14: Taxation in company financial statements

Question 1

Should output VAT be shown on the value of sales or turnover in the financial statements?

Answer 1

No, VAT does not belong to the trader

Question 2

What are the double entry for accounting for output VAT on an invoice basis?

Answer 2

Dr Bank (VAT inclusive)
Cr Sales (VAT exclusive)
Cr VAT control a/c (output VAT)

As you make a sale, you will debit bank (as you have received the sale amount + VAT)

You will then account for the sale in the PnL (you will not account for VAT here as you as the amount does not belong to you)

Then, you will credit the output VAT amount in the VAT control account.

Question 3

Should input VAT be shown in the expenses of the PnL?

Answer 3

No, as it not normally an expense and should not be shown as a value of costs or expenses in the financial statements.

Question 4

What is the double entry for accounting for input VAT?

Answer 4

Cr Bank (or creditors)
Dr Expenses (VAT exclusive) (or purchases)
Dr VAT control a/c (input VAT amount) 

As you are accouting for the purchase of a good or stock, you will credit bank

Then debit expenses or purchases as you have purchased that good/stock

Then, you will account for input VAT separately in the VAT control account.

Question 5

Why is input and output VAT recognised at the same time as the sale / purchase?

Answer 5

• Because businesses use the normal, invoice-based accounting for VAT
• And is not dealing with VAT on a cash accounting basis

Question 6

How should you know what the VAT payable/ refundable from HMRC is by looking at the VAT control account?

Answer 6

• The closing balance will show the VAT amount payable/ reclaimable

Question 7

Provide an example of irrecoverable VAT?

Answer 7

Business entertainment, blocked VAT on cars

Question 8

In the case of if a business purchases a good that is irrecoverable, how much do they pay?

Answer 8

VAT inclusive price (Cost + VAT)

Question 9

What is the purpose of the Flat Rate Scheme?

Answer 9

To help smaller business account for VAT, saving on costs and time keeping VAT records.

Question 10

Under the Flat Rate Scheme, how is VAT payable calculated? (2)

Answer 10

• It is calculated by a % of total VAT inclusive turnover

- The % is determined by the trade sector the business is in

Question 11

Under the Flat Rate Scheme, input VAT is not deductible. Except which 2 circumstances?

Answer 11

• Purchase of capital goods with a VAT inclusive price of £2,000 or more
• It relates to a purchase pre registration

Question 12

In terms of income tax, how are royalties and debenture interest paid by the company?

Answer 12

When a company pays royalties, they deduct basic income tax at source and pay this over to HMRC - the individual will receive it net of basic rate income tax.

Similarly, when a company receives royalties, they will receive it net of basic rate income tax

Question 13

What is the double entry for interest and patent royalties payable?

Answer 13

Cr Bank (Net amount)
Cr Income tax control account (Income tax amount)
Dr Interest and patent royalties expense a/c (Gross)

Question 14

Once calculated the double entry for the interest and patent royalties payable, what is the second double entry to show the payment of the income tax payable?

Answer 14

Cr Bank

Dr Income tax control account

Question 15

What is the double entry for patent royalties receivable?

Answer 15

Dr Bank (Net amount)
Cr Income tax control account (Income tax amount)
Cr Patent royalty income (Gross amount)

Question 16

If there is a credit on the income tax control account, what does this represent? Payable or receivable

Answer 16

Represents income tax payable

Question 17

If there is a debit on the income tax control account, what does this represent? Payable or receivable

Answer 17

Represents income tax receivable

Question 18

What are the quarterly periods for income tax returns for companies?

Answer 18

31 March, 30 June, 30 September 31 December

Question 19

When is income tax due for companies?

Answer 19

14 days after the relevant return period

Question 20

What is the double entry for corporation tax?

Answer 20

Dr Corporation tax expense

Cr Corporation tax creditor

Question 21

When is corporation tax payable?

Answer 21

9 months and 1 day after the end of the accounting period

Question 22

If you have under provision for the previous FY, what is the double entry to correct this in the following year’s CT charge?

Answer 22

Dr Corporation tax expense
Cr Corporation tax creditor

(Effectively increase the following year’s CT charge)

Question 23

If you have over provision from the previous year CT charge, what is the double entry to correct this in the following year’s CT charge?

Answer 23

Cr Corporation tax expense
Dr Corporation tax creditor

(Effectively decreasing the following year’s CT charge)

Question 24

What is an example of a permanent difference?

Answer 24

Business entertainment - it is a valid expense and recognised on financial statements, but is not taxable and therefore will not be on the tax computation

Question 25

What is an example of a timing difference?

Answer 25

Depreciation charges appear in the financial statements but not in recognised as an expense for tax purposes

Question 26

How should you account for permanent differences?

Answer 26

Do not give rise to deferred tax adjustments

Question 27

What are the accounting entries required to record the interest payable in the following situation

XYZ Ltd has £40,000 10% debentures.

All of the debentures are held by individuals and XYZ Ltd pays interest annually. Assume the basic rate of income tax is 20%.

Dr
Dr
Cr
Cr

Answer 27

Dr Debenture Interest (40,000 @ 10% x 20%) 800
Dr Debenture Interest (40,000 @10% x 80%) 3200
Cr Bank 3200
Cr Income tax control account 800