ACCA Advanced Taxation (ATX) Practice Exam

What is the only factor that affects the lower and upper limits when calculating a company's corporation tax?

1. The company's total revenue

2. The number of associated companies

3. The type of industry the company belongs to

4. The company's net profit margin

The correct answer is: The number of associated companies

The correct answer is that the number of associated companies is the factor that affects the lower and upper limits when calculating a company's corporation tax. In the context of corporation tax, especially under certain tax jurisdictions, the tax bands or limits are often influenced by a company’s size and whether it has associated companies. Associated companies can be defined as entities that are controlled by the same person or group of people, which can lead to significant implications regarding how much taxable income can be attributed to a single company. The presence of associated companies may require the taxpayer to calculate their profits in aggregate, which could push them into different tax brackets. This relationship directly affects the limits within which the corporation tax is calculated, potentially leading to changes in the rate applied based on their combined income. Other factors listed, while significant in broader tax considerations, do not directly impact the limits specific to calculating corporation tax in the same way. Total revenue influences taxable income but does not determine the limits as associated companies do; the type of industry can affect allowable expenses and deductions but typically does not impact tax band limits; and net profit margin provides insight into overall profitability, yet it doesn’t relate to the tax band thresholds directly.