Corporation Tax is not Calculated on Net Profit

Taxable profit and net pre-tax profit are not the same. This describes how the taxable profit on which corporation tax is calculated is arrived at.

Operating and Pe-Tax Profit

The Figurewizard pre-tax profit forecast includes the profit exclusively from core trading (operating profit) plus "exceptional" gains or losses such as from a profit arising from the sale of a fixed asset.

The net pre tax profit does not represent the taxable profit though. A number of adjustments have to be made beforehand.

Taxable Profit - Allowances

The first of these concerns depreciation which is added back to profit and substituted for by capital allowances, These are especially generous in the first year of acquisition with the first £200,000 of most general fixed assets attracting a 100% first year allowance. 

It is likely therefore that most SMEs can set all expenditure for new plant and machinery, fixtures and fittings, equipment, computers and commercial vehicles off against the year's profit.

None of this applies to to property or company cars though, which attract much less generous capital allowances.

Taxable Profit - On non-Deductible Expenditure

Some expenditure however will be written back to taxable profit. That will include non-allowable expenses regarded as not being wholly and exclusively for the purpose of trade. These will include entertainment expenses or travel to or from the place of work and home. 

Provisions, such as for bad debts are also written back as these are notional charges with which expenditure is absent. However once a bad debt is deemed to have become irrecoverable, usually after a period of six months or more, it then becomes a valid deductible charge to profit. 

See How It's Done

The link below takes you to a working example of our corporation tax calculator, which includes the step by step calculations Figurewizard makes to arrive at a user's forecast taxable profit and tax payable.

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