CORPORATION TAX | CORPORATION TAX ACT 2009
STEP 1 Calculate Trading Profits
Chargeable Receipts
less Deductible Expenditure
less Capital Allowances
equals Trading Profits
Examples that ARE Deductible Expenditure:
• Director/ Employee salaries and benefits
• Contributions to an approved pension scheme for directors/ employees
• Payment to a director/ employee on termination of employment
• Interest payments on borrowings (under the loans relationship rules)
Examples that are NOT Deductible Expenditure:
• Dividends (as they are distributions of profit)
• Purchase of own Company Shares back from Shareholders (s1305)
Capital Allowances
1. Annual Investment Allowance (AIA)
100% allowance on the first £1,000,000 on purchases of plant/ machinery
2. Writing Down Allowance
18% allowance on the current pool and new purchases exceeding the AIA
STEP 2 Calculate Chargeable Gains
PART 1 Identify the Chargeable Disposal
• A Sale
• A Gift
PART 2 Calculate the Gain/ Loss
Proceeds of disposal (for a sale) or market value for gift/ sale at an undervalue
less Costs of Disposal
equals NET Proceeds of Disposal
less Initial and Subsequent Expenditure
equals Gains or Loss (before indexation)
PART 3 Apply Indexation Allowance
N.B. The Indexation Factor WILL be provided in an exam question.
• The indexation allowance is applied to the initial (acquisition costs inc. fees) and
subsequent expenditure (property improvements, legal/agent fees)
• It is NOT applied to costs of the disposal
• If expenditures incur at different times, the index factor for the relevant time period
must be applied to each expenditure
• Indexation can be used to reduce a gain to zero but cannot create/ increase loss
STEP 1 Calculate Trading Profits
Chargeable Receipts
less Deductible Expenditure
less Capital Allowances
equals Trading Profits
Examples that ARE Deductible Expenditure:
• Director/ Employee salaries and benefits
• Contributions to an approved pension scheme for directors/ employees
• Payment to a director/ employee on termination of employment
• Interest payments on borrowings (under the loans relationship rules)
Examples that are NOT Deductible Expenditure:
• Dividends (as they are distributions of profit)
• Purchase of own Company Shares back from Shareholders (s1305)
Capital Allowances
1. Annual Investment Allowance (AIA)
100% allowance on the first £1,000,000 on purchases of plant/ machinery
2. Writing Down Allowance
18% allowance on the current pool and new purchases exceeding the AIA
STEP 2 Calculate Chargeable Gains
PART 1 Identify the Chargeable Disposal
• A Sale
• A Gift
PART 2 Calculate the Gain/ Loss
Proceeds of disposal (for a sale) or market value for gift/ sale at an undervalue
less Costs of Disposal
equals NET Proceeds of Disposal
less Initial and Subsequent Expenditure
equals Gains or Loss (before indexation)
PART 3 Apply Indexation Allowance
N.B. The Indexation Factor WILL be provided in an exam question.
• The indexation allowance is applied to the initial (acquisition costs inc. fees) and
subsequent expenditure (property improvements, legal/agent fees)
• It is NOT applied to costs of the disposal
• If expenditures incur at different times, the index factor for the relevant time period
must be applied to each expenditure
• Indexation can be used to reduce a gain to zero but cannot create/ increase loss
