2011 PK Mwangi Global Consulting

Paying your income tax

Companies resident in a particular tax jurisdiction must pay company tax on all profits and capital gains. This means that they are treated as resident in that country (tax jurisdiction) for company tax purposes.

PK Mwangi Global Consulting

2011 PK Mwangi Global Consulting

A period of account is any period for which a company prepares accounts and will usually be a period of 12 months. However, a period of account may be longer than this.

Company tax is charged in respect of accounting periods and although this will usually be the same as the period of account, the period of account may be longer. Thus, if a company has a period of account of 18 months, this must be split into two accounting periods- the first 12 months long and the other 6 months long. So an accounting period, on which company tax becomes payable, cannot be longer than 12 months.

The company’s tax liability will be computed with reference to profits made during the accounting period and will include both its taxable trading profits (income generated from its regular

2011 PK Mwangi Global Consulting

trading activities) and chargeable or capital gains (profit earned from the disposal of capital equipment or other assets)

The taxable trading profit which is the trading

profit that is taxed is rarely the same figure as the profit shown in the company’s profit and loss account i.e the pre-tax profit. However, the pre-tax profit figure is the starting point for the series of adjustments made in arriving at the taxable trading profit.

There are four types of adjustments that need to be made to move from the pre-tax profit to the taxable trading profit.

2011 PK Mwangi Global Consulting

1. expenditure which tax law prevents from being an allowable deduction (and that has already been deducted in the profit and loss account) needs to be added back to the pre-tax profit figure. These are non-deductible expenses and examples include:

capital expenditure i.e purchase of capital equipment depreciation of capital equipment loss on the sale of company assets

gifts NOT given to charity i.e non-charitable gifts

entertainment and gifts to non-employees appropriations of profits

2011 PK Mwangi Global Consulting

professional examination fees clothing that is not used in the business i.e

that which is non-protective or not part of the company uniform

commuting expenses fines and penalties incurred for violations of

law, such as income tax penalties, traffic tickets, etc

personal, living, or family expenses political contributions transfer taxes on business property

2011 PK Mwangi Global Consulting

2. taxable trading income that needs to be included in the profit and loss account, but has not been included, needs to be added to the pre-tax profit figure.

3. expenditure that is deductible for tax purposes, but has not been charged to the profit and loss account, needs to be deducted from the pre-tax profit figure. This is the most important adjustment and includes deductible expenses for income tax purposes such as:

capital allowances i.e a certain percentage of expenditure on industrial buildings, plant and machinery is deducted from taxable income on an annual basis

wages and salaries costs of raw materials or stock sold interest payable on debt

2011 PK Mwangi Global Consulting

cost of work equipment business telephone costs motor expenses for business use expenditure on research and development car hire or van rental for business use postage, printing accessories and stationery advertising costs on yellow pages, local

newspapers, Google, etc computer consumables for business use professional fees e.g legal, accountancy, tax,

advisory, etc subscription fees

2011 PK Mwangi Global Consulting

charitable donations (under certain conditions)

entertainment and gifts gifts to employees (below a specified sum) gifts to customers (below a specified sum)

charge for irrecoverable debts car leasing (restricted to cars below a stated

value) premium paid for a short-term lease

4. income included in the profit and loss account that should not be included (since it is not taxable trading income) needs to be deducted from the pre-tax profit figure

Following these adjustments any available capital gains are added to the adjusted taxable trading profit to arrive at the total taxable profit for the year. Any income tax payable for the year will be based on this total taxable profit.

Where the company has suffered a trading loss it may:set this loss against total profits of the accounting period producing the loss, orcarry the loss forward and set it off against profits from the same trade in future accounting periods.

2011 PK Mwangi Global Consulting