Corporation Tax Computation
In this guide we aim to provide you with a checklist of the steps to allow you to confidently calculate a corporation tax liability from the start point of a set of accounting results.
Calculating the corporation tax (CT) liability of a company involves a number of steps, starting with calculating the tax-adjusted trading profit or loss of the business and progressing through to applying the appropriate tax rate to Taxable Total Profits (TTP).
Adjust the accounting profit
Check Chargeable Accounting Period
2. Consider the Chargeable Accounting Period (CAP) of the business and whether this spans more than one financial year or not. A CAP falling entirely in FY15 will result in a tax charge of 20% x TTP as there is only a single rate of CT from 1 April 2015.
Corporation tax limits
3. Consider the corporation tax limits of £1,500,000 and £300,000. These must be adjusted for CAPs of less than 12 months and taking account of group companies. If the CAP falls entirely in FY15 the upper limit is relevant for payment purposes only.
4. Identify any dividend income that must be included in the calculation of Augmented Profits (AP), being TTP plus franked investment income. Dividends from non-group companies will generally be included in this figure.
5. Compare the AP figure to the adjusted corporation tax limits from step 3:
- A company with AP of less than the lower limit (adjusted if required per step 3) will pay tax at 20% for both FY14 and FY15.
- A company with AP of more than the adjusted upper limit will pay tax at 21% in FY14 and 20% in FY15 – using a hybrid of these rates is possible if the CAP spans a change of financial year.
- Companies with AP of between the adjusted upper and lower limits will pay tax at the full rate less marginal relief in FY14 and at 20% in FY15.
Apply relevant tax rate
6. The final step is to apply the relevant tax rate to TTP (not AP!). If this calculation involves a marginal company and a CAP spanning a change in financial year you should time apportion TTP, AP and the adjusted limits to the relevant financial years on a monthly basis, otherwise apply 20%, 21% or a hybrid of the two rates.
Following these steps should assist you in calculating corporation tax liabilities and you will find that not every computation involves every step. However, you should get used to working through each of the steps in turn to avoid missing anything crucial.
Once you have completed the corporation tax liability it is good practice to follow up with filing and payments dates. The CT600 will generally be due 12 months after the end of the CAP. The payment date will depend on whether the company is ‘large’ or not. Large companies pay their CT liability in quarterly instalments, while other companies will pay 9 months and 1 day after the CAP.
Note on quarterly instalments:
Corporation tax quarterly payments are introduced at TC Principles of Tax and remain examinable at TPS Taxation. A taxpayer company will not only want their adviser to calculate the tax but to be clear about when this is paid. For large companies this is quarterly. Here's a question we’ve received on this:
- “I can't seem to get the right dates when working out quarterly payments of corporation tax for large companies, particularly when it's not a 12-month period. Can you help?”
Fiona Winter, one of our tax tutors explains:
The approach is the same whether you are dealing with a 12-month period or a short CAP (remember that a company cannot have a CAP greater than 12 months). Always fix the first and last payment dates in stone - these can’t be moved:
- First payment = 6 months and 14 days (we will call this 6 ½ months) after the start of the CAP.
- Final payment = 3 ½ months after the end of the CAP.
Now go back to the first payment and add three months - this will be your second payment date as long as it is not later than the final payment.
Move three months on from the second payment to identify the date of the third payment - again as long as it is not later than the final payment.
You will never have more than four instalment payments but you may have fewer than four.
The amount due on each date is 3/n of the estimated CT liability, or the balance of tax if lower. "n" refers to the number of months in the CAP. So for a 12 month period each payment would be 3/12 (or 1/4) of the liability. For an 8-month period they would be 3/8, 3/8 and finally the balance.