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AIA

PTP Tax Tip No 40 - Minimising the tax bill for a company with a 30 September year end

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27th Nov 2006
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Q: My client company made taxable profits of £32,000 in the year to 31 September and paid a dividend of £10,000 on 9 January 2006. The taxable profits included a chargeable gain of £20,000 realised in February 2006. To calculate the corporation tax I have taken £16,000 of the profits as falling before 1 April 2006 and the other £16,000 after 31 March 2006. This gives £26,000 at 19% and the other £6,000 at an average rate of 16.33% so the total tax bill is £5,920. Can I allocate the chargeable gain entirely to the first notional period which seems to have a lower average rate and thereby save a bit of tax for my client?

A: Yes and no! You have correctly apportioned the profit between the two notional accounting periods either side of 31 March 2006 and applied the starting rate and NCD rate to the first notional period. It would be possible to argue that the whole of the gain be allocated to the first notional accounting period and you time apportion the rest of the taxable profit.(FA 2006 simply says that the profits should be apportioned, but previous practice would certainly allow a just and reasonable allocation.) However this would then give profits subject to corporation tax of £26,000 in the first notional period and £6,000 in the second. The first period would not then qualify for any starting rate relief (profits exceed six months worth of the £50,000 threshold) and the tax liability would then be calculated at 19% on the whole £32,000 giving £6,080 – an extra £160!

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