F6 chapter 19

Chapter19Taxabletotalprofittradingprofits——adjustmentofprofits•Theadjustmentofprofitscomputationforcompaniesbroadlyfollowsthatforcomputingbusinessprofitssubjecttoincometax(chapter5)•Mainadjustmentitems-disallowexpenditurewhichisnotwhollyandexclusivelyforthepurposeofthetrade-disallowentertaining(exceptentertainingstaff)-disallowexpenditureoncapitalitems-adjustforleasedhighemissioncars(CO2160)-adjustforgiftstocustomers-disallowdepreciation-adjustforprofit/lossesondisposalofcapitalitems-addbackGiftAiddonations-adjustfornon-tradingincome•However,thereareminordifferencesbetweenindividualandcompanyforprofitadjustmentasfollows:-nodisallowancefor“privateuse”forcompanies-interestpayableandreceivable-capitalallowances-dividendspayable:dividendspayablebyacompanyareanappropriationofprofitandarenotallowableasatradingexpense.•Giftaiddonationareaddedbackinthecalculationofadjustedprofit.Astheyaretreatedasadeductionfromtotalprofits.interestpayableandreceivableInterestpayableandreceivableforcompanyInterestpayableandreceivableforindividualLoanfortradingLoanfornon-tradingInterestpaidinterestpaidareallowedasatradingexpenseinterestpayablemustbeaddbacktotradingprofitInterestreceivablemustbedeductedfromtradingprofitInterestreceivedInterestreceivablemustbedeductedfromtradingprofit.LoanfortradingLoanforpartnershiporemploymentLoanforpropertyInterestpaidallowedasatradingexpenseDeductibleasqualifyinginterestfromtotalincomedeductedfrompropertyincomeInterestreceivedAssavingsincome•Test1Capitalallowances•Capitalallowancesmustbedeductedinarrivingattaxabletradingincome.•Calculationofcapitalallowancesfollowsincometaxprinciples(chapter6)withminordifferences.ForcompanyForindividual•noprivateusedasset•Noreductionofallowances•Privateusedasset,notpooled•C.A.appropriatedonbusinesspercentageC.A.baseoneachCAP(12months)separately.C.A.baseonperiodofaccounts•Example2&test2Interestincome•Interestincurredfortradeornon-tradepurpose•Interestincome-interestreceivableisnormallyassessableasnon-tradinginterestincomeandshouldbedeductedwhencalculatingadjustedtradingprofitandincludedinthecorporationtaxcomputationasinterestincome.-accrualbasis-receivedgrossbycompanies.•Interestpaid-tradingpurpose–deductibleastradingexpenses,noadjustmentneeded-non-tradingpurpose–addedbacktotradingprofit&deductedfrominterestincome.Interestincome•Exampleofnon-tradepurposeinterestreceivable:–Interestreceivableoninvestmentssuchasgilts,loannotes,loanstockandbonds•Exampleoftradinginterestpayable–InterestonaloantakenouttopurchaseP&Mforthebusiness–Loanoroverdrafttofundthedailyoperations–Issueofloannotestofundtradingoperations•Exampleofnon-tradinginterestpayable–Interestpayableonaloantopurchaseacommerciallyletproperty–Interestpayableonaloantoacquirethesharesofanothercompany•Test3Propertybusinessincome•Rentalincomeisdeductedinarrivingattradingincomebutbroughtinagainaspropertybusinessincome.•Thecalculationofpropertybusinessincomefollowsincometaxprincipleswithcertaindifferences.(a)Propertybusinesslossesare-firstsetoffagainsttotalprofit(beforeGiftAid)ofthesameaccountingperiod-thencarriedforwardtobesetagainsttotalprofits(beforeGiftAid)inthefuture-isalsoavailablefor‘grouprelief’(chapter22)(b)interestpaidbyacompanyonaloantobuyorimprovepropertyisnotapropertybusinessexpense.ItistradeasinterestincomeJune2010Q2(a)•MiceLtdpaidloaninterestof£1,800inrespectoftheperiod1January2010to31March2010onaloanthatwastakenouttopurchasethisproperty.On1July2009MiceLtdmadealoanfornon-tradingpurposes.Loaninterestof£6,400wasreceivedon31December2009,and£3,200willbeaccruedat31March2010.•Howtodealwiththeseinterestpaidandreceived?•7,800(6400+3200-1800)asinterestincomeLongperiodsofaccount•Ifperiodofaccountexceeds12monthsitmustbesplitinto2accountingperiods,first12monthsandsecondofthebalancemonths.•Thencorporationtaxliabilityiscalculatedseparatelyforeachaccountingperiod.Stepsareasfollows:Step1:allocateincomeandexpenditureto2accountingperiodsIncomeorexpenditureAllocationmethodNotestradingincomebeforecapitalallowancestimebasiscapitalallowancescalculatedforeachaccountingperiodForlatteraccountingperiod,capitalallowancespro-ratedonatimebasis.propertyincome,interestincomeandotherincomeaccruingbasisforeachaccountingperiodchargeablegain/losswhenrealizedQCDswhenpaidFrankedinvestmentincome(FII)Whenreceived•Step2:calculatetaxabletotalprofitsand‘profits’foreachaccountingperiod•Step3:calculateCTliabilityforeachaccountingperiod.notes:Forthelatteraccountingperiod,theupperandlowerlimitswillbepro-ratedonatimebasisasshortaccountingperiod.Test6