Corporation Tax

Introduction

**Corporation tax** is a levy placed on the taxable profits of **limited companies** and other organisations, including clubs, societies, associations and other unincorporated entities. In the UK it is the **fourth largest source of government revenue**. This chapter takes you step by step through the **basis of charge**, the **four-step method of calculation** (income profits, chargeable gains, reliefs against total profits, and applying the correct rate), the **tax treatment of company distributions** (dividends, share buybacks, capital reductions and close companies), and an **outline of anti-avoidance legislation**. Master the calculation method — it is the part most frequently tested in SQE1-style single best answer questions.

Assessment focus

For the SQE1 FLK1 assessment you must be able to **calculate a company's corporation tax liability** in a realistic client scenario. The examinable core is the **method of calculation**: identifying **chargeable receipts**, **deductible expenditure** and **capital allowances** to reach **trading profit**; adding **property income** to obtain **income profits**; computing **chargeable gains** (including the **indexation allowance** and **roll-over relief**); applying **reliefs against total profits**; and applying the **correct rate of tax**. Note the headline rates: **19% for 2022/23**, rising to **25% from 1 April 2023** for profits above **£250,000**, with a **small profits rate of 19%** for profits up to **£50,000**. Questions are single best answer questions (SBAQs) set in client-based scenarios and require **application**, not mere recall. Trading loss reliefs and the substantial shareholding exemption sit at the edge of the syllabus but appear in the question bank, so understand them in outline. This is a **closed-book** assessment.

Study tips

1) Memorise the **four-step method**: ① income profits, ② chargeable gains, ③ reliefs against total profits, ④ apply the rate. 2) Learn the **trading profit formula**: **Chargeable receipts − Deductible expenditure − Capital allowances**. 3) Remember the **capital allowance figures**: writing-down allowance (**WDA**) on plant and machinery at **18%** per year; **Annual Investment Allowance (AIA)** up to **£1,000,000** (this £1,000,000 limit was made **permanent** from 1 April 2023); the Covid-19 **super deduction** at **130%** applied only for expenditure between **1 April 2021 and 31 March 2023** and has now been replaced by **full expensing** — a **100% first-year allowance** for companies on new main-rate plant and machinery from **1 April 2023** (made permanent in 2023). 4) Companies pay **corporation tax** on gains — **not** CGT — and get **no annual exemption**. Add income profits and chargeable gains to find **total profits** and the applicable rate. 5) **Payment date**: **nine months and one day** after the end of the accounting period. 6) For **roll-over relief**, the replacement asset must be acquired **one year before or three years after** the disposal; the deferred gain reduces the replacement's acquisition cost.