Hi,
I just wanted to get my understanding clarified here.
There is an over-provision in earlier year's accounts for £2000. When I adjust it against the tax charge in the Income Statement for the current year, would it then mean that the tax payable for the current year to HMRC will reduce by the adjusted amount i.e. if current year's tax is £4400, after the adjustment entry of over-provision the net tax liability will be £4400 - £2000 = £2400.
The over-provision of tax of £2000 has come about due to a carry forward of tax losses in an earlier previous year because of which the tax due of £2000 did not have to be paid. But the provision in the accounts have to be reversed.
Am I correct about this? Please can anyone confirm to me.
Thanks in advance for your comments.
Replies (7)
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Yes writing back the £2,000
Yes writing back the £2,000 over-provision will reduce the tax charge in this year's P& L account by £2,000, from £4,400 to £2,400.
over or under provision for Corporation Tax
Hi John,
I was reading this question & answers and got interested to know as to when this situation can arise, i.e. the provision for CT is too high or too low and
we need to adjust it in the next year accounts.
When we file the CT600 and the accounts with it we would normally make sure the tax in the CT600 agrees with the tax charges in the P&L, and the provision
for CT in the BS is the same amount as the charge. So what should happened for us to pay tax less or more than we declared in CT600?
Thank you.
KR,
Julia
Yes and also remember that the client must be advised to pay the right amount to HMRC because the "tax payable to HMRC for the current year" is not reduced, only the P & L charge.
Correct
Imagine that £5k was reserved in the previous year's balance sheet for that year's tax and the actual liability and payment was £3k. This would leave £2k as a liability in the balance sheet that is no longer needed.
In the current year you would debit the liability and credit the P&L with the release of the overprovision.
At this point you will have a £2k tax credit in the P&L and nothing in the balance sheet. You then reserve for the current year tax by debiting the P&L and crediting the liability in the balance sheet with £4,400.
You now have a charge in the P&L of £2,400 and a liability due to HMRC of £4,400 in the balance sheet.
Does that help?