Advance Taxation and Tax Liability - Essay Example

The interest paid on the debenture is allowable since it is used for trading purposes. The amounts also relate to interest expense for the year hence are allowed and should not be added back to trading profit.

The income from the property is deducted from the net profit because they are not part of the trading profit and are taxed differently.

The bank interest of 12400 is also deducted from the net profit since they are not in normal trade and hence do not form part of trading profit.

The purchase of fixed assets should be capitalized and is therefore disallowed in computing taxable profit. They have thus been added back. The assets purchased are motor cars and Lorries totaling 64800.

Assuming that the equipment sold had a zero net book value, the sales price is equivalent to the profit on the sale of fixed assets. The amount is thus deducted from the net profit since it does not form part of the trading profit.

1. b) Watson Corporate tax liability 31/3/2013

Trading profits (W1)                                                                                                    630760

Nontrade interest (W2)                                                                                                   12400

Property income                                                                                                              20600

–––––––––

Total Taxable profit                                                                                                       663760

Dividend income( 54000*100/90)                                                                                  60000

Augmented profit                                                                                                            723,760

Corporate tax liability (24%*723760)                                                                          173,702.4

Nontrade interest constitutes the bank interest of 12400

Property income of 20600 does not form part of trading income but is taxable.

Since the profit is less than 1500,000, the corporate tax rate is 24%

Task 2

If Watson considers a change in the payment of tax, the company will need to comply with the rules governing the calculation of tax for more than 12 months. In the case of a period of 17 months, the tax computation will be apportioned into two chargeable accounting periods i.e. 12 months and the other of 5 months. In this case, the trading income will be apportioned based on the time. Capital allowances will however be calculated separately for each of the chargeable accounting period (CAP)

Moreover, property income will also be apportioned based on time. Nontrade interest on the other hand will be considered in the period of accrual in case there are no details to assist in apportionment.  Nonchargeable gains will be computed for the period of the gain while gift aid will be considered in the period in which they are paid.

Zee Ltd has the following results for the four years to 31 March 2013

Task 3

Year ended 31 March                     2010       2011        2012       2013    

Trading Profit                                    61,900    77,400    64,200    Nil

Less loss b/f                                      -              -              -              -                                                          

Chargeable gains                               -              4,300      2,700      (1,800)   

Total Profits                                      61,900    81,700    66,900    (1,800)

Less: Loss of relief                                                                          1,800

Carry back                                                                        (66,900) 

                                                          61,900    81,700    Nil          Nil

Less Gift aid                                      3,400      3,400      wasted    wasted

Taxable total profit                           58,500    78,300    Nil          Nil

Workings 1

Chargeable gains

                                                           2010       2011        2012       2013    

Gain in the year                                 Nil          4,300      2,700      5,700

Less loss b/f                                                                                     (7,500)

Net chargeable gain                        Nil          4,300      2,700      (1,800)

Workings 2

Loss Memorandum

Loss for 2013                                    172,500

Same period relief                             (1,800)

Carry back for 2012                          (66,900)

Carried forward and utilized 103,800

Year ending March 2013                 Nil

Carry forward to March 31, 2013, 103,800

The company will not be entitled to a repayment in the first three years since the company has not incurred losses. In the fourth year, the company will carry forward its entitlement for the non-recovered claims plus interest to subsequent years.  The relief will therefore be realized in the year 2014 and after.

In conclusion, companies must ensure that they compute their tax liability or make their tax claims as per the tax regulations to avoid unnecessary penalties and to ensure that they operate as per tax requirements.