AAT L4 Business Tax Computations 3 — Questions and Answers

Question 1: A company sells a factory it has used for 12 years for £600,000. The original cost was £350,000 and indexation allowance (up to December 2017) is £95,000. What is the chargeable gain?

£250,000
£155,000 (Correct answer)
£600,000
£300,000

Correct answer: £155,000

Gain before indexation = £600,000 − £350,000 = £250,000. Indexation allowance = £95,000. Chargeable gain = £250,000 − £95,000 = £155,000.

Companies, unlike individuals, can claim indexation allowance on capital gains to adjust the original cost for inflation (measured by the Retail Price Index). Indexation allowance was frozen at December 2017 for disposals after that date. Computation: Disposal proceeds: £600,000. Less original cost: (£350,000). Gain before indexation: £250,000. Less indexation allowance: (£95,000). Chargeable gain: £155,000. Key rules: Indexation allowance cannot exceed the unindexed gain — it cannot create or increase a loss. It applies from the date of acquisition to December 2017 (or date of disposal if earlier). For assets acquired before December 2017, the frozen December 2017 index is used regardless of when the disposal occurs. The chargeable gain of £155,000 is included in the company's total profits and taxed at the applicable corporation tax rate (19% for profits up to £50,000, 25% for profits over £250,000, with marginal relief between £50,000 and £250,000 for FY2023 onwards). Note that individuals and trustees use a different system (annual exempt amount, CGT rates) and cannot claim indexation allowance.

Question 2: For the financial year 2023 (FY2023), the main rate of corporation tax applies to companies with profits above what threshold?

£1,500,000
£250,000 (Correct answer)
£50,000
£300,000

Correct answer: £250,000

From 1 April 2023, the main rate of 25% applies to profits above £250,000. The small profits rate of 19% applies up to £50,000, with marginal relief between £50,000 and £250,000.

The corporation tax rate structure changed significantly from 1 April 2023 (Financial Year 2023). Prior to this, a flat 19% rate applied to all companies. From FY2023: Small profits rate (19%): applies to companies with profits of £50,000 or less. Main rate (25%): applies to profits above £250,000. Marginal relief: for profits between £50,000 and £250,000, the effective rate tapers from 19% to 25%. The marginal relief fraction is 3/200 of (£250,000 − augmented profits). Augmented profits = taxable profits + exempt dividends received. The thresholds are divided by the number of associated companies (companies under common control), preventing fragmentation of businesses to access the lower rates. For a company with profits of £175,000 (between the thresholds), effective tax rate calculation: tax at 25% = £43,750, less marginal relief = 3/200 × (£250,000 − £175,000) × 175,000/175,000 = 3/200 × £75,000 = £1,125. Tax = £43,750 − £1,125 = £42,625. Effective rate ≈ 24.36%.

Question 3: A company makes a loan to its director of £30,000. The company does not charge interest. Which of the following tax charges applies?

No tax charge arises as the director is also a shareholder
A section 455 CTA 2010 charge of 33.75% of the loan amount applies (Correct answer)
The director must pay income tax on the full loan amount
PAYE must be operated on the loan as it is treated as salary

Correct answer: A section 455 CTA 2010 charge of 33.75% of the loan amount applies

A s455 CTA 2010 charge of 33.75% (£10,125) is payable by the company when a loan is made to a participator (shareholder/director). It is repayable when the loan is repaid.

Section 455 CTA 2010 imposes a corporation tax charge when a close company (broadly, a company controlled by 5 or fewer participators, including directors who are shareholders) makes a loan or advances money to a participator. The s455 charge rate is 33.75% of the outstanding loan balance (matching the income tax rate on dividends for higher rate taxpayers, to prevent disguised dividends). This charge is due 9 months and 1 day after the end of the accounting period, alongside regular corporation tax. The charge is temporary: when the loan is repaid (or written off), HMRC repays the s455 tax paid, but the repayment is delayed by 9 months and 1 day after the accounting period in which repayment occurs. Additionally, if no (or insufficient) interest is charged, a benefit in kind arises for the director on the official rate of interest (2.25% for 2023/24) applied to the average outstanding balance. This is reported on form P11D and subject to income tax via the director's self-assessment return. National Insurance is not charged on beneficial loan interest.

Question 4: Company A has trading profits of £300,000 and Company B (a 75% subsidiary) has a trading loss of £80,000. They wish to use group relief. What is Company A's taxable profit after group relief?

