Corporation Tax
TRADING INCOME CALCULATION / CALCULATING TRADING PROFITS OF A BUSINESS:
To calculate corporation tax, you must first work out the trading income/profits
calculation…note: calculating trading losses is the same calculation – the result may bring a profit result or a loss result.
Chargeable receipts (1) – [minus] any deductible expenditure (2) – [minus] any capital allowances (3) =
trading profit (or trading losses)
Step one for calculating trading income:
Find the chargeable receipts
look for the sales the company has made. Chargeable receipts mean receipts of the business which derive
from the company’s trading – providing goods and services. Anything of a trade or income nature.
The chargeable receipts is:
Step two for calculating trading income:
Minus chargeable receipts from deductible expenditure (chargeable receipts – deductible expenditure)
The test to apply here is to deduct expenditure which is:
1. Of an income nature – can question whether the expenditure has the quality of recurrence rather being
once and for all. (Expenditure on an item which is incurred for the purpose of enabling the trader to sell
that item at a profit)
NOTE: the expense to the trader of buying premises is not of an income nature.
2. The expenditure must have been incurred ‘wholly and exclusively’ for trading purposes, meaning the
expenditure does not have a dual purpose.
3. And not statute barred’ s34 ITTOIA.
Examples: Wages / rent / insurance / advertising / new headed paper / stock / business rates / utility bills like
electricity / postage pension schemes / interest on borrowings . NOTE: if there is anything about ‘bad debt’
deduct this too.
What is the deductible expenditure amount =
Step three for calculating trading income:
Work out the capital allowances which can be used on ‘x’ assets (plants & machinery and new assets bought)
there are potentially up to three things to do here:
1. Deduct 18% from the pool of assets for capital allowance on plant & machinery
Each 12-month accounting period which ‘x’ has owned the asset(s), ‘x’ is allowed to deduct up to 18% off of the
value of the asset/s. Assets will be pooled together – so look at the existing value of the pool of assets the
company has (plant and machinery) [will probably be pointed out in the question]
Example: The machinery ‘x’ has, has a ‘written down allowance’ of £50,000 and ‘x’ has owned this asset for 2
years. Year 1 calculation = 18% off of 50,000 [1% = 500 x 18 = 9,000] = 9,000, so the asset is now worth 41,000
[50,000 – 9,000]. Year 2 calculation = 18% off of 41,000 [1% = 410 x 18 = 7,380] = 7,380, so the asset is now worth
33,620 [41,000 – 7,380].
2. Annual Investment Allowance – used on expenditure to buy new capital / assets.
The AIA will allow a maximum of the first 1,000,000 spent on ‘fresh’ expenditure on plant and machinery
incurred in an accounting period to be deductible. Examples…
‘x’ buys machinery for 170,000. The written down value of ‘x’s existing pool of machinery is 80,000 = the new
expenditure (170,000) is wholly deductible. The rest of the pool will need to be calculated (1% of 80,000 = 800
x 18% = 14,400 the written down value for the pool for the next accounting period will be 65,000 (80,000 –
14,400).
Continued below…
, Corporation Tax
If ‘x’ bought new machinery for over £1,300,000 (over the AIA) and has an existing pool of plant and machinery
of 200,000 the calculation would be as follows:
AIA – the first 1,000,000 is deductible leaving 300,000.
The pool – 200,000 + 300,000 = 500,000.
1% of 500,000 = 5,000 x 18 = 90,000
Total capital allowances used for the accounting period = 90,000 and the 1,000,000 = 1,090,000.
The written down value of the pool for the next accounting period will be 410,000 (500,000 – 90,000).
3. Further deductions and Super-deduction (may not have to do – don’t do if it will confuse me and my answer
more)
If there is anything over 1,000,000 (above example) remember to use the excess £ over 1,000,000 and add it to
the pool to then deduct the 18% off.
Due to Covid-19, the government introduced a new capital allowance during April 2021- March 2023 to be used on
new expenditure on plants and machinery. While expenditure over 1,000,000 normally would attract the 18%
allowance (as above), there is now a super deduction of 130%. Example…
‘x’ buys new machinery for 2,500,000. In calculating the trading profits for the accounting period, the company
will be able to claim a capital allowance of 3,250,000 (1% of 2,500,000 = 25,000 x 130% = 3,250,000)
If an asset in the pool is sold:
Must compare the written-down value of the asset at the time of sale with the price the asset sold for to see if ‘x’ made
a profit or a loss.
If ‘x’ made a profit – the profit will form a chargeable receipt for the next accounting period.
If ‘x’ made a loss – there will be a deduction from chargeable receipts in the period in which the asset sold in the amount
of the loss (??)
What is the capital allowance amount:
(the sum from completing step 2 – [minus] the amount ‘x’ is allowed to deduct)
‘x’ buys machinery for 170,000. The written down value of ‘x’s existing pool of machinery is 80,000 = the new expenditure
(170,000) is wholly deductible. The rest of the pool will need to be calculated (1% of 80,000 = 800 x 18% = 14,400 the
written down value for the pool for the next accounting period will be 65,000 (80,000 – 14,400).
The capital allowance amount = 184,400 (the 170,000 is totally deductible and the 18% off the pool is 14,000 are added
together)
What is overall calculation chargeable receipts ( ) – deductible expenditure ( ) – capital allowances ( )=
trading profits/loss. IF THERE IS A LOSS SEE BOTTOM OF PAGE FOR RELIEFS TO APPLY
A completed example:
‘x’ runs a business. In the most recent accounting period, ‘x’ makes 1,000,000 from sales. The deductible expenditure was 300,000
broken down as follows:
80,000 – wages
140,000 - Materials
40,000 – rent
40,000 – electricity
‘x’s business has a pool of assets with a written down value at the start of the accounting period of 100,000. ‘x’ also buys a new
machine for 200,000 in the same accounting period.
Calculation:
Chargeable receipts = 1,000,000
Minus
Deductible expenditure = 300,000
Minus
Capital allowances = 18,000 + 200,000 = 218,000
Deduct 18% from pool: 18% off of 100,000: 18,000
AIA deduction: up to 1 million…so the new machine for 200,000 is completely deductible as it falls under 1
million
Trading profit = 1,000,000 – 300,000 – 218,000 = 482,000
(1,000,000 – 300,000 = 700,,000 – 218,000 = 428,000)
