ExpertHard20 marksExtended Response
ACCA · Question 32 · Corporation Tax Liabilities
Section C: Constructed Response
Quantum Bio-Solutions Ltd is a UK resident company specializing in bio-tech manufacturing. The company prepares accounts to 31 March each year. For the year ended 31 March 2024, the draft statement of profit or loss shows a net profit before tax of £850,000.
The following items have been included in arriving at the net profit of £850,000:
- Depreciation of £120,000.
- Entertaining clients: £15,000.
- Entertaining staff (annual Christmas party, cost £120 per head): £6,000.
- Legal fees for the acquisition of a new freehold factory: £8,500.
- Qualifying charitable donations: £10,000.
- Property rental income: £25,000 (This is the net amount received. Gross rent was £30,000, and £5,000 of allowable property expenses were deducted in the accounts).
Capital Allowances Information:
- The tax written down value of the main pool at 1 April 2023 was £45,000.
- On 10 May 2023, the company purchased new lab equipment for £150,000.
- On 15 August 2023, the company purchased a second-hand delivery van for £18,000.
- On 1 November 2023, the company completed the construction of a new factory building at a cost of £600,000 (excluding land). It was brought into use on the same day.
Required:
Calculate Quantum Bio-Solutions Ltd's Corporation Tax liability for the year ended 31 March 2024.
Show all workings, including the adjustment of trading profits, calculation of capital allowances (including Structures and Buildings Allowance), and the final tax calculation.
Section C: Constructed Response
Quantum Bio-Solutions Ltd is a UK resident company specializing in bio-tech manufacturing. The company prepares accounts to 31 March each year. For the year ended 31 March 2024, the draft statement of profit or loss shows a net profit before tax of £850,000.
The following items have been included in arriving at the net profit of £850,000:
- Depreciation of £120,000.
- Entertaining clients: £15,000.
- Entertaining staff (annual Christmas party, cost £120 per head): £6,000.
- Legal fees for the acquisition of a new freehold factory: £8,500.
- Qualifying charitable donations: £10,000.
- Property rental income: £25,000 (This is the net amount received. Gross rent was £30,000, and £5,000 of allowable property expenses were deducted in the accounts).
Capital Allowances Information:
- The tax written down value of the main pool at 1 April 2023 was £45,000.
- On 10 May 2023, the company purchased new lab equipment for £150,000.
- On 15 August 2023, the company purchased a second-hand delivery van for £18,000.
- On 1 November 2023, the company completed the construction of a new factory building at a cost of £600,000 (excluding land). It was brought into use on the same day.
Required:
Calculate Quantum Bio-Solutions Ltd's Corporation Tax liability for the year ended 31 March 2024.
Show all workings, including the adjustment of trading profits, calculation of capital allowances (including Structures and Buildings Allowance), and the final tax calculation.
How to approach this question
Step 1: Adjust the net profit to find the Tax-Adjusted Trading Profit (add back depreciation, client entertaining, capital legal fees, donations, and deduct the property income). Step 2: Calculate Capital Allowances (AIA on equipment/van, WDA on pool, SBA on the factory). Step 3: Deduct Capital Allowances from adjusted profit. Step 4: Calculate Total Taxable Profits (TTP) by adding Property Income and deducting Qualifying Charitable Donations. Step 5: Calculate Corporation Tax at the main rate of 25% (since profits exceed £250,000).
Full Answer
Quantum Bio-Solutions Ltd - Corporation Tax Computation for year ended 31 March 2024
1. Adjustment of Trading Profit
Net profit before tax: £850,000
Add back:
- Depreciation: £120,000
- Client entertaining: £15,000 (Not allowable)
- Staff entertaining: £0 (Allowable, <£150 per head)
- Legal fees for factory: £8,500 (Capital expenditure)
- Qualifying charitable donations: £10,000 (Deducted later from total profits)
Less:
- Net property income: (£25,000) (Assessed separately)
Adjusted Trading Profit before CA = £978,500
2. Capital Allowances
Main Pool:
TWDV b/f: £45,000
Additions qualifying for AIA:
- Lab equipment: £150,000
- Second-hand van: £18,000
Total AIA claimed = £168,000 (Well within £1m limit)
Main pool balance for WDA = £45,000
WDA @ 18% = £8,100
Structures and Buildings Allowance (SBA):
Cost of factory: £600,000
Brought into use: 1 November 2023 (5 months of the accounting period: Nov, Dec, Jan, Feb, Mar)
SBA = £600,000 x 3% x 5/12 = £7,500
Total Capital Allowances = £168,000 (AIA) + £8,100 (WDA) + £7,500 (SBA) = £183,600
3. Taxable Total Profits (TTP)
Trading Profit = £978,500 - £183,600 = £794,900
Property Income = £25,000
Total Profits = £819,900
Less: Qualifying Charitable Donations = (£10,000)
Taxable Total Profits (TTP) = £809,900
4. Corporation Tax Liability
Since TTP (£809,900) exceeds the upper limit of £250,000, the main rate of 25% applies to the whole amount.
Corporation Tax = £809,900 x 25% = £202,475.
Common mistakes
Adding back staff entertaining. Forgetting to pro-rate the SBA from the date of first use. Deducting charitable donations as a trading expense rather than from total profits. Applying the 19% small profits rate incorrectly.
Practice the full ACCA TX — Taxation Practice Exam 1
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