Taxation: Computation, Allowances, and Compliance
Core concepts
Taxation questions test the computation of taxable income and tax payable, the treatment of allowances and reliefs, and compliance obligations. Candidates must understand the difference between accounting profit and taxable profit (temporary and permanent differences), capital allowances, deductible versus non-deductible expenses, withholding taxes, and the administration of returns, assessments, and appeals. Value-added tax (VAT) concepts include output tax, input tax, exempt versus zero-rated supplies, and registration thresholds.
Traps
Common traps: treating a capital expense as deductible, forgetting to add back non-deductible items such as fines or private expenses, and misapplying capital allowances (which replace depreciation for tax). Watch for the distinction between tax avoidance (legal) and tax evasion (illegal). In VAT questions, exempt supplies do not permit input tax recovery, whereas zero-rated supplies do. Questions may ask for the tax base of an asset for deferred tax purposes, which differs from its carrying amount.
Worked example
Accounting profit is 500,000. Add back a non-deductible fine of 20,000 and depreciation of 60,000; deduct capital allowances of 80,000. Taxable profit = 500,000 + 20,000 + 60,000 - 80,000 = 500,000. At a 30% rate, tax payable is 150,000. The 20,000 difference between depreciation and capital allowances creates a temporary difference for deferred tax.
Rule of thumb
Start from accounting profit, adjust for permanent differences, then adjust for timing differences to reach taxable profit.