Taxation Flashcards
What type of tax are individuals and limited companies subject to?
Limited companies subject to taxation on profits
Individuals subject to taxation on income
Where do the rates of corporation tax come from?
When does Parliament set the rates?
Tax rules …?
* E.g. a bonus payable in arrears based on accounting profit will be accrued for - 2 effects
- Parliament sets the rates each year in the Finance Act
- Tax rules may differ from accounting rules
- E.g. a bonus payable in arrears based on accounting profit will be accrued for
o It is not tax deductible until it is paid
o This stops one taxpayer reducing their liability before another is liable to tax on the income
Corporation tax provision - accruals concept
What is it?
What is the double entry?
- In the same way a company provides for a future transaction which relates to the current reporting period
- We need to provide for the taxation charge
Timing
When is the company tax return normally submitted and settled?
- Company tax return normally submitted after the end of your accounting period
– settled after financial statements produced
Check-in question
Corporation tax was estimated to be £55,000 and £75,000 for the years
ended 31 March 20X3 and 20X4 respectively. On 01 January 20X4 corporation tax of £50,000 was paid.
What is the tax charge in the P&L for the year ended 31 March 20X4?
70,000
Tax Example (4 double entries)
Estimated tax liability in y1 to be £25,000 as at 31 March 22 but paid no tax in that year. During the year end 31 March 23 they paid the tax liability of £22,000 for the year ended 31 March 22. The company estimates its tax liability for year end 31 March 22 as £30,000
· y/e 31 March 2022
Dr tax charge IS £25,000 Cr tax payable SOFP £25,000
Being estimated tax liability for ye 31.3.22
y/e 31 March 2023
Dr tax payable SOFP £22,000 Cr Bank £22,000
Being tax paid in the year
Dr tax payable SOFP £3,000 Cr tax charge IS £3,000
Being over provision y/e 2022
Dr Tax charge IS £30,000 Cr tax payable (SOFP) £30,000
Being estimated tax liability for ye 31.3.23
Tax avoidance
What is it (2)
Tax avoidance
* Reducing tax liability legally
* Use of artificial tax avoidance schemes
Government tax schemes to encourage behaviours
* E.g. pension schemes attract tax relief for companies and employees
Tax evasion
What is it (3)
Tax Evasion - Illegal (and immoral) manipulation of business affairs to escape taxation.
Use of ‘tax havens’
* Zero or low rates of tax
* Normal tax rates but grant preferential treatment to certain activities
