Corporation tax (for P6 (UK))

Part 1 of 4

This is the Finance Act 2016 version of this article. It is relevant for candidates sitting the P6 (UK) exam in the period 1 April 2017 to 31 March 2018. Candidates sitting P6 (UK) after 31 March 2018 should refer to the Finance Act 2017 version of this article (to be published on the ACCA website in 2018).

This article follows a company as it begins trading, acquires an additional business, and eventually invests overseas. It sets out the commercial decisions taken by the company and its shareholders at the different stages in the company’s development and summarises the tax implications of those decisions. After reading about each stage in the company’s development, stop and think about the possible tax implications before reading on.

Early years

Kai Milford and his friend, Fay Dusky, formed Global Figurines Ltd (GFL) on 1 April 2015. Kai and Fay each acquired 40% of the company at a cost of £100,000. Kai used a recent inheritance to acquire the shares whereas Fay took out a bank loan for £100,000 secured on her house. The remaining 20% of the shares is owned equally by five unrelated individuals.

GFL manufactures models of historic figures and advertises them for sale to the public in magazines and on its website. Kai and Fay work full time in the management of the company. The other shareholders are passive investors.

GFL incurred significant start-up costs during the year ended 31 March 2016. As a result, its taxable total profits, after paying salaries to Kai and Fay, were only £60,000.

The tax implications arising out of these events are:

  • The interest paid by Fay on the loan to acquire the shares in GFL is qualifying deductible interest. This is because GFL is a close company (it is controlled by Kai and Fay, ie by fewer than five shareholders) and Fay owns more than 5% of the company. Qualifying deductible interest is a tax-allowable payment that is deducted in arriving at Fay’s net income.
  • GFL’s corporation tax liability for the year ended 31 March 2016 would have been £12,000 (£60,000 x 20%).


It is always important to identify whether or not a company is a close company. It is then necessary to consider the facts of the situation in order to determine which, if any, of the implications of a company being close are relevant.

Part 2 of this article reviews the implications of the company acquiring the business of another company.

Note: The corporation tax issues relating to groups are considered in two further articles:

  • Corporation tax – Group relief (for P6 (UK))
  • Corporation tax – Groups and chargeable gains (for P6 (UK))

Written by a member of the P6 (UK) examining team

The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.