CAT / FIA FTX Syllabus E. Corporation Tax Liabilities - Allowable expenditure in calculating T.A.T.P. - Notes ^{1 / 7}

* At the exam you will start the adjustment with the profit before taxation of £X and deal with all the items listed and you will indicate with a zero (0) any items which do not require adjustment.

Allowable expenses

Are expenses which should be included in taxable profits.

Therefore we have to keep them in Profit before tax.

You will indicate these expenses with 0 in the exam, because these items do not require adjustment, because they were all allowable.

• Patent royalties’ receivable/payable

• Staff costs

• Impairment losses

• Legal fees:

  - in connection with the Issue of loan notes (for trading activities)
  - in connection with an action brought against a supplier for breach of contract
  - in connection with  the registration of trade marks

• Loan arrangement fee for trading

• Income element of premium paid for grant of short lease for trading premises

• Gifts to customers if:

  - they cost LESS than £50 per recipient per year
  - are not of food, drink, tobacco
   - are not vouchers for exchangeable goods
  - carry an advertisement for the company making the gift (e.g. pens costing £30 each displaying company's name)

• Repairs

  For example:
  - Repairs to warehouse following a flood
  - Repainting the exterior of the company's office building

• Accountancy

• Entertaining employees

  The only exception to the non-deductibility of entertaining expenditure is when it is in respect of employees.

• Non-qualifying charitable donations

Illustration 1

Operating profit is £100,000.

Expenses included in Operating profit:
Repairs to warehouse following a flood £100
Entertaining employees £30
Accountancy £15
Legal fees in connection with the registration of trademarks £5
Gifts to customers - pens costing £30 each displaying company's name = £60

Required:

Calculate Tax adjusted trading profit.

• Solution

Disallowable expenses

Are adjustments which INCREASE taxable profits.

Meaning these items were included in PBT, but should not have been there, therefore we have to take them away by ADDING them to PBT.

An Example:
The expense of £10 is included in PBT (e.g. £100) but should not have been there, so you need to take the expense away from PBT and therefore you add the expense to PBT (£100 + £10 = £110) and therefore you will increase Profit.

• Entertaining customers and suppliers UK and overseas

  Note: 
  The only exception to the non-deductibility of entertaining expenditure is when it is in respect of employees.

• Depreciation / Amortisation (usually given in the question)

• Legal costs:

  - of acquiring a short lease
  - for issue of preference shares
  - for renewal of long lease

• Issue cost of shares

• Dividends

• Issue cost and interest for non-trading loan

• Capital expenditure

  e.g. 
  - costs of new computers
  - Extending the office building in order to create a new reception area
  - Improvement of the building rather than repair

• Donations:

  - to political parties
  - paid under the gift aid scheme

• Gifts to customers if:

  - they cost MORE than £50 per recipient per year  (e.g. pens costing £60)
  - are of food, drink, tobacco (e.g. food hampers)
   - are vouchers for exchangeable goods
  - don't carry an advertisement for the company making the gift (e.g pens not displaying company's name)

Remember that the above is just a summary of the important points mentioned in Topic: Allowable expenditure

Illustration 2

Operating profit is £100,000
Depreciation £500
Capital Allowances £400

Expenses included in Operating profit:
Donations to political parties £25
Entertaining employees £30
Accountancy £15
Legal fees in connection with the registration of trade marks £5
Legal fees for issue of preference shares £20
Gifts to customers - pens costing £30 each displaying company's name = £60
Gifts to customers - watches costing £60 each = £120

Required:

Calculate Tax adjusted trading profit.

• Solution

Illustration:

Alpha Ltd. had an accounting profit of £59,850.

The following items are included in the accounting profit figure:

What is the tax adjusted accounting profit?

Solution:

Note:

1. A company is allowed an annual investment allowance of £1,000,000 per year.

   This means that a company can spend up to £1,000,000 on capital items, for example ventilation systems and be allowed the full expenditure to be an allowable expense in the tax year. 

   Therefore, as the capital expenditure on ventilation systems is only £5,000 – the annual investment allowance will take care of this.

2. The loan interest is allowable as it is a loan for trading requirements

As companies will have shareholders (people who own the company) and directors/employees (people who work for the company) separated, there are some differences between the rules for unincorporated traders and companies:

These include:

• No private element of expenses added back

• Drawings (cash and goods) are not relevant for companies. 

  Dividends are paid out of post-tax profits.

• Family salaries are not relevant for companies.

Basically, there will not be any personal use of expenses because everyone who uses the company’s money or facilities will be an employee, not an owner.