ExpertHard20 marksExtended Response
ACCA · Question 32 · Corporation tax liabilities
Section C: Constructed Response
BioSynthetix Ltd is a biotech manufacturing company. The company previously prepared accounts to 31 December. It changed its accounting date and prepared accounts for the 9-month period from 1 January 2023 to 30 September 2023.
For this 9-month period, the company had the following results:
- Tax-adjusted trading profit (before capital allowances and R&D enhancements): £180,000.
- UK Property Business Income: £15,000.
- Qualifying Charitable Donations paid: £5,000.
Additional Information:
- Capital Allowances: The tax written down value of the main pool at 1 January 2023 was £40,000. During the 9-month period, the company purchased new lab equipment (main pool) for £120,000.
- Research & Development (R&D): BioSynthetix Ltd qualifies as an SME. Included in the trading profit above is £50,000 of qualifying R&D expenditure. The company wishes to claim the SME R&D enhanced deduction (assume the 86% enhancement rate applies for this period).
- Associated Companies: BioSynthetix Ltd has one associated company.
Required:
Calculate BioSynthetix Ltd's Corporation Tax liability for the 9-month period ended 30 September 2023.
Note: You must show your calculation of Capital Allowances, the R&D enhancement, Total Taxable Profits (TTP), and the Marginal Relief calculation (time-apportioning limits where necessary).
Section C: Constructed Response
BioSynthetix Ltd is a biotech manufacturing company. The company previously prepared accounts to 31 December. It changed its accounting date and prepared accounts for the 9-month period from 1 January 2023 to 30 September 2023.
For this 9-month period, the company had the following results:
- Tax-adjusted trading profit (before capital allowances and R&D enhancements): £180,000.
- UK Property Business Income: £15,000.
- Qualifying Charitable Donations paid: £5,000.
Additional Information:
- Capital Allowances: The tax written down value of the main pool at 1 January 2023 was £40,000. During the 9-month period, the company purchased new lab equipment (main pool) for £120,000.
- Research & Development (R&D): BioSynthetix Ltd qualifies as an SME. Included in the trading profit above is £50,000 of qualifying R&D expenditure. The company wishes to claim the SME R&D enhanced deduction (assume the 86% enhancement rate applies for this period).
- Associated Companies: BioSynthetix Ltd has one associated company.
Required:
Calculate BioSynthetix Ltd's Corporation Tax liability for the 9-month period ended 30 September 2023.
Note: You must show your calculation of Capital Allowances, the R&D enhancement, Total Taxable Profits (TTP), and the Marginal Relief calculation (time-apportioning limits where necessary).
How to approach this question
1. Calculate Capital Allowances, remembering to time-apportion the WDA (9/12). The AIA limit is also time-apportioned but easily covers the £120k. 2. Calculate the R&D enhancement (86% of £50k). 3. Deduct CAs and R&D from the initial trading profit. 4. Add property income and deduct charitable donations to find TTP. 5. Calculate the CT limits by time-apportioning for 9 months AND dividing by 2 (for the 2 companies). 6. Calculate CT at 25% and deduct Marginal Relief, or use the marginal rate bands.
Full Answer
This question tests the handling of short accounting periods in Corporation Tax.
Capital Allowances: The 18% WDA must be scaled down for the 9-month period (18% x 9/12 = 13.5%). The AIA limit is also scaled down (£1m x 9/12 = £750k), but £120k is well within this, so it's fully allowable.
R&D: SME R&D expenditure gets an additional 86% deduction (for expenditure from 1 April 2023).
CT Limits: The standard limits (£50k and £250k) must be adjusted for TWO factors: the short period (9/12) and the number of associated companies (divided by 2). This makes the limits £18,750 and £93,750.
Because TTP (£21,600) falls between these limits, marginal relief applies. The relief is calculated as 3/200 x (Upper Limit - Augmented Profits).
Common mistakes
Forgetting to time-apportion the WDA or the CT limits. Forgetting to divide the CT limits by 2 for the associated company. Calculating R&D enhancement incorrectly.
Practice the full ACCA TX — Taxation Practice Exam 5
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