£300,000 (group relief not available as A has profits)
£220,000 (Correct answer)
£240,000
£380,000

Correct answer: £220,000

Group relief allows a 75% subsidiary's trading losses to be surrendered to the parent. Company A can claim £80,000 of Company B's loss, reducing its taxable profit to £300,000 − £80,000 = £220,000.

Group relief (Part 5 CTA 2010) allows trading losses and certain other amounts to be surrendered by one group company and claimed by another, enabling the group to achieve an overall tax saving when some members are profitable and others have losses. The 75% group relationship requires: the claimant company holds at least 75% of the ordinary share capital of the surrendering company (directly or indirectly), AND has rights to at least 75% of distributable profits and assets on winding up. Mechanism: Company B surrenders £80,000 trading loss. Company A claims £80,000 group relief. Company A's taxable profit = £300,000 − £80,000 = £220,000. Tax saving = £80,000 × 25% = £20,000 (at the main rate). Group relief is subject to the 'corresponding accounting period' rule — relief is available only for the overlapping period of the surrendering and claimant companies' accounting periods. The loss is also limited by Company A's taxable profit (can't create a negative figure). The surrendering company (B) does not benefit from the relief itself — it simply reduces the group's overall tax burden.

Question 5: What is the purpose of the 'disincorporation relief' or, more broadly, the 'substantial shareholding exemption' (SSE) in corporation tax?

To exempt small companies from paying corporation tax entirely
To exempt gains on disposal of shares in trading subsidiaries where certain conditions are met (Correct answer)
To reduce the rate of tax for companies with overseas operations
To allow companies to defer tax on gains by reinvesting proceeds

Correct answer: To exempt gains on disposal of shares in trading subsidiaries where certain conditions are met

The Substantial Shareholding Exemption (SSE) provides a complete exemption from corporation tax on gains arising from the disposal of shares in trading subsidiaries where the conditions (12 months' 10%+ holding in a trading company) are met.

The Substantial Shareholding Exemption (SSE) under Schedule 7AC TCGA 1992 (as applied to companies) exempts gains (and ignores losses) on disposal of shares in trading companies or groups where certain conditions are satisfied. Conditions for SSE (must all be met): The investing company must have held at least 10% of the ordinary share capital of the investee company for a continuous period of at least 12 months in the 6 years before disposal. Both the investing company and the investee must be trading companies (or members of a trading group) throughout the 12-month holding period. Effect of SSE: gains are fully exempt from corporation tax. Losses are not allowable (you can't claim a loss where gain would be exempt). This is a significant relief as it removes tax barriers to corporate restructuring and investment. The SSE was substantially reformed from April 2017: the requirement that the investing company also be a trading company was removed for disposals after 1 April 2017, making the exemption available to non-trading holding companies. This improved the UK's competitiveness as a holding company location.

Question 6: A company purchased a car (CO2 emissions: 45g/km) for £30,000. What capital allowance pool does this car go into and what is the annual WDA rate?

Main pool, 18% WDA (Correct answer)
Special rate pool, 6% WDA
100% first-year allowance as it is a low-emission vehicle
No capital allowances — cars are disallowed

Correct answer: Main pool, 18% WDA

Cars with CO2 emissions of 50g/km or less (but above 0g/km) go into the main pool and qualify for an 18% writing down allowance. Zero-emission cars get a 100% first-year allowance.

Capital allowances for cars are based on CO2 emissions, unlike other plant and machinery. The rules for accounting periods from April 2021 are: 0g/km (fully electric): 100% first-year allowance in the year of purchase. 1–50g/km: Main pool — 18% writing down allowance per year on the reducing balance. Over 50g/km: Special rate pool — 6% writing down allowance per year on the reducing balance. For this car at 45g/km: it falls in the 1–50g/km band, so it enters the main pool with an 18% WDA. Year 1 allowance = £30,000 × 18% = £5,400. Pool value carried forward = £30,000 − £5,400 = £24,600. Note: Cars are NOT eligible for the Annual Investment Allowance (AIA), which is a critical difference from other plant and machinery. Mixed-use cars (part private, part business) are kept in single-asset pools with a disallowance for private use, meaning the WDA is reduced proportionately. The pool structure and emission thresholds are tested regularly in AAT Business Tax assessments.

AAT L4 Business Tax Computations 3

A company sells a factory it has used for 12 years for £600,000.
The original cost was £350,000 and indexation allowance (up to December 2017) is £95,000.
What is the chargeable gain?