Week 9: Accounting for Income Taxes & Deferred Taxes Flashcards
When does a large company and a small company pay its tax?
It depends on whether the company is classified as ‘small’ or ‘large’. Small companies pay all at once. Large companies pay in instalments based on estimated profits.
Small companies (taxable prof. < £1.5m)
9 months and 1 day after accounting year end
Large company: taxable profits > £1.5m & £20m
1st instalment: 6 months and 13 days after 1st day of accounting period
3 months after 1st instalment
3 months after 2nd instalment
3 months and 13 days after the last day of the accounting period
What is defered tax?
defered tax is a A short or long-term asset or liability on the Statement of Financial Statement arising from over or underpayment of taxes.
These arise due to temporary differences in income recognition between tax laws and accounting recognition rules (HMRC & IFRS in the UK)
Depreciation methods and deferred income are the most common cause of deferred income tax.
Permanent differences due not give rise to deferred tax.
What is taxable income vs book income?
To work out the corporation tax liability to HMRC, a company must calculate the taxable profits for the period.
This will usually be different from the book income (tax for accounting purposes) shown in the financial statements.
When calculating taxable income, the company will use the book income (accounting profit figure from the accounts) as a starting point, then adjust to this get to the taxable income figure, considering temporary and permanent timing differences.
What are some permenatnt differences between the taxable income vs book income?
Expenses included in the financial statementsthat are not deductible for tax purposes, for example client entertaining, company formation fees and fines.
Cause a difference between the effective tax rate on the tax return and the effective tax rate in the financial statements.
These do not give rise to deferred tax and only have an impact in the accounting period in which they occur.
What are some temprary differences between Taxable Income vs Book Income (Accounting profits on an accruals basis)?
Expenses included in the financial statementsthat are deductible for tax and accounting purposes, but in different time periods.
Accrual accounting recognises revenues and expenses when earned or incurred. For tax purposes, these are recognised when received or paid for giving rise to differences in taxable income.
Different inventory valuation methods can cause differences like LIFO for tax and FIFO for Accounting purposes
How does depreciation casue a difference between taxable income and the book income?
When an asset is depreciated, the depreciation rate is set by thecompany
Depreciation is not an allowable expense for corporation tax
Instead, ‘capital allowances’ are allowed for corporation tax purposes. No residual values.
This means there may be more or less tax due in some years than others. However, over the lifetime of the asset, these differences will eventually disappear.
How does defered tax asset arise?
a dered tax asset arises when
financial statement asset
tax bases > book carrying value
financial statement liability
tax bases < book carrying value
How does defered tax liability arise?
a dered tax liability arises when
financial statement asset
tax bases < book carrying value
financial statement liability
tax bases > book carrying value
What are capital allowances?
capital allownaces are a ttype of tax relief for business. They let a business deduct some or all of the cost of an item from its profits before paying tax.
There are different types of capital allowances name them?
There are different types of capital allowances:
annual invetsment allowance which allows a busimess to claim 100% of teh cost of plant and machinery upt o 1m in th eyear its occured
writing down allowances (WDA’s) which spread the tax dedecutions over time at 18% and 6% a year for main rate and special rat eexpendeture
first year allowances allows a compnay to claim a percent of the cost of plant and machinery investments in the year its incurred
structures and buildings allowance (SBAs) allows a business to deduct 3% per year over 33 1/3 years for qualifying expenditure on non-residential structures and buildings
