Taxable profit and net profit are not the same. This describes how the taxable profit on which corporation tax is calculated is arrived at.
Operating and Exceptional Profit
Corporation tax is not calculated on the net pre-tax profit as published in the profit and loss statement. That is calculated instead from the taxable profit.
Net pre-tax profit represents the net gain from trading (operating profit) plus "exceptional" gains or losses made from non-operating activities such as from the sale of a fixed asset or an investment. It does however form the basis for calculating the taxable profit.
Calculating Taxable Profit
The first change made to net profit is to add back depreciation charges. These are substituted for by annual investment allowances and capital allowances.
Other amendments will
include adding back non-allowable expenses such as for entertainment and other charges to profits that are considered not to be wholly and exclusively incurred for the purpose of trade. Typically these are payments made on behalf of staff or directors.
Once the taxable profit has been established in this fashion, corporation tax will be assessed on that. There is a further relief however for taxable profits greater than £300,000 and not more than £1,500,000 known as marginal relief.
From 2015 marginal relief will no longer apply as the small and main rates of corporation tax become unified at 20%.
See How It's Done
To view a working example which displays exactly how the taxable profit, marginal relief and tax payable are calculated, follow the link below.