Taxation of Businesses and Companies: Trading Income, Corporation Tax and Business Reliefs
Unincorporated businesses
Trading profit is tax-adjusted accounting profit: start with the accounts profit, add back disallowables (depreciation, entertaining, capital items), deduct capital allowances, then apply the loss rules (current year, carry back, carry forward, terminal loss). Since 2023/24 profits are taxed on a tax year basis, with 2023/24 as a transition year containing a catch-up charge that may be spread over five years.
Companies
Companies pay corporation tax on a similar profit concept, but with no personal allowances, the loan relationships and intangible assets regimes, and a three-tier rate structure: 25% main rate, 19% small profits rate, and marginal relief between them driven by augmented profits. Loss reliefs are separately ordered (current year, carry back, group relief, carry forward) and are subject to the 5m deductions allowance restriction.
Reliefs to know
- Capital allowances: annual investment allowance, full expensing for new plant and machinery for companies, writing down allowances, structures and buildings allowance, cars by CO2 emissions.
- Business asset disposal relief at 10% for qualifying gains; business property relief for inheritance tax; SEIS, EIS and the patent box.
Traps
The basis period transition is a favourite. So is mixing the trading allowance (1,000) with actual expenses when you cannot claim both. For companies, candidates forget that marginal relief depends on augmented profits, not taxable total profits, and that associated companies divide the lower and upper limits.
Worked example
Augmented profits of 100,000: tax at 25% is 25,000, less marginal relief of (250,000 minus 100,000) multiplied by 3/200, which is 2,250. Tax payable is 22,750, an effective rate of 22.75%.