TX: Corporation tax

Answer: B. A corporation tax accounting period cannot exceed 12 months. A 24-month period of account must be split into two 12-month accounting periods: 1 October 2025 to 30 September 2026, and 1 October 2026 to 30 September 2027. Option A is wrong — accounting periods are capped at 12 months. Options C and D describe incorrect splits.

Answer: B. Depreciation is not an allowable deduction for corporation tax — it is added back and capital allowances are claimed instead. Salaries (A), tax return preparation fees (C), and staff training (D) are all allowable trading expenses incurred wholly and exclusively for the purposes of the trade.

Answer: B. The loan relationships rules apply to all interest income and expense for companies. Interest paid on a borrowing is a debit (deductible), reducing taxable profits. Interest received is a non-trading credit, added to taxable income. This treatment applies regardless of whether the loan is for trading or non-trading purposes. Option A incorrectly disallows the interest paid. Option C incorrectly exempts interest received. Option D is wrong — loan relationship debits and credits are treated under a separate regime, not as trading items.

Answer: C. QCDs are deducted from total profits after all income streams have been aggregated — they are not deducted in computing trading profits. This means QCDs cannot create or increase a trading loss. They reduce the overall taxable total profits. Option A is wrong — QCDs are not a trading deduction. Option B is wrong — they reduce, not add to, profits. Option D is wrong — they are a deduction from profits, not a tax credit.

Answer: B. Profits of £180,000 fall between the lower limit (£50,000) and upper limit (£250,000), so marginal relief applies. Step 1 — CT at main rate: £180,000 × 25% = £45,000. Step 2 — marginal relief: (Upper limit − Augmented profits) × Standard fraction = (£250,000 − £180,000) × 3/200 = £70,000 × 0.015 = £1,050. Step 3 — CT payable: £45,000 − £1,050 = £43,950 — option B. Option A (£45,000) applies the main rate with no marginal relief — the error of treating profits above £50,000 as automatically subject to the full 25% with no further adjustment. Option C (£34,200 = £180,000 × 19%) wrongly applies the small profits rate; this only applies when profits are at or below £50,000. Option D makes an error in the marginal relief calculation, possibly using the wrong standard fraction or limits.

Answer: C. Profits of £45,000 are below the lower limit of £50,000 (no associated companies), so the small profits rate of 19% applies. CT = £45,000 × 19% = £8,550. Option A (£11,250) applies the main rate of 25%: £45,000 × 25% = £11,250. Option B (£9,000) uses an incorrect rate. Option D (£11,000) also uses a wrong rate.

Answer: B. Trading losses carried forward prior to 1 April 2017 can only be set against future trading profits of the same trade. They cannot be set against non-trading income such as bank interest. This means only £40,000 of the £65,000 trading profit is sheltered — the £5,000 interest income remains taxable. Note: the restriction on offsetting against total income applies to pre-April 2017 carried forward losses. Post-April 2017 losses have more flexibility.

Answer: B. A company can carry back a trading loss to set against total profits of the immediately preceding 12-month accounting period (1 year carry back). The full £80,000 can be carried back against the £120,000 profits of the year ended 31 March 2025. Option A goes back 2 years — the basic carry back is 1 year. Option C (£40,000) restricts the amount incorrectly. Option D — a 3-year carry back is only available for terminal losses on cessation.

Answer: A. The indexation allowance for companies is calculated as: cost × indexation factor = £200,000 × 0.092 = £18,400. This reduces the chargeable gain. Note: indexation allowance for companies was frozen at December 2017 — the factor applies from the date of purchase to December 2017 only, even if the asset is sold later. Option B uses a different factor. Option C halves the correct answer. Option D uses the full cost.

Answer: B. Group relief requires a 75% group relationship — one company must own at least 75% of the other, directly or indirectly. Alpha owns 80% of Beta, which exceeds 75%, so relief is available. The whole loss of £60,000 can be surrendered to Alpha (and Alpha has enough taxable profit, £90,000, to absorb it). The 80% ownership does not scale down the amount — group relief is all-or-nothing once the 75% test is met. Option A is wrong; 100% ownership is not required. Option C wrongly applies a proportionate 80% limit. Option D also recognises that the full loss is surrenderable, but is loosely worded — the loss is surrendered to a fellow 75% group member, here Alpha specifically, which is why option B is the precise answer.

