Page 13 - CIMA OCS Workbook May 2019 - Day 1 Tasks

CIMA MAY 2019 – OPERATIONAL CASE STUDY

CHAPTER TEN

EXERCISE ONE (TAX)

From: Finance Officer.
To: Suresh Patel, Managing Director
Subject: Re: Income tax paid by VitaMine

Hi,
Income tax

There are several reasons why the rate of income tax based upon the statement of profit or loss
will not agree to the stated rate of tax from information published by the government.

There are several forms of expense which, although perfectly legitimate and treated in
accordance with accounting principles and standards, are not allowed as a deduction from profit
chargeable to tax.

Entertaining expenses
It may be helpful to first distinguish between subsistence and entertaining.

Subsistence relates to meals and refreshments purchased by employees whilst they are away
from their normal place of work for performance of their work responsibilities. This could be, for
example, a member of the sales team out visiting a number of potential commercial customers
and staying away from home in a hotel for several nights.
It is reasonable that such expenses incurred by employees in the performance of their work are
reimbursed by the company, provided that they fall within the established expenses policy, such
as the maximum amount that can be claimed per meal.

Entertaining relates to expenditure for meals and other refreshments purchased when dealing
with suppliers and customers. As with subsistence expenses, such payments are not illegal, and
ca be reclaimed by employees provided that they have been incurred within the limits stated
within the company expenses policy.
However a critical distinction between the two forms of expenditure is that employee
subsistence is a tax-allowable expense, whereas entertaining of suppliers and customers is not.
The consequence of this distinction is that any expenditure incurred for entertaining purposes
must be added to the profit before tax for the year to increase the amount that would be
chargeable to tax.
Political donations

As with entertaining expenses, it is not illegal to make a political donation. It would be treated as
an expense in the statement of profit or loss.

However, such donations will not be allowed as a tax-deductible expense. The consequence of
this is that the taxable profit for the year will increase by the amount of the political donation,
and therefore increase the amount of tax payable.
Accounting depreciation and amortisation charges

Depreciation charged in the financial statements is in accordance with IAS 16, Property, plant
and equipment. However, in order to arrive at the depreciation charge, several judgements are
needed, such as an estimate of the useful life of an asset to the business and its residual value at
the end of that time period.

66 KAPLAN PUBLISHING