This article is relevant to those of you sitting the TX-UK exam in the period 1 June 2023 to 31 March 2024, and is based on tax legislation as it applies to the tax year 2022-23 (Finance Act 2022).
Where a question requires the adjustment of profits, the following will often be included as a note to the requirements:
This approach has been adopted so that candidates maximise available time, and to help them score full marks.
Three extracts from examples of exam questions requiring adjustment of profits are shown below to demonstrate how different questions should be approached. The first two are for a limited company and the third is for a sole trader.
The first example relates to a company with a short period of account of less than 12 months.
(a) Calculate Harbour Ltd’s corporation tax liability for the four-month period ending 31 March 2023.
Note: Your computation should commence with the operating profit figure of £715,500.
This question requires that you calculate the corporation tax liability, starting with the operating profit figure.
1). The first step will be to adjust the operating figure to establish the tax adjusted trading profit. The following adjustments are therefore required:
2). The second step is then to consider the other income to which the company will be chargeable to corporation tax as follows:
3). Finally, the resulting taxable total profits are charged at 19%, the corporation tax rate.
The solution is as follows:
The second example relates to another company. In this particular case, the company has made an operating loss.
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(b) Calculate Mooncake Ltd's tax adjusted trading loss for the year ended 31 March 2023.
The requirement here is to calculate the tax adjusted trading loss starting with the operating loss figure which is after certain deductions have been made but before capital allowances have been deducted.
The process for this adjustment of loss is the same as for the adjustment of profit in example one; the only difference being that the starting point is a negative figure. The non-deductible items will be added back since they have already been deducted in arriving at the profit or the loss. The adding back of these items will reduce the loss (if we were starting with a profit the non-deductible items would be added back thereby increasing the profit). The following adjustments are required:
The solution to this requirement is shown below.
The final example is of the profits of a sole trader. The requirement here asks you to use a draft profit figure to begin with and to consider some items which have NOT been taken into account when calculating the trading profit.
In this instance, because the items listed have NOT already been reflected in the draft profit figure, the adjustments are to deduct only those allowable for tax purposes and to add any items which are taxable.
The following adjustments are therefore required:
Written by a member of the TX-UK examining team