ACCA Advanced Taxation (ATX) Practice Exam

What is the method to calculate the first instalment of corporation tax for a large company when the accounting period is less than 12 months?

1. Annual tax divided by 12 months

2. Lower of 3/n x CT or total CT

3. Total CT evenly divided by number of months

4. Only total CT for the last year

The correct answer is: Lower of 3/n x CT or total CT

The method to calculate the first instalment of corporation tax (CT) for a large company when the accounting period is less than 12 months is indeed to use the formula that involves the lower of 3/n times the corporation tax or the total corporation tax for the year. This approach is necessary because large companies are required to pay their corporation tax in instalments based on their estimated tax liability, and the number of months in the accounting period influences this calculation. The factor of 3/n accounts for the fact that the tax is calculated over a shorter period, so the instalment is adjusted to reflect that reduced time frame. When determining the first instalment, it is essential to ensure that the company does not overestimate or underestimate its tax liability during this shorter accounting period. This is why calculating the instalment as the lower of 3/n times the estimated CT or the total CT is a critical method—it helps in ensuring that the tax payments align more closely with the actual profits earned during that period. Other methods mentioned involve either incorrect assumptions or do not align with how the regulations are structured for large companies with shorter accounting periods. Using 12 months for an annual calculation or dividing total CT evenly over months doesn't accurately reflect the imposition of instal