ACCA Advanced Taxation (ATX) Practice Exam

What are the upper and lower limits under corporation tax adjusted for?

1. Only short accounting periods

2. Associated companies and a short accounting period

3. Shareholder types

4. International tax compliance

The correct answer is: Associated companies and a short accounting period

The upper and lower limits for corporation tax are adjusted primarily for associated companies and short accounting periods. When multiple companies are considered associated, the profits and the limits that apply need to be calculated collectively to reflect the potential economic group they represent. This adjustment is necessary because associated companies can share resources and may be engaged in similar activities, impacting the taxable profits that can be attributed to each entity. Additionally, for companies with short accounting periods (for instance, if they don't cover the typical 12 months), the appropriate adjustments must be made to ensure that any limits set for the corporation tax are fairly applied based on the actual time frame of their accounting period. This ensures that companies are not unduly penalized or benefitted due to the length of their reporting period. In contrast, the other options do not accurately capture the specific criteria for adjusting the limits related to corporation tax. Shareholder types, for example, do not directly influence the corporation tax limits, nor does international tax compliance directly affect corporation tax limits. Therefore, focusing on both associated companies and the adjustment for short accounting periods highlights the comprehensive nature of the adjustments required for accurate corporation tax calculations.