Taxation and Business Law Fundamentals
This domain tests core tax mechanics and the legal framework for business transactions. Candidates must distinguish accounting profit from taxable profit, understand indirect tax, and identify contractual and company-law issues. Jurisdiction-specific rates are usually given or not required; the method matters.
Core rules
- Direct taxes apply to income or profits; indirect taxes apply to transactions, such as VAT or GST. Taxable profit differs from accounting profit because of permanent and temporary differences.
- Permanent differences never reverse, such as non-deductible entertainment. Temporary differences reverse and create deferred tax under IAS 12.
- A deferred tax liability arises from a taxable temporary difference where the carrying amount of an asset exceeds its tax base. A deferred tax asset requires probable future taxable profit.
- VAT output tax is charged on sales; input tax is recoverable on eligible purchases. The net amount is paid or reclaimed. Input tax is not recoverable for exempt supplies.
- Contract law requires offer, acceptance, consideration, intention, and capacity. Company law governs directors' duties, share capital, meetings, and insolvency. Tax avoidance is legal structuring; tax evasion is illegal concealment.
Worked example
An asset has a carrying amount of 800 and a tax base of 600. The taxable temporary difference is 200. At a tax rate of 25%, the deferred tax liability is 200 x 25% = 50. If the asset is expected to be recovered through use, the difference reverses through taxable profits. If a tax rate change is enacted before the reporting date, measure deferred tax at the enacted rate expected to apply when the difference reverses. A non-deductible fine creates a permanent difference and no deferred tax. The reasoning must identify the difference type before calculating the balance.
Traps that cost marks
Do not multiply accounting profit by the tax rate and call it tax expense. Do not create deferred tax for permanent differences. Do not reclaim input VAT on exempt or private expenses. Do not confuse avoidance with evasion. Do not ignore director authority or company constitution when approving a transaction.