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 Exceptional Profit

The Figurewizard net pre-tax profit forecast includes the net gain from trading (operating profit) plus "exceptional" gains or losses made from non-operating activities such as from the sale of a fixed asset or an investment.

The forecast taxable profit upon which the forecast for corporation tax payable is calculated is only concerned with profits arising from trade though. Exceptional gains such as income from investments or interest receivable are taxed independently. Charges such as provisions (e.g. depreciation) although reported as deductions from pre-tax profit are disregarded as charges to taxable profit.

Figurewizard carries a working example on this site illustrating how both its forecasts for taxable profit and corporation tax payable are calculated and displayed step-by-step.

Calculating Taxable Profit

If you follow the link to taxable profits / corporation tax below you will see how depreciation is first added back to the reported net profit.

This is because HMRC substitutes annual investment and capital allowances for depreciation which, in an asset's first year of ownership will be more generous. .

Other amendments include adding back non-allowable expenses such as for entertainment and other charges to profits that are considered not to be wholly and exclusively incurred for the purpose of trade. Typically these are payments made on behalf of staff. In the case of directors such payments are again removed and to be charged to the director's loan account.

Provisions and Taxable Profit

Apart from depreciation, other provisions will also be disregarded and written back, the most typical of these being provisions against bad debts. Only once it has become reasonable to assume that a debt is genuinely irrecoverable (usually after six months due) can it be set off against profits for tax purposes.

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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