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.
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 pretax 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.
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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
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purchase of capital equipment
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depreciation of capital equipment
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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
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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:
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capital allowances i.e a certain percentage of expenditure on
industrial buildings, plant and machinery is deducted from
taxable income on an annual basis
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wages and salaries
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costs of raw materials or stock sold
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interest payable on debt
2011 PK Mwangi Global Consulting
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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
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4.
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
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
2011 PK Mwangi Global Consulting
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, or
 carry the loss forward and set it off against profits from the same
trade in future accounting periods.
2011 PK Mwangi Global Consulting