Calculate Corporation Tax - Example

While the example below looks overly simple, it is based on a small consultancy business. Other than adding back some expense items, the calculation flows quite simply.

Account Item

Value

Sales

£42,000

Cost of Sales

£4,200

Overhead Expenses

£5,000

Dividend Paid

£6,000

Net Profit

£26,800



Take each of the items in the corporation tax model:

Model Item

Value

Notes

Net Profit

£26,800

 
Reduce Expense Bill

+ £800

Entertaining is to be added back
Reduce non taxable income

£0

 
Take account of cost of assets

£0

 
Reduce tax for previous losses

£0

 
Add back dividends

+ £6,000

 
Include capital gains

£0

 
Taxable Profit

£33,600

Effect of dividend and entertainment


Business financial year is 1st October ie six months into the financial year. Blended tax rate is therefore 50%/50% ie 20.5% Therefore corporation tax due is £6,888. Had we taken a blended rate of the original net profit the corporation tax would have been £5,494. Hence the system is increasing the tax bill as required by the regulation.

You might argue that this is overly simplistic. Perhaps, but not all that simplistic. In more complicated examples, that complexity lies in the rules behind reducing the expense bill or cost of assets. The devil will be in the detail and advice ought to be sought. Despite this I hope the model has helped explain the mechanism.