Answer: B. Indexed cost = £90,000 × (1 + 0.230) = £90,000 + (£90,000 × 0.230) = £90,000 + £20,700 = £110,700. Chargeable gain = £180,000 − £110,700 = £69,300. Note: indexation allowance cannot create or increase a loss — it can only reduce the gain to nil. Option A (£90,000) ignores indexation. Option C incorrectly suggests the gain is nil. Option D (£20,700) is the indexation allowance only.

Answer: A. Taxable total profits: Trading profit £280,000 + Non-trading loan relationship credit (bank interest) £12,000 + Chargeable gain £25,000 = Total profits £317,000. Less QCD £8,000. Taxable total profits = £309,000. Option B (£301,000) deducts the QCD from trading profits instead of total profits. Option C (£317,000) does not deduct the QCD. Option D ignores interest and the gain.

Answer: B. A company is UK resident if it is incorporated in the UK, OR if its central management and control (the strategic decisions made by the board) is exercised in the UK. Both tests are used — a foreign-incorporated company can still be UK resident if controlled from the UK. Option A (registered in England and Wales) is too narrow — registration alone is not the test. Options C and D are not relevant residency tests for companies.

Answer: C. AIA: £30,000 on new equipment. Pool: WDV b/f £85,000 − disposal proceeds £8,000 = £77,000. (The disposed asset's proceeds are deducted from the pool, not the original cost.) WDA: £77,000 × 18% = £13,860. Total: £30,000 + £13,860 = £43,860. Option A incorrectly adds the new equipment to the pool before deducting disposal proceeds. Option B also calculates the pool balance incorrectly. Option D does not claim AIA.

Answer: B. Intragroup asset transfers within a 75% chargeable gains group are made on a no gain/no loss basis — Gamma Ltd is deemed to dispose of the asset at a value that gives no chargeable gain and no allowable loss. Delta Ltd acquires the asset at the same base cost as Gamma Ltd held it (not market value). The gain is deferred until Delta Ltd disposes of the asset outside the group. Option A triggers an immediate gain — wrong. Option C gives Delta market value — wrong. Option D (electing to transfer the gain) is not relevant here.

Answer: B. Pre-trading expenditure of a revenue nature incurred in the 7 years before trading commences is treated as if incurred on the first day of trading. The £15,000 market research cost is deductible in the first accounting period. Option A is wrong — specific relief exists. Option C is wrong — this is revenue expenditure, not capitalised. Option D is wrong — there is no 'start-up allowance' per se.

Answer: B. Where a company has associated companies, the lower and upper limits are divided by the number of associated companies plus one (the company itself). Redwood has 1 associate, so total = 2 companies. Lower limit = £50,000 / 2 = £25,000. Upper limit = £250,000 / 2 = £125,000. Option A gives the standard limits without adjustment. Option C doubles the limits incorrectly. Option D is also wrong.

Answer: B. Rollover relief defers the gain to the extent proceeds are reinvested. Proceeds not reinvested = £600,000 − £550,000 = £50,000. This £50,000 is immediately chargeable. The remaining gain (£200,000 − £50,000 = £150,000) is deferred and deducted from the base cost of the new asset. Option A wrongly denies all rollover relief. Option C is the deferred gain, not the immediately chargeable amount. Option D requires full reinvestment of proceeds.

Answer: C. Property business profit = Rent − Allowable deductions. Allowable: insurance £2,400 + repairs £8,600 + managing agent fees £4,200 = £15,200. (Note: unlike residential property for individuals, there is no finance cost restriction for companies.) Profit = £84,000 − £15,200 = £68,800. Option A uses gross rent. Option B makes an incorrect deduction. Option D also makes an error.

Answer: A. A long period of account is split into a 12-month accounting period and a short period. Trading profits are apportioned on a time basis: Year 1 (12 months) = £360,000 × 12/18 = £240,000. Year 2 (6 months) = £360,000 × 6/18 = £120,000. Option B splits equally (9 months each) — wrong. Option C uses incorrect proportions. Option D allocates all profit to year 2 — wrong.

