Taxation: Taxable Income, Reliefs and Tax Administration
Taxation tests whether you can move from accounting profit to taxable profit, apply reliefs and credits correctly, and explain administration and compliance obligations. Rates, thresholds and specific rules vary by jurisdiction, so the examiners reward the mechanics and the reasoning; the figures below are illustrative.
Computing taxable income
- Start from accounting profit before tax, then add back expenses that are not deductible and deduct allowances and exempt income.
- Permanent differences (fines, non-deductible entertainment) never reverse; temporary differences (accounting depreciation versus capital allowances) reverse over time and give rise to deferred tax.
- Capital expenditure is relieved through capital allowances, not as a revenue deduction.
- Reliefs commonly examined: trading losses carried forward or back, group relief, double taxation relief, and withholding tax credits.
Indirect tax and administration
- VAT/GST is charged on taxable supplies, with input tax recovered where it relates to taxable outputs; exempt supplies break the credit chain.
- Compliance: registration thresholds, filing deadlines, record retention, penalties and interest; self-assessment shifts the burden of proof to the taxpayer.
Worked example
Accounting profit 500,000. Add: depreciation 60,000, non-deductible entertainment 20,000, regulatory fine 5,000. Deduct: capital allowances 90,000, exempt dividend income 15,000. Taxable profit = 500,000 + 60,000 + 20,000 + 5,000 − 90,000 − 15,000 = 480,000. Tax at 30% = 144,000; less withholding tax credit 10,000 = tax payable 134,000. Note that the 15,000 dividend is excluded from taxable profit but may still carry a credit.
Traps that cost marks
- Treating penalties and fines as deductible because they arise from trading.
- Claiming a credit for withholding tax without evidence of deduction.
- Confusing a tax exemption with a tax credit, or netting VAT against revenue in the accounts.