Lecture 6 - Income Taxes Flashcards
corporation tax?
companies are liable to pay tax on their profits
corporation tax rate?
25% for the financial year beginning 1st April 2023
previously was 19% in the financial year beginning 1st April 2022
who are taxes filed to?
HMRC
her majesty’s revenue and customs (HMRC)
objective of IAS12?
prescribe accounting treatment for income taxes
all listed companies must prepare FS in accordance with…
IFRS
accounting profit?
profit/loss for a period before deducting tax expense
tax authorities calculate tax based on…
taxable profit
taxable profit?
profit/loss for a period determined in accordance with rules established by taxation authorities
starting point for calculation of taxable profit?
accounting profit on the I/S
2 types of differences between taxable and accounting profit/loss
temporary differences
permanent differences
taxable profit/loss = accounting profit/loss?
no
temporary differences?
- income/expenses recognised in different time periods
- accrual vs cash
- capital allowances
- depreciation
‘differences between CA of an asset/liability in the SOFP and its tax base’
permanent differences?
- exempt income e.g., dividend income
- expenses deducted for accounting, but never allowed for tax purposes
‘differences between taxable/accounting profit that originate in one period and don’t reverse in subsequent periods’
how is taxable profit calculated?
- start with accounting profit
- deduct/add back temporary / permanent difference items
- relevant corporation tax is applied to taxable profits
- tax rate is used
journal entry if tax is payable vs if tax is recoverable?
payable: DR tax exp, CR current tax liability
recoverable: DR current tax, CR tax exp
calculation of taxable profit?
accounting profit
+/- permanent differences
+/- temporary differences
= taxable profit/loss
current tax?
the amount of income tax payable in respect of the taxable profit for a period
when do small companies pay corporation tax?
9 months and 1 day after the end of the accounting period
how do large companies pay taxes?
in instalments
instalment payments are based on the company’s estimate of its corporation tax liability for that AP
instalment payments are due on the 14th day of the 7th, 10th, 13th and 16th months following the START of the accounting period
how is under/over provision of tax accounted for?
as a change in accounting estimate
handled prospectively
how do you calculate under/over provision?
amount assessed by HMRC less amount provided = under/over provision
e.g., DR tax exp, CR tax authority (under provision)
e.g., DR tax authority, CR tax expense (over provision)
components of tax expense include…
- current tax expense
- under/over provision of previous periods
- deferred tax
- changes in tax rate
deferred tax?
amount of income tax payable in future periods in respect of taxable temporary differences
tax that is payable in the future
deferred tax liability?
deferred tax asset?
DTL = amount of income tax payable in the future
DTA = amount of income tax recoverable in the future
treatment of irredeemable preference shares?
irredeemable preference shares remain in existence indefinitely
classified as equity on the SOFP
treatment of redeemable preference shares?
classified as a liability on the SOFP
dividend payments on redeemable preference shares are treated as an interest expense, not a distribution of profits
bonus issue?
the allocation of additional shares to stockholders
increases the company’s share capital
double entry for a share bonus issue?
dr share premium (to reduce it)
cr share capital (to increase it)
