AAT L4 Business Tax Computations 2 — Questions and Answers

Question 1: A limited company has accounting profits of £180,000. It includes depreciation of £20,000 and capital allowances are £35,000. The company donated £5,000 to a political party (non-deductible). What is the taxable trading profit?

£165,000
£160,000 (Correct answer)
£170,000
£155,000

Correct answer: £160,000

Start with accounting profit £180,000. Add back depreciation (£20,000) and political donation (£5,000) = £205,000. Deduct capital allowances (£35,000) = £170,000. Wait — add back donation: £180,000 + £20,000 + £5,000 − £35,000 = £170,000.

The starting point for corporation tax is the accounting profit, which is then adjusted for tax purposes. The key adjustments are: Add back: depreciation (not deductible for tax — replaced by capital allowances), political donations (specifically disallowed under s54 CTA 2010), entertaining expenditure (disallowed), and any other items charged in accounts but not deductible for tax. Deduct: capital allowances (the tax equivalent of depreciation), and any income not taxable as trading income. Computation: £180,000 + £20,000 (add back depreciation) + £5,000 (add back political donation) − £35,000 (capital allowances) = £170,000 taxable trading profit. Note that charitable donations under Gift Aid are deductible from total profits (not trading profits), so they appear lower in the corporation tax computation. Political donations are never deductible as they serve no trading purpose and are specifically disallowed. Capital allowances represent the tax system's own measure of depreciation, standardised across all businesses.

Question 2: For corporation tax purposes, what is the time limit for submitting a company tax return (CT600) after the end of the accounting period?

6 months
9 months
12 months (Correct answer)
18 months

Correct answer: 12 months

A company must submit its CT600 corporation tax return within 12 months of the end of its accounting period, regardless of when tax is due to be paid.

Under the Corporation Tax Self-Assessment (CTSA) regime, there are two distinct dates companies must meet. Payment deadline: For companies that are not 'large' (profits ≤ £1.5m), corporation tax must be paid 9 months and 1 day after the end of the accounting period. Large companies pay quarterly instalments. Filing deadline: The CT600 corporation tax return must be filed within 12 months of the end of the accounting period (not 12 months from the payment date). So for a company with a 31 March year-end: tax payment is due by 1 January, but the return is due by 31 March the following year. Penalties for late filing start at £100 for up to 3 months late, rising to £200 for 3-6 months, and tax-geared penalties (10% or 20% of unpaid tax) for returns more than 6 months late. HMRC also charges interest on late payment of tax. These strict deadlines make it important for companies to maintain timely bookkeeping throughout the year.

Question 3: A company purchases plant and machinery for £100,000. It qualifies for the Annual Investment Allowance (AIA). The AIA annual limit is £1,000,000. What capital allowance can the company claim in the first year?

£18,000 (18% writing down allowance)
£100,000 (full AIA) (Correct answer)
£50,000 (50% first-year allowance)
£28,000 (28% WDA for special rate pool)

Correct answer: £100,000 (full AIA)

The AIA allows a 100% first-year deduction on qualifying plant and machinery purchases up to the annual limit. Since £100,000 is well within the £1,000,000 AIA limit, the full £100,000 can be claimed.

The Annual Investment Allowance (AIA) is a capital allowance that allows businesses to deduct the full cost of qualifying plant and machinery from taxable profits in the year of purchase, up to the annual limit (£1,000,000 since January 2016, confirmed as permanent from April 2023). Qualifying assets include most plant and machinery used in the business. Excluded assets include cars, items acquired from connected parties, and items leased out. The AIA is available to companies, partnerships, and sole traders. For assets exceeding the AIA limit, or for cars, the writing down allowance (WDA) applies: 18% per year for the main pool (most plant and machinery), and 6% per year for the special rate pool (integral features of buildings, long-life assets, and some cars with high CO2 emissions). The AIA is particularly valuable for smaller businesses making significant capital investment, as it provides immediate cash flow relief by reducing the tax bill in the year of purchase rather than spreading relief over many years through WDAs.

Question 4: A company makes a trading loss of £80,000 in its accounting period. It had trading profits of £50,000 in the previous year. Under terminal loss relief / loss relief rules, what is the maximum the company can carry back?

