My name is Steve Chen, a fellow member of ACCA and course director at APC (www.globalapc.com), teaching ACCA online courses to students from all around the world. This article will explain the concept of tax return in your ACCA Financial Accounting Papers.
Each year, a business needs to complete a tax return indicating the amount paid to the tax authority. The tax return can be completed either in paper format or via an online form. The company may pay its tax bill in one instalment or in several, according to the tax rules in different countries. For example, in the UK, if the taxable profits are up to £1.5 million in the year, a single tax payment to the HMRC will need to be made. This payment is due nine months and one day after the end of the accounting period.
If the taxable profits are more than £1.5 million, depending on their accounting periods, the tax payments may be settled in three or four instalments. For example, a company with a standard accounting period of twelve months will pay in four instalments. A company with an accounting period of nine months (less than twelve months) will normally pay tax in three instalments.
However, if the business has just commenced trading (that is, producing Financial Statements for the first time) or in administration (business to be liquidated soon), the accounting period can be extended to a maximum of eighteen months. The calculation of the tax due by instalments now becomes quite complicated. The business will first need to estimate the total tax liability payable in the first and remaining instalments. As the accounting period extends, the business will need to revise the estimated payable tax liability.
In this case, the company may have underpaid or overpaid its tax liability in previous instalments.
In this case, the company needs to top up the amount which is underpaid or to claim the refund from the tax authority for the amount overpaid. This is called under- or overpayment of tax.
Under or over pay taxes
Other examples where the business under or overpays tax may include errors made, or it could be the case that the transfer price set for the sale of goods among group entities is not at fair value, and hence the tax authority requires additional adjustments to be made regarding the taxable profit.
The business will also need to consider interest charged by the tax authority for the amount underpaid, or to claim the interest income back from the tax authority for the amount overpaid, and this really depends on the tax rules in different countries.
In addition to providing ACCA lectures online, I also wrote articles in ACCA AB magazine. Besides, I am the author of four accounting books. If you are interested in studying ACCA courses with me, please visit my website http://www.globalapc.com for further information, where you can find many of my ACCA demo video lectures.