Answer: B. SMEs can claim an additional deduction of 86% of qualifying R&D expenditure (under the merged RDEC/SME scheme rates for 2025-26). Total deduction = £100,000 + (£100,000 × 86%) = £100,000 + £86,000 = £186,000. This enhanced deduction reduces taxable profits. Option A is the base expenditure only. Option C is the additional deduction only. Option D uses an incorrect rate.

Answer: B. Loan relationships are classified as trading or non-trading. Interest on a loan for trading purposes = trading debit (deductible in computing trading profits). Interest on a loan for non-trading purposes (investment property) and interest received on deposits = non-trading items. Non-trading: credit £4,200 − debit £3,100 = net credit £1,100 (taxable). Total: trading debit (£9,500) deducted from trading profits; £1,100 non-trading credit added to total profits. Option A nets all items together incorrectly. Option C treats all items as trading. Option D misclassifies the trading loan.

Answer: B. For a deduction to be allowable it must be incurred wholly and exclusively for the purposes of the trade. Where remuneration is considered excessive, HMRC may restrict the deduction to the amount that is commercially justifiable — typically the market rate. The excess (£130,000) is disallowed. Option A allows the full amount — incorrect if HMRC challenges the excess. Option C is too extreme — HMRC would not disallow the entire salary. Option D is incorrect — the excess is not taxed as a benefit; it is simply disallowed.

Answer: B. The substantial shareholding exemption (SSE) exempts gains on the disposal of shares where: the investing company has held at least 10% of the ordinary share capital for a continuous 12-month period in the 6 years before disposal; and both companies are trading companies (or members of a trading group). Crestline holds 15% (above 10%) for 5 years — SSE applies. The gain of £800,000 is fully exempt. Option A charges the gain — SSE prevents this. Option C — rollover relief requires reinvestment. Option D — indexation only reduces, not exempts.

Answer: D. Non-large companies pay CT as a single payment 9 months and 1 day after the end of the accounting period. For a year ending 31 December 2025: 31 December 2025 + 9 months = 30 September 2026 + 1 day = 1 October 2026. Option A is the end of the accounting period itself. Option B is 3 months after year end. Option C is 8 months after year end. The correct date is 1 October 2026.

Answer: B. Consortium relief allows losses to be surrendered between a consortium company and its consortium members. The maximum surrender to any one member is limited to: the lower of (i) the surrendering company's loss × member's ownership % and (ii) the claimant's profits. Company A owns 25% of Link Ltd. Maximum surrender = £200,000 × 25% = £50,000. This is also below Company A's profits of £150,000. So maximum = £50,000. Option A (£200,000) gives the full loss without applying the ownership %. Option C is 25% × £150,000. Option D is Company A's full profits.

Answer: C. Fines and penalties imposed by law are not allowable deductions — they are not incurred wholly and exclusively for the purposes of the trade; allowing them would undermine the deterrent purpose of the fine. Wages (A) are allowable. Legal fees for renewing a short lease (B) are revenue expenditure and allowable. Pension contributions (D) are allowable when paid.

Answer: C. Intragroup transfers between companies in a 75% chargeable gains group are automatically made on a no gain/no loss basis — no election is needed. Orion Ltd is treated as disposing at a value giving no gain or loss. Sirius Ltd acquires at Orion Ltd's original base cost of £300,000 (plus indexation to December 2017). The gain is effectively deferred until Sirius Ltd disposes of the asset outside the group. Option A triggers an immediate gain — wrong. Option B gives Sirius market value — wrong. Option D suggests an election is needed — not required for automatic no gain/no loss treatment.

Answer: C. UK resident companies pay corporation tax on all their profits, which includes trading income, non-trading income (such as rental income, loan relationship credits), and chargeable gains — all subject to CT. Option A is wrong — directors' remuneration is employment income taxed on the directors personally (PAYE), not CT on the company. Option B — dividends from UK companies are generally exempt from CT under the dividend exemption rules. Option D is wrong — companies do not pay capital gains tax; gains are included within CT.

Answer: B. Group relief can only be surrendered in respect of the overlapping period of the two companies' accounting periods. Sub Ltd: 1 Jan 2025 to 31 Dec 2025. Parent Ltd: 1 Apr 2025 to 31 Mar 2026. Overlap = the period common to both = 1 April 2025 to 31 December 2025. The surrenderable loss and claimant's profits are time-apportioned to this overlap period. Option A spans the full range of both periods. Options C and D give incorrect overlaps.