ExpertHard20 marksExtended Response
ACCA · Question 32 · Corporation tax liabilities
Section C
'BioSynthetix Ltd' manufactures biodegradable packaging. You are required to calculate the company's Corporation Tax Liability for the year ended 31 March 2024.
The draft statement of profit or loss shows a profit before tax of £450,000. This profit has been arrived at after deducting/including the following items:
- Depreciation: £45,000
- Client entertaining: £3,500
- Staff Christmas party: £2,500 (there are 15 staff members, all attended)
- Legal fees regarding the acquisition of a new factory: £8,000
- Legal fees for debt collection (trade debts): £1,200
- Bank interest received: £4,000
- Interest paid on a loan used to buy a non-trading investment property: £9,000
Capital Allowances Information:
- The Tax Written Down Value (TWDV) on the main pool at 1 April 2023 was £30,000.
- On 1 June 2023, the company purchased new, unused manufacturing machinery for £150,000. (Assume the company claims Full Expensing on this).
- On 15 August 2023, the company purchased a second-hand delivery van for £15,000.
- On 10 November 2023, the company sold some old machinery (originally in the main pool) for £12,000 (original cost £20,000).
Other Information:
- The company has a brought forward trading loss from the previous year of £25,000.
- The company does not have any associated companies.
Required:
Calculate BioSynthetix Ltd's Corporation Tax Liability for the year ended 31 March 2024.
Show all workings, including the adjustment of trading profit, the capital allowances computation, and the treatment of the non-trading loan relationship.
Section C
'BioSynthetix Ltd' manufactures biodegradable packaging. You are required to calculate the company's Corporation Tax Liability for the year ended 31 March 2024.
The draft statement of profit or loss shows a profit before tax of £450,000. This profit has been arrived at after deducting/including the following items:
- Depreciation: £45,000
- Client entertaining: £3,500
- Staff Christmas party: £2,500 (there are 15 staff members, all attended)
- Legal fees regarding the acquisition of a new factory: £8,000
- Legal fees for debt collection (trade debts): £1,200
- Bank interest received: £4,000
- Interest paid on a loan used to buy a non-trading investment property: £9,000
Capital Allowances Information:
- The Tax Written Down Value (TWDV) on the main pool at 1 April 2023 was £30,000.
- On 1 June 2023, the company purchased new, unused manufacturing machinery for £150,000. (Assume the company claims Full Expensing on this).
- On 15 August 2023, the company purchased a second-hand delivery van for £15,000.
- On 10 November 2023, the company sold some old machinery (originally in the main pool) for £12,000 (original cost £20,000).
Other Information:
- The company has a brought forward trading loss from the previous year of £25,000.
- The company does not have any associated companies.
Required:
Calculate BioSynthetix Ltd's Corporation Tax Liability for the year ended 31 March 2024.
Show all workings, including the adjustment of trading profit, the capital allowances computation, and the treatment of the non-trading loan relationship.
How to approach this question
Step 1: Adjust the accounting profit. Add back depreciation, client entertaining, and capital legal fees. Deduct bank interest received and non-trading loan interest paid (these are dealt with separately). Staff party is allowable (<£150/head). Trade debt legal fees are allowable. Step 2: Calculate Capital Allowances. Full expensing (100%) on new machinery. AIA or WDA on the second-hand van. Deduct disposal proceeds from the main pool. Calculate WDA on the main pool. Step 3: Deduct Capital Allowances from adjusted profit to get Adjusted Trading Profit. Step 4: Deduct brought forward trading losses. Step 5: Calculate Non-Trading Loan Relationship (NTLR) income/deficit (Interest received - Interest paid). Step 6: Aggregate profits to find Taxable Total Profits (TTP). Step 7: Apply the Corporation Tax rate (25% as profits > £250k).
Full Answer
.
Common mistakes
Failing to recognize that the staff party exceeds the £150 per head limit (£2,500/15 = £166) and therefore the ENTIRE amount is disallowed. Netting off the NTLR deficit incorrectly. Applying AIA to the new machinery instead of Full Expensing (though mathematically the same, the terminology/boxes on the return differ).
Practice the full ACCA TX — Taxation Practice Exam 3
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