Corporation Tax Act 2010

Section 4: Amount of profits to which corporation tax rates applied

34. This section sets out the stages by which the profits of a company on which corporation tax is chargeable are calculated. Subsections (1) and (2) are new and subsections (3) and (4) are based on section 834C of ICTA.

35. The starting point is to find a company’s total profits. Subsections (3) and (4) rewrite the definition of total profits in section 834C of ICTA. Section 834C was inserted by CTA 2009 into ICTA: it is based on section 9(3) of ICTA which was repealed by CTA 2009.

36. Step 1 in subsection (3) refers to the amount in respect of which the company is chargeable under the charge to corporation tax on income after any reduction required to give effect to relief from tax. This covers reliefs that reduce one or more of the components of income subject to the charge. Relief for trade losses brought forward against trade profits of the subsequent accounting period is an example of a relief that operates against a single component of income. Reliefs that potentially operate against more than one component of income include relief under section 68 of the Act for losses on disposals of certain shares (see section 71(1)) and relief under section 457 of CTA 2009 for non-trading deficits from loan relationships.

37. Similarly Step 2 refers to the amount to be included in respect of chargeable gains (under section 8 of TCGA) after any reduction required to give effect to relief from tax. This caters for reliefs that operate to reduce the amount of chargeable gains that feeds into the total profits calculation:again relief under section 457 of CTA 2009 for non-trading deficits from loan relationships is an example of a relief that potentially operates in this way.

38. Under subsection (4) the calculation of total profits is subject to the provisions of the Corporation Tax Acts. One example of the kind of qualification covered by this subsection is provision of the kind to be found in Chapter 3 of Part 11 of the Act, under which certain income of charitable companies is not taken into account in calculating total profits (see, for example, section 478(1)).

39. “Total profits” is defined for the purposes of the Corporation Tax Acts by reference to section 4(3) and (4): see sections 1118(5) and 1119.

40. Subsection (2) completes the calculation of the profits of a company on which corporation tax is chargeable for an accounting period, in this Act the company’s “taxable total profits”. Step 1 starts with the total profits of the period. Step 2 provides for the deduction of any amounts which can be relieved against the total profits of the period.

41. The reference to amounts which can be relieved allows for particular rules about deductions from total profits such as those that apply to the calculation of ring fence profits from oil activities.

42. The qualification in subsection (4) for subsection (2) takes into account non-standard provision for relief such as the relief under section 459(1)(b) of CTA 2009 for non-trading deficits from loan relationships. Under section 462, relief is given by way of set off against components of total profits, but only after certain reliefs listed in section 463(5) of CTA which operate against total profits.

43. In Schedule 1 there is an amendment to section 1219(1) of CTA 2009 which deals with relief for expenses of management. In section 1219(1), which is based on section 75(1) of ICTA, the reference is to the deduction being made in calculating total profits. The amended subsection refers to the deduction being made from total profits.

44. Under the new section 1219(1A), the deduction for management expenses is given priority over all other deductions made in the calculation of taxable total profits.The effect of the law is not changed by this amendment and the revised wording accords with both current interpretation and practice.