Taxation
Framework
Taxation questions test your understanding of the tax base, taxable income computation, allowable deductions, capital allowances and the difference between accounting profit and taxable profit. Know how to adjust profit before tax for non-deductible expenses, non-taxable income, and timing differences such as depreciation versus capital allowances.
Key areas
Be comfortable with income tax on individuals and companies, sales or value-added tax mechanics (output tax less input tax), withholding tax, and the treatment of capital versus revenue items. Understand how tax losses are carried forward and how deferred tax arises from temporary differences.
Traps
Common traps include confusing accounting depreciation with tax capital allowances, forgetting that some expenses are only partly deductible, and mixing up tax payable with the tax expense in the financial statements. Watch the difference between an exempt item and a deferred item. Questions may ask for the effective tax rate rather than the statutory rate-compute tax expense divided by accounting profit.
Worked example
Accounting profit 500,000. Add back non-deductible fines 20,000. Deduct capital allowances 60,000 and add back accounting depreciation 50,000. Taxable profit = 500,000 + 20,000 + 50,000 - 60,000 = 510,000. At a 30% rate, current tax = 153,000. The difference between tax expense on accounting profit and current tax reflects deferred tax.
Rule of thumb
Build the tax computation line by line from accounting profit: start with profit before tax, add back disallowed items, deduct allowances, then apply the rate. Never apply the rate to accounting profit unless there are no adjustments.