ACCA Advanced Taxation (ATX) Practice Exam

How is repayment interest treated for the purpose of corporation tax?

1. Tax-deductible expense

2. Taxable interest income

3. Exempt from tax

4. Ignored for corporation tax

The correct answer is: Taxable interest income

Repayment interest is treated as taxable interest income. This means that when a company receives interest on repayments, this income is subject to corporation tax. It's important to distinguish this from other forms of income or expenses, as repayment interest is not simply a cost or an exemption; it directly contributes to the company's taxable profits. Interest income affects the company's overall tax liability, where the revenue from the interest is included in the corporation tax computation, increasing the taxable profit that the company will report. This aspect of tax treatment reflects the general principle that income, including interest earned, should be taxed unless there are explicit exemptions or deductions applicable. In contrast, other options such as tax-deductible expense or exempt from tax would apply to different types of income or expenditures. For instance, a tax-deductible expense would reduce a company's taxable profits, while being exempt from tax would mean that the income is not subject to taxation at all. The choice that indicates repayment interest being ignored for corporation tax overlooks the necessary inclusion of such income in the tax computations of businesses. Thus, the treatment of repayment interest as taxable interest income is consistent with how income is recognized under corporate tax principles.