Accounting For Taxation (IAS12)

Question 1

Accounting for taxation (IAS12)o

Answer 1

Prescribes accounting treatment for income taxes

Does not deal directly with the calculation of tax liability but some tax knowledge is inevitably required.

Question 2

In practise

Answer 2

Calculation is performed by in-house tax department/external tax specialist
Inclusion within financial statements by reporting accountant

Tax rules/rates may change and affect the calculation of tax liability, but accounting treatment remains the same

Question 3

Uk corporate tax

Answer 3

Rules and rates set in the Finance Act each year

Question 4

Payment due dates

Answer 4

Small company = profit is less that 1.5 million. YE + 9months 1 day after accounting year
Large profit is greater than 1.5 million: 4 equal QIPS on the 14th installment payments on the 7th, 10th, 13th and 16th month after the start of the of the accounting year

Question 5

Filing deadlines

Answer 5

Statutory: 9 months after year end
Tax: 12 months after year end

Question 6

Tax assets and liabilities

Answer 6

They arise from the difference between accounting rules GAAPs and tax rules of each individual country.
THIS IS WHY IAS12 is important

Question 7

Accounting profits

Answer 7

Deduct those expenses that have been incurred in earning those profits (matching). In your year of trading

Salaries, rent etc

Question 8

Taxable profits

Different from accounting profits

Answer 8

• certain items are disallowed by tax authorities e.g. depreciation, entertainment, bad debt, penalties, IC interests
• staff entertainment is one type and this is allowable as they can reduce their taxable profit. Second option is client entertainment.
• Tax depreciations = different from normal depreciations.
• others are allowed which accounting profits do not, e.eg capital allowances, transfer pricing adjustments
• most companies try to claim as much deductions as possible.
• in the uk taxable depreciation is 80% capital allowance rate.

Question 9

Current tax

Answer 9

Amount of income tax payable (recoverable) in respect of the taxable profit (tax loss) for a period.
Asset if amount paid is greater than amount due
Adjustment reflecting over-/under-provisions of current tax in previous periods should be included in the current tax expense.
Prior year adjustment - adjustments in Reston to the prior year.

Statutory is 9 months after year end
Tax accounts need to be in 12 months after year end.

Question 10

Income tax expense

Answer 10

The amount of income tax expense reported on a company’s financial statements contains:

Current income tax payable as in line with the permanent differences reported on the tax return

Deferred tax liabilities incorporating all timing differences (tax consequences of certain liabilities beyond the next financial period)

Question 11

Permanent differences

Answer 11

Allowable deductions for accounting purposes but will never be allowed as a deduction for tax purposes
Client entertainment costs; company formation costs; penalties. E.g missed statutory deadline by the end of December. You DR penalties in the PL and not deductible cause rules were broken
Don’t have to look at the item again.

Question 12

Temporary/timing differences

Answer 12

Allowable for both accounting and tax purposes, just in different time periods
Accelerated capital allowances; general bad debt provisions; pensions.
Timing of the actual deduction varies.
Only timing can impact deferred tax.
You deferred tax deduction - which is a deferred tax asset which you can use in the future to reduce your overall liability.
Think of you have under or over claimed and if you have over claimed that means you can’t claim as much

Question 13

Depreciation vs capital allowances

Answer 13

IAS16: “the depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the company”

Question 14

Taxable/capital allowances

Answer 14

Do not take account of useful economic life, residual value, economic benefits
Sometimes enhanced rates to encourage certain investments

Question 15

UK tax rules

Answer 15

Annual investment allowance up to £200,000 - you can claim 100% deduction on all your fixed asset purchases
Main (writing down allowance) pool at 18% reducing balance
Special rate pool at 8%
Enhanced capital allowance pool at 100% - if a business invests in electric car charging points. Green incentives are allowed 100% allowance rate - you can claim 100% tax deduction in year one but you can’t do so in other years.

Question 16

Benefits of tax loss if a company incurs

Answer 16

Current year relief. E.g Group Relief - 2 subsidiaries group taxable profit is less

Carried back to recover current tax of a prior period - refile previous tax returns but you can only go back two years. You can save some money if higher tax rate.

Carried forward to reduce future taxable profits, by reducing future taxable profits. Very predictive.

Question 17

Accounting (IAS12)

Tax losses

Answer 17

Deferred tax assets - helps to reduce your taxable liability

Probable profits test: “to the extent that it is probable that taxable profits will be available in the future against which these deductible temporary differences can be utilized” unknown when you can utilize the losses = failure meaning you can’t recognize it as an asset.

• review deferred tax assets annually to ensure assets recognised are not overstated and to reassess unrecognised assets e.g improvement in trading conditions or tax planning opportunities available to create taxable profits.

Question 18

Changes in UK Tax Rates

Answer 18

The Finance Act 2015 reduced the main rate of UK corporation tax from 20% to 19% from 1 April 2017 and 18% from 1st April 2020.
An additional change to the UK corporation tax rates was enacted on 15 September 2016 which reduced the rate further to 17% from 1 April 2020.
YE 2017: 19.25%
2018/2019: 19%
YE 2020 17.5%
Future 15%

Question 19

Measurement

Answer 19

To be tax effected at rate that are expected to apply when liabilities are settled based on enacted tax rules

Question 20

Current tax assets and liabilities measurement

Answer 20

At rates that have been substantially enacted by the end of the reporting period, e,g after all stages of readings at the House of Commons
Is still 19%

Question 21

Deferred tax assets and liabilities

Answer 21

At rates expected to apply to the period when the liability is settled, based on tax rates that have been substantively enacted by the B/S date
Measured on a non-discounted basis
- recovered loss
When will you start to generate a profit
YE 2020= 17.5%

Question 22

Rate changes

Answer 22

Two different methods when there is a change in tax rates use old rate: deferral method

• deferred charge/credit
• emphasis on profit and loss

Use new rate: liability method

• deferred tax liability = liability that will pay in future
• show at figure that best represents that liability on balance sheet

Question 23

Disclosure

Answer 23

Disclosure deferred tax should be distinguished from current tax: IAS12 should be separate

Disclose net amount only if:
Tax is payable to the same tax authorities and
The entity intends to settle on a net basis

Separate disclosures for all major components of tax expense:
Material adjustment re prior periods
Tax losses/tax credits - can’t recognize full loss and need to explain why
Significant impact on current tax/deferred tax due to changes in tax rates/laws - 2020 17.5 but impact is minimal

Reconciliation between tax charge and accounting profit at applicable tax rates

Question 24

Double entry income

Answer 24

Debit expense P/L
CR BALANCE SHEET AS LIABILITY OR INCOME TAX

Debit income statement as tax charge account
Cr liability account in the balance sheet
Dr liability account when settled
Cr cash when you make a payment

Question 25

Bad debt examples

Answer 25

General bad debt - unable to specify which of my customers won’t be able to pay me. Providing a general 5% figure. Additional expense so profit goes up. But it’s not deductible

Specific bad debt = you can identify which of the customers are unable to pay you back.
Dr bad debt
Cr trade receivables
HRMC is Able to recognize specific bad debt