I'm looking into the accounts of one of my clients (small ltd company) I noticed that in the year 2011 the Corporation Tax figure recorded under Creditors is wrong, that's because the figure shown there is calculated without deducting capital allowances, though Depreciation has been added back to the profit. This figure stands at 325 in the accounts for 2011 against Creditors. Now when the Corporation Tax Return was filed by the previous accountant, the end result shows no Corporation Tax liabilty for 2011 as a previous years (2010) loss has been carried forward and adjusted against the profits for 2011. Hence there was no Corp. Tax liability in 2011.
Whereas the accounts filed with Companies House shows the figure of 325 as Corp. Tax liability for 2011.
In 2012-
Corporation Tax figure shown under Creditors shows Corp. Tax for 2012 plus the 325 wrongly calculated for 2011. So it seems the 325 figure has not been corrected.
Can anyone here let me know how to deal with this situation as I'm preparing accounts for 2013 now. How should I deal with this figure that is still under Creditors?
Any ideas?
Thanks in advance for you all your comments.
VS
I have a query about Corporation Tax which has been shown wrongly in the accounts
You would include the overall adjustment in this year accounts, as part of the tax figure on the P&L, which should balance up your creditor. If you are doing a tax note, you would call it "under/over provision in previous years"
My answer assumes that the £325 was included on the PL for 2011, and so, there is no debtor included for the recoverable tax... I have seen it before, where an accountant has shown the amount owed and the amount recoverable separately. I am sure you would have picked this up, though!
Thanks for your reply. But in this situation the Corp. Tax has been calculated wrongly altogether. £325 is the tax that was calculated on the profits without deducting capital allowances. The previous accountant seems to have forgotten to deduct the capital allowance and has put a note in the bookkeeping worksheet to that effect.
Had capital allowances been deducted, the Corp. Tax would have been about £145.
Now the company did not have to pay any Corp. Tax for 2011 due to the loss carried forward from 2010. Therefore there was no Corp. Tax payment at all for 2011.
But the accounts have £325 lying in the Creditors.
When the 2012 accounts were prepared, this amount was ignored and has remained unadjusted in the Creditors.
Now I'm doing the accounts for 2013 and I'm wondering how to deal with this amount in the accounts.
Can anyone please let me know what they would have done to solve a situation like this?
I am sorry, I am a little confused. Your original post talks only of the accounts, and the wrong disclosure of tax.
Are you saying that the CT600 was also wrong?
As I understood your original post, the 2011 accounts showed £325 in creditors (meaning that £325 should have gone to the PL tax charge)
You said the 2011 CT600 was NIL because of loss relief - and I understood that this was correctly filed.
That means the BS and PL should have shown NIL also - as there was no liability due for 2011... as, even the £145 would have been relieved by the loss C/fwd??
But instead of NIL creditor/PL tax charge - you have £325
Have I got this correct? If not, please explain?
If the return was correct, based on what I am understanding from your post, I stand by my advice that you would adjust the BS/PL in this current year to correct the creditor. You would debit creditor, credit PL tax charge. If you have a tax note, you would show the £325 as an under/over provision in a previous year - as that is what has happened. £325 was provided for in the accounts, but not what ended up being due. NIL was due.
Sorry if I have totally got the wrong end of the stick here, but thats how I am reading it. Happy to be corrected.
It may help if you can confirm the PL tax charge for 2011. As I am just assuming that would also be £325
-- Edited by FoxAccountancyServices on Monday 31st of March 2014 08:19:01 PM
"As I understood your original post, the 2011 accounts showed £325 in creditors (meaning that £325 should have gone to the PL tax charge)
You said the 2011 CT600 was NIL because of loss relief - and I understood that this was correctly filed.
That means the BS and PL should have shown NIL also - as there was no liability due for 2011... as, even the £145 would have been relieved by the loss C/fwd??
But instead of NIL creditor/PL tax charge - you have £325
Have I got this correct? If not, please explain? "
Hi Michelle,
You are correct, 2011 did not have any tax liability at all due to the loss adjustment. But BS and PL have not been corrected and remained uncorrected in 2012 also. That's why in 2012 final accounts, BS still shows £325 liability.
As per your advice, if I do this journal entry, Dr Creditors Cr PL Tax charge, would it not show 2013 accounts wrongly. As 2012 accounts profits have been accumulated as Retained Earnings.
Still can't understand the justification behind this entry.
You are correct, a lower profit was taken to reserves in 2011 because of that entry... the £325 PL tax charge reduced profit to a lower figure, and so profit reserve is now still understated.. and reducing the PL tax charge in 2013 by the £325 will increase the PL reserve back to where it should have been.
In some companies, a draft CT figure is put into the accounts, and can be adjusted the following year. And, it is adjusted by way of an "over/under provision for the previous year" - you would see this in the tax note, which appear in the notes to the financial statements and provides a reconciliation of the PL charge.
A simple note could look like this:
Charge for the year 500
Over provision 2011 (325)
Charge per PL 175
Some notes are very detailed and start by taking the profit at 20% and then show all the adjustment to tax for add backs and CAS, and sometimes deferred tax adjustments.
In 2011 £325 tax was over provided in the accounts. The accountant over provided for the tax liability in the accounts. The simple way to fix this is to reverse the provision.
Thanks so much for your simple explanation, it's clear to me now. I will just reverse the over provision of tax in the accounts for 2013 through a journal entry as suggested by you .
Glad to help. As long as you have a note on file, you could always explain why the 2013 PL charge was £325 lower than the 2013 CT600 charge - but no one is likely to ask. Its more about whether the CT600 figures are correct, and the tax man got his fair payment! :))
