HMRC internal manual

Company Taxation Manual

Corporation Tax: introduction: computation of profits

You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.

CTA09/S2 (4), S35, S209, S299(1), S752, S933(1), S969, S972 (1), 974 (1), S977 (1), S979 (1), S1305; TCGA92/S8

The old rule was that income is computed in accordance with IT principles and chargeable gains are computed in accordance with CGT principles. This rule was subject to any modifications in the Taxes Acts. Tax Law Rewrite, however, applies separate codes to IT and CT. CTA09/S2 (4) provides that the charge to CT on income is in accordance with the Corporation Tax Acts. Loan relationships are now dealt with in CTA09/PART5 and PART6.

For CT purposes CAA01:

  • allows capital allowances as deductions in computing profits, and
  • treats balancing charges as additions to profits.

CTA09/S1305 (1) prohibits deductions in computing profits for dividends or other distributions.

Before Tax Law Rewrite, ICTA88/S337A (1) prohibited certain deductions, unless the deductions are expressly authorised by any other provision of the Taxes Acts. The prohibited deductions were:

  • in computing profits, dividends or other distributions (ICTA88/S337A (1)(a)),
  • in computing income from any source, charges, as defined in ICTA88/S338A (ICTA88/S337A (1)(b)).

Additionally, ICTA88/S337A (2) provided that, in computing income from any source, no deduction were made:

  • for accounting periods ending after 31 March 1996, in respect of interest except under the loan relationships legislation (ICTA88/S337A (2)(a)),
  • in respect of losses from intangible fixed assets ICTA88/S337A (2)(b).

For accounting periods ending on or before 31 March 1996, the prohibition on charges also extended to yearly interest. But ICTA88/S337 (3) then restricted the operation of the prohibition so that yearly bank interest payable was allowed if it was payable in the UK to a bank carrying on a genuine banking business in the UK.

An investment company (see CTM08020 onwards) resident in the UK is allowed a deduction in computing its total profits (management expenses) for expenditure incurred on managing its investment business.