Corporation Tax Adjustments

Clients often ask about why their corporation tax liability is not exactly the 19% of their profit. This is due to the adjustments that are made before calculating the liability for corporation tax. By these adjustments, we mean the addition of disallowable expenses back to profits as well as the deduction of capital allowances or losses from the profits.

Following is the list of some of the common disallowable expenses that are usually added back to profits for corporation tax purposes.

Company Setup or Incorporation Expenses

Company set up or incorporation costs are disallowable expenses. It is acceptable to include these costs as part of profit and loss account, however, these are added back to profits before calculating the corporation tax liability.

Depreciation Expenses

It is a standard accounting practice to capitalise the company assets which can be used for more than a year. This is to say that cost of these assets will not be expensed but rather recorded as a balance sheet item under Assets. It is then estimated that how much this asset would depreciate over its useful life. This estimation is expensed through the profit and loss account as depreciation expenses. However, for corporation tax purposes, this amount is added back to profits.

For example, fixtures bought by the company with the initial cost of £5,000 and 5 years of useful life will be depreciated by £1,000 each year. This £1000 will be recorded as depreciation expenses under the profit and loss account but will be added back in each of the Financial years before calculating the corporation tax.

Client Entertainment

Monies spent on client entertainment (such as lunch or dinner) are not allowable expenses for corporation tax purposes. Let’s say the Profit and Loss account of a company shows a profit of £8,000 for a given year. Now, if this includes an expense of £500 under the Client Entertainment category, this would be added back to profits before calculating the corporation tax. In this case, 19% of CT rate will be applied on £8,500 rather than £8,000.

Fines and penalties

Fines or penalties suffered by the company are also disallowable for corporation tax purposes. The same method of adding back (as explained earlier) will be applicable for corporation tax calculation. List of fines and penalties falling within the scope of this type of disallowable expenses can be found on HMRC website.

 Capital Allowances

Assets, as discussed above, are depreciated in every useful year of their life but this cost is not allowable for corporation tax purposes. To compensate for this, HMRC allows for Capital Allowances to be claimed for fixed assets in the Business. One of these allowances is the Annual Investment Allowance which is deducted from the profits before calculating the corporation tax and hence reducing the corporation tax bill.

Let’s say a business purchases fixtures that are eligible for Annual Investment Allowance claim. Total purchase price of these fixtures was £10,000. Under the Annual Investment Allowance claim, business would be allowed to claim the full cost of £10,000 before arriving at taxable profits. 

Losses

HMRC allows for losses incurred in previous accounting periods to be brought forward and offset against the current year profits. Under this principle, if a company incurs a loss of £5,000 in the previous accounting period and earns profit of £10,000 in the current accounting period, the total profit subject to corporation tax in the current year would be £5,000.

Corporation Tax Rate

From accounting perspective, it is self-evident that if the corporation tax rate changes during a tax year, the change cannot be applied in a universal manner to all companies due to each company having their Accounting Periods ending in different months of the year. For this reason, any changes in corporation tax rate are applied by apportioning the profits for relevant months. So, the profits arising during the months falling under previous rate would be calculated by the relevant corporation tax rate and later profits would be subject to the new tax rate.

Other Adjustments

There can be other adjustments depending on the nature of expenses incurred and capital allowances available. We advise that you seek professional advice for correct calculation of corporation tax.

At UGS Accountants, we offer specialised advice and support to new and developing small businesses. We recognise the importance of how different each business and its needs can be. For this reason, we proactively work with you to make the structuring of business, preparation of your accounts, bookkeeping, VAT and tax return a highly beneficial process, not merely a statutory one.