax liabilities

Discussion of UK Tax Law and its implications
for unincorporated and incorporated
businesses
• In United Kingdom, HM Revenue and Custom (HMRC) is liable or responsible for administration and collection
of taxes from the various taxpayer's such as individual, corporate and not for profit organization.
• In the year 2020 – 2021, the total tax receipt is around £584.5 billion which is basically 7.7% decrease as
compared to previous year tax receipt.
• The main sources of taxes for the central government of UK is income tax, corporate tax, capital gain tax,
inheritance tax, insurance premium tax, environmental taxes, value added tax (VAT), custom duty, excises duty
and stamp, land, petroleum revenue taxes (Kasum, Sanni and Fagbemi, 2019).
• Individual in UK get a personal allowance of £12,570 (for 2022-23) as a tax-free income on which the individual
need not pay taxes.

Implication of UK Tax law for incorporated
businesses
• Corporation tax in the UK is the tax which is levied on limited company and any foreign company with the UK
branch or office.
• The corporate tax is one of the largest source of tax revenue for the government of UK. The corporation tax rate
is one of the lowest in the word at 19%.
• At spring budget 2021, the government announced an increase in the Corporation Tax main rate from 19% to
25% for companies with profit over £250,000 together with the introduction of small profit rate of 19% with
effect from 1 April 2023.
• The small profit rate will apply to companies with profit of not more than £50,000. As per the current corporate
tax rule, all the incorporated companies need to pay the tax on its annual profit at the rate 19%.
• In order to compute the corporate tax, the federal tax law has signified that taxable income should be considered
different from business income (Überbacher and Scherer, 2019).

Implication of Tax Law for UN-incorporated
businesses
• Unincorporated businesses are the businesses which does not get themselves registered under the companies act,
2006 of UK.
• This includes sole proprietorship, partnership and trust which pay taxes as per different rules and with different
rates.
• The incorporated company pay taxes at flat rate while the unincorporated companies pay taxes at different rate
depending total taxable income.
• For example, as per UK tax law, sole traders pays the tax on their profit through annual self-assessment scheme
run by HMRC at 20%, 40% and 45%.

Determination of capital gain taxes payable and
chargeable gains subject to corporation
taxes
• You need to pay Capital Gains tax when you sell an asset, or an asset is deemed as sold if your total
taxable gains are above your annual capital gain tax allowances for individuals.
• However, if the asset is sold by a limited company (incorporated business), it is a chargeable gain
which is subject to a corporation tax.
• A limited company does not get capital gain tax allowances.
• The capita gain tax for individual is based on if they are higher taxpayer or basic taxpayer and type
of asset sold.

Determination of Capital Gain Tax :
Prop. Purchased: 01.08.2013
Prop. Sold: 31.03.2021 for 92 months
DATE DETAIL £ £
01.08.2013 PROPERTY PURCHASED 99,999.00
ADD: LEGAL COST 780.00
TOTAL ACQUISITION COST (A) 100,779.00
31.03.2021 PROPERTY SOLD 145,000.00
Less: LEGAL COST (1,363.00)
Less: Agent Commission (2,043.00)
Less: Accountancy fees (450.00)
DISPOSAL PROCEEDS (B) 141,144.00
NET GAIN (B - A) 40,365.00
CAPITAL GAIN CALCULATION
CHARGABLE
GAIN GAIN
01.08.13 to 31.03.15 Main home (CGT Tax free) 8,775.00 -
(£40,365 X 20m/92month)
01.04.15 to 01.06.20 Property was on rent 27,641.25 27,641.25
(£40,365 X 63m/92month)
01.07.20 TO 31.03.21 Last 9 months (CGT tax free) £3,948.75
(£40,365 X 9m/92month)
Letting Relief -
40,365.00 27,641.25
Chargable CGT for Mr B (before P.A) 50% 13,820.63
Chargable CGT for Mrs C (before P.A) 50% 13,820.63
SUMMARY
Mr B Mrs C
Chargable Gain 13,820.63 13,820.63
Less: EXEMPT ALLOWANCE (12,300.00) (12,300.00)
TOTAL TAXABLE @ 18% 1,520.63 1,520.63
TAX PAYABLE 273.71 273.71

Determination of Chargeable gain subject to
Corporation tax
Calculation of chargeable gains or capital gain taxes payable subject to corporation tax
are as follows:
Particulars Amount (£)
Sales Proceed 94,945
Less Indexation cost of shares -30,000
Chargeable gain 64,945
Less Indexation allowances (30000×0.086) -2,580
Profit on disposal of shares 62,365
Less: Current year of trading loss* (22,500)
Net Chargeable Gain £39,865

Calculation of Adjusted profit for corporation
tax purposes.
Particulars Details Amount (£)
Operating Profit (as per the profit and loss statement) 711,475
Less: Interest Expense (67,200)
Add Accounting Depreciation Note 1 10,170
Add Business Entertainment Note 2 2,500
Trading profit before tax 656,945
Other Business Income:
Rental Income (on cash basis) Note 3 25,000
Loan interest income (on accrual basis) Note4 Note 4 0
Profit after adjustment of disallowable expenses (A) 681,945
Allowable deductions/ reliefs and allowances expense:
Capital allowances on computer & other equipment Note 5 (£175,000)
Structure and buildings allowances on existing freehold office building (£100,000 x
3%)
Note 6 (3,000)
Less Total business expense (B) (178,000)
Trading Loss Brought Forward (C) Note 7 (87,654)
Trading taxable profit of the business (A) - (B) – (C) 416,291

Calculation of corporation tax liabilities
Trading taxable profit of the business £416,291
Corporation tax rate 19.00%
Corporation Trading Tax liability (A)
£416,291 * 19%
£79,095.29
Capital Gain on sale of shares £62,365
Capital gain tax rate 19%
Corporation capital gain tax liability
(B)
£62,365* 19% £11,849.35
Non-trading Loan Relationship
Interest (C)
£8,100 * 19% £1,539
Total Corporation Tax liability (A) + (B) + (C) £92,483.64

References
• Wessels-Ridder, E., 2021. Evaluation of the case for the provision of investment incentives through the corporate
tax system. Available at SSRN 4032778.
• Schiavone, G., 2020. Tax aspects of UK debt financing. Novità fiscali, 2020(11), pp.721-725.
• Panikian, G. and et.al., 2021. Time series modelling methods to forecast the volume of self-assessment tax
returns in the UK. Journal of Applied Statistics, pp.1-18.
• Advani, A., 2022. Who does and doesn't pay taxes?. Fiscal Studies. 43(1). pp.5-22.
• Advani, A., Ooms, T. and Summers, A., 2021. Missing incomes in the UK: evidence and policy
implications. Journal of Social Policy, pp.1-21.
• Petit, G. and et.al., 2021. Policy Forum: Re-Envisaging the Canada Revenue Agency-From Tax Collector to
Benefit Delivery Agent. Canadian Tax Journal/Revue fiscale canadienne. 69(1). pp.99-114.

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