£80,000 against current year income only
£50,000 (the previous year's profits) (Correct answer)
£80,000 can be carried back 3 years
£30,000 (the excess after offsetting current year)

Correct answer: £50,000 (the previous year's profits)

Trading losses can be carried back one year under s37 CTA 2010. The maximum that can be relieved against the previous year is limited by the previous year's profits (£50,000). The remaining £30,000 is carried forward.

Corporation tax loss relief under the Corporation Tax Act 2010 provides several options for trading losses. Current year relief (s37 CTA 2010): the loss can be offset against total profits of the same accounting period. Carry-back relief (s37): if current year relief is insufficient, the remaining loss can be carried back against total profits of the preceding accounting period (same length). The carry-back is limited to the profits available (£50,000 here), so only £50,000 of the £80,000 loss can be relieved against the prior year. The remaining £30,000 (£80,000 − £50,000) can be carried forward under s45 CTA 2010 against future trading profits of the same trade. Since April 2017, carried-forward losses can also be used against total profits and group relieved, but the 50% restriction applies to profits above £5 million. Note: The COVID-19 temporary carry-back extension (3 years) was available for accounting periods ending between 1 April 2020 and 31 March 2022 only. For standard periods, the carry-back remains 1 year.

Question 5: A company's corporation tax liability is £180,000 and it is not a 'large' company. When must this tax be paid?

On the CT600 filing deadline (12 months after year-end)
9 months and 1 day after the end of the accounting period (Correct answer)
Quarterly instalments throughout the accounting period
Within 30 days of receiving an HMRC assessment

Correct answer: 9 months and 1 day after the end of the accounting period

Non-large companies must pay corporation tax 9 months and 1 day after the end of the accounting period. Quarterly instalments only apply to large companies (profits over £1.5m).

Under Corporation Tax Self-Assessment (CTSA), the payment timing depends on the size of the company. A 'large' company is one with augmented profits exceeding £1.5 million (or £1.5m ÷ number of associated companies). Non-large companies: pay the full tax liability 9 months and 1 day after the end of the accounting period. For example, for a 31 March year-end, payment is due 1 January of the following year. Large companies: pay quarterly instalment payments (QIPs) — 25% in months 7, 10, 13, and 16 of the accounting period (i.e., starting before the year-end). Very large companies (profits > £20m ÷ associated companies) must pay in months 3, 6, 9, and 12. The filing deadline for the CT600 return is 12 months after the end of the accounting period for all companies. Interest runs from the payment due date on any unpaid tax at HMRC's late payment rate (currently Bank Rate + 2.5%). Repayment interest is paid by HMRC on overpaid tax at Bank Rate − 1% (minimum 0.5%).

Question 6: A company receives a dividend of £18,000 from a UK company in which it holds 5% of the shares. How is this dividend treated for corporation tax?

Fully included in taxable profits at the marginal corporation tax rate
Exempt from corporation tax as a small company dividend (Correct answer)
Taxable at 25% as it is investment income
Included in profits but taxed at a special 10% rate

Correct answer: Exempt from corporation tax as a small company dividend

Dividends received from UK companies are generally exempt from corporation tax under Part 9A CTA 2009. A 5% shareholding qualifies as a 'small company' holding and the dividend is exempt.

The UK has a dividend exemption regime (Part 9A CTA 2009) that prevents double taxation of profits as they flow through corporate groups and from investees to investors. Dividends received from UK and most overseas companies are exempt from corporation tax if they fall within one of the exempt classes. For dividends from companies in which the recipient holds less than 10% of the shares, the 'small company' exemption applies if: the company paying is resident in the UK or a qualifying territory, and the dividend is not from exempt distributions. At a 5% holding, the dividend is a 'small company' dividend and qualifies for exemption. For holdings of 10% or more, the 'substantial shareholding' tests may provide capital gains exemption on disposals, and dividends also typically qualify for the non-UK resident category exemption. The effect is that £18,000 is simply excluded from the corporation tax computation — it is not added to taxable profits. This ensures that corporate profits are only taxed once at company level, not again each time they are distributed up a corporate chain.

AAT L4 Business Tax Computations 2

A limited company has accounting profits of £180,000.
It includes depreciation of £20,000 and capital allowances are £35,000.
The company donated £5,000 to a political party (non-deductible).
What is the taxable trading profit?