ACCA Advanced Taxation (ATX) Practice Exam

Which element is considered when calculating upper and lower limits under corporation tax?

1. Employee count

2. Turnover

3. Tax residency

4. Associated companies

The correct answer is: Associated companies

When calculating upper and lower limits under corporation tax, the concept of associated companies plays a significant role. Associated companies are those that have a certain degree of control over each other, usually defined by shareholding relationships or other forms of financial connection. The presence of associated companies can affect the thresholds that determine the rates of corporation tax that a company is liable to pay. Specifically, when calculating the limit for the small profits rate and the main rate, the number of associated companies can lead to adjustments in these thresholds. For instance, when a company has associated companies, it must aggregate the profits of those companies to determine the appropriate tax rate applicable for the group as a whole, rather than applying thresholds individually to each company. This consideration is crucial, particularly for businesses that may be slightly above or below these profit limits, as it can significantly influence their overall tax liability. Understanding the rules surrounding associated companies helps companies make informed decisions regarding their corporate structure and financial strategies to optimize tax outcomes.