Chapter 14 - Taxation In Company Financial Statements Flashcards
What is output VAT?
- VAT registered business charge VAT to their customers by adding VAT onto selling price - output VAT
- must be paid over to HMRC (trader acting as collector)
- VAT does not belong to the trader and should not be shown on the value of sales or turnover
What is the accounting entry for output VAT? (Sales or turnover)
Bank/debtor debited (VAT-inclusive amount) - increase in assets
Sales/Turnover credited (with VAT-exclusive amount) -increase in income
VAT control a/c credited (output VAT) as this is owed to HMRC
What is input VAT?
- businesses may incur VAT as part of the cost of its purchases and expenses - input VAT
- can be reclaimed from HMRC by a VAT registered person
- should not be shown in the value of costs or expenses
What are the accounting entries for input VaT? ( purchased or expenses)
Expense/purchased debited (with VAT exclusive amount) - increase in expenses
VAT control a/c debited (input VAT) this is owed to the business
Bank/creditors credited (with VAT inclusive amount) - decrease in assets/increase in liabilities
What does it mean if the closing balance on the VAT control a/c is a VAT creditor?
- business owes money to HMRC
-output VAT > Input VAT
What does it mean if the closing balance on the VAT control a/c is a VAT debtor?
- HMRC owes money back to the business
- Input VAT > Output VAT
What is the formula for the VAT element where amount given is inclusive of VAT
(VAT rate / 100+VAT rate) * VAT-inclusive amount
What is irrecoverable VAT?
- VAT on purchases and expenses that cannot be reinvested from HMRC
Examples include business entertaining and blocked VAT on cars
- in this case VAT is a cost of the business and the full purchase price including VAT will be debited to the expense or asset account
What was the aim of the VAT and flat rate scheme?
- to simplify the way small businesses account for VAT so that less time and money is spent keeping VAT records
Using the flat rate scheme what is VAT calculated on?
Turnover gross of VAT
How is the flat rate determined?
- laid down by HMRC depends upon the trade sector on which the business operates
In terms of payments made by the company what is the double entry for interest or patent royalties?
Interest/patent royalty expense a/c debited (gross amount - inclusive of income tax)
Bank credited (net amount)
Income tax control a/c credited (income tax)
In terms of income what is the double entry for interest/patent royalties?
Bank debited (net amount - income tax exclusive amount)
Patent royalties a/c credited (net amount)
When cash is received and
Income tax control a/c debited with income tax amount - reflecting that this can be reclaimed
Patent royalties received credited (income tax amount)
With the tax suffered at source
Where a company pays both interest and patent royalties the balance on the income tax a/c may be overall a credit or a debit. Describe what these both mean.
Credit - excess payments over receipts
- income tax payable to HMRX
Debit - excess receipts over payments
- repayable to the company
- can be offset against the corporation tax liability
What is the double entry for a corporation tax charge?
- corporation tax charge debited (increase in expenses)
- corporation tax creditor credited (increase in liabilities)
When is corporation tax paid?
- usually payable 9m and 1 day after the balance sheet date
- large companies will pay their current corporation tax liability in four quarterly instalments
How is an under provision of corporation tax accounted for?
Corporation tax charge debited (increase in expenses)
Corporation tax creditor credited (increase in liabilities)
Too little tax was paid hence tax liability I the following period will be greater
How is an over provision of corporation tax accounted for?
Corporation tax creditor debited (decrease in liabilities)
Corporation tax charge credited (decrease in expenses)
Over provision means too much tax was paid and hence tax in the following period will be reduced
What two areas can the differences between the expected tax charge and actual charge be broken down into?
Permanent difference
Timing differences
What are permanent differences?
- arise when certain types of income and expenditure are recognised in the accounts but will never appears on the tax comp I.e business entertaining
What are timing differences?
Arise when certain types of income and expenditure are recognised in difference periods for the purpose of financial statements on the one hand and taxation on the other
E.g depreciation charged appear in the financial statements but are not allowed as an expense for tax purposes instead capital allowances reduce taxable profits
How do we account for permanent differences?
- do not give rise to deferred tax adjustments
- difference will lead to distortion of tax charge and so will be included in reconciliation
What is deferred taxation?
System of dealing with the distortions caused by timing differences
- objective is to ensure tax charge shown in the p&l is not out of line with the profit earned
- not a real tax just an accounting adjustment
What would happen in a year where capital allowances are high compared to depreciation?
- tax liability will be lower than the reported profits would suggest
What would happen in a year where capital allowances fall short of the depreciation charge?
- would result in a higher tax liability than our reported profits would suggest
How is the timing difference calculated?
Difference between capital allowances and depreciation
- the taxed at 20%
What is the deferred tax entry when capital allowances > depreciation
I.e where corporation tax charge is lower than expected ?
Deferred taxation charged debited (p&l) (increase in expenses)
Deferred taxation provision credited
(b/s)
What is the deferred tax entry when depreciation > capital allowances?
I.e corporation tax charge is higher than expected?
Deferred taxation provision debited (b/s)
Deferred taxation charge credited (p&l)
What is meant by profit reconciliations?
FRA 102 requires companies to produce a reconciliation between the expected tax charge based on the accounting profit and the actual corporation tax charge
- need to identify the differences between the accounting profit and taxable profit and split them into timing and permanent differences
Give some examples of what gets added back when calculating taxable profit?
- depreciation (timing difference)
- business entertaining (permanent difference)
Give some examples of what gets deducted when calculating taxable profits?
- capital allowances (timing difference)
