Key facts
- Taxable profit starts with your accounting profit and is adjusted for tax purposes.
- Disallowable expenses (e.g. entertaining, depreciation) must be added back.
- Capital allowances replace accounting depreciation in the tax computation.
- Other reliefs — such as trading losses and R&D relief — are deducted to arrive at the final taxable figure.
How Taxable Profits Are Calculated
A company’s taxable profit is not the same as its accounting profit. The figure shown in your profit and loss account (or income statement) must be adjusted to comply with tax law before Corporation Tax can be calculated.[1]
The accounts are prepared under Generally Accepted Accounting Practice (GAAP) — typically FRS 102 or FRS 105 for UK companies. Tax legislation then requires certain items to be added back and others to be deducted, producing a figure known as adjusted trading profit (or taxable profit).
The Tax Adjustment Process
The adjustment from accounting profit to taxable profit follows a logical sequence. The table below summarises each step:[2]
| Step | Adjustment | Example |
|---|---|---|
| 1. Start with net profit | Take the net profit (or loss) per the company’s accounts | £120,000 net profit |
| 2. Add back disallowable expenses | Add back expenses not allowable for tax (entertainment, depreciation, fines, etc.) | + £15,000 depreciation + £3,000 entertaining |
| 3. Deduct non-taxable income | Remove income not taxable as trading income (e.g. dividends received, capital profits) | − £5,000 dividends received |
| 4. Deduct capital allowances | Claim capital allowances in place of accounting depreciation | − £20,000 AIA claimed |
| 5. Deduct other reliefs | Deduct any available reliefs (trading losses brought forward, R&D, etc.) | − £10,000 losses b/f |
| 6. Taxable profit | The resulting figure is the company’s taxable profit for the accounting period | = £103,000 taxable profit |
Tip: Keep a separate tax computation workpaper alongside your statutory accounts. This makes it straightforward to track every adjustment and supports your CT600 filing.
Common Add-Backs
The most frequent adjustments involve adding back expenses that the accounts include but tax law does not permit:[4]
- Depreciation and amortisation — replaced by capital allowances
- Client entertaining — never deductible for Corporation Tax
- Fines and penalties — not allowable (e.g. parking fines, HMRC penalties)
- Political donations — not deductible under any circumstances
- Capital expenditure — claim capital allowances instead
- General provisions — only specific bad debts are allowable
How Capital Allowances Fit In
Because depreciation is added back, companies need a tax-approved mechanism for obtaining relief on capital expenditure. This is where capital allowances come in.[3]
Capital allowances are deducted in the tax computation to replace the depreciation charge. The amount may be higher, lower, or the same as accounting depreciation, depending on the type of asset and the allowance claimed (AIA, full expensing, WDA, etc.).
Example: A company buys a machine for £50,000. The accounts depreciate it at £10,000 per year. For tax, the company claims 100% AIA in year one — so £50,000 is deducted from taxable profit, while only £10,000 depreciation is added back. The net effect is an additional £40,000 deduction in the first year.
Other Deductions and Reliefs
After adding back disallowable items and replacing depreciation with capital allowances, companies may also deduct:
- Trading losses brought forward from previous periods (subject to the 50% restriction for losses carried forward after 1 April 2017 on profits above £5 million)
- R&D enhanced deductions under the merged R&D scheme
- Patent Box deductions reducing the effective rate on patent-related profits
- Group relief — surrendered losses from other group companies
- Management expenses for investment companies
Frequently Asked Questions
What is the difference between accounting profit and taxable profit?
Accounting profit is prepared under GAAP (e.g. FRS 102). Taxable profit is the adjusted figure after adding back disallowable expenses (like depreciation and entertaining) and deducting capital allowances and other reliefs.
Why is depreciation added back in a Corporation Tax computation?
Depreciation is an accounting estimate, not a tax-allowable deduction. Instead, HMRC provides capital allowances (AIA, full expensing, WDA) as the approved mechanism for relieving capital expenditure.
What expenses are not allowable for Corporation Tax?
Common disallowable expenses include client entertaining, depreciation and amortisation, fines and penalties, political donations, capital expenditure, and general provisions for bad debts.
How do capital allowances affect taxable profit?
Capital allowances are deducted in the tax computation to replace the depreciation charge added back. The amount may be higher or lower than accounting depreciation, depending on the allowance claimed (e.g. 100% AIA vs 18% WDA).
Further Reading
- Allowable Business Expenses — the full list of deductible costs for companies
- Disallowable Expenses — every item you must add back in the tax computation
- Capital Allowances Overview — how capital allowances replace depreciation
- Corporation Tax Rates — current rates applied to your taxable profit
- The CT600 Tax Return — where taxable profit is reported to HMRC
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