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The reporting of taxation on Annual report Income statements

Practical Issues
TheMotorcycleBoy
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The reporting of taxation on Annual report Income statements

#153775

Postby TheMotorcycleBoy » July 20th, 2018, 5:08 pm

Moderator Message:
Moved from Technical Analysis to Taxes


Hi folks,

Apologies if this is the wrong forum area for this post.

Anyway as some of you know I'm spending a bit of time reviewing company financial statements in the process of evaluating share purchases. When I see

Profit before tax  1000
Taxation 200
-------------------------
Profit after tax 800


what kind of tax is being recorded here? It is just corporation tax or income tax or the summation of both? Sorry to seem dim, but in most firms it's just described as "taxation" but in the Sage one I'm reviewing it says "income tax".

Mildly curious,
Matt

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Re: The reporting of taxation on Annual report Income statements

#153854

Postby snagga » July 21st, 2018, 2:14 am

Hi

This probably is the wrong board (technical analysis refers to trying to predict future share price changes from charts of historic prices) but i don't know what the right one is.

For a UK quoted company, the types of taxes included in the tax expense line in the P&L should correspond to what International Financial Reporting Standards define as income taxes: "... income taxes include all domestic and foreign taxes which are based on taxable profits. Income taxes also include taxes, such as withholding taxes, which are payable by a subsidiary, associate or joint arrangement on distributions to the reporting entity."

Under the UK tax system, companies are subject to Corporation Tax on their profits whereas Income Tax is the tax that individuals pay on their income. So for a UK company's UK operations, the tax expense line in the P&L would reflect UK Corporation Tax but not UK Income Tax. The P&L might also include foreign taxes on any profits earned overseas. The company would not pay UK Income Tax on its profits. Its involvement with UK Income Tax would generally be limited to acting as a collection agent - eg. deducting PAYE from employees' salaries. These amounts are already included as part of the salary expense to the company.

TheMotorcycleBoy
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Re: The reporting of taxation on Annual report Income statements

#153857

Postby TheMotorcycleBoy » July 21st, 2018, 5:27 am

Thanks,

So where in the P&L statement is the company's corporation tax recorded?

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Re: The reporting of taxation on Annual report Income statements

#153892

Postby snagga » July 21st, 2018, 10:26 am

Melanie wrote:So where in the P&L statement is the company's corporation tax recorded?


Generally it's in the tax expense line because it is a tax on the company's profits. Sage probably calls that line "income tax" because the accounting rules (which are International Financial Reporting Standards) use this type of terminology.

Some of the corporation tax might not actually be included in P&L. If part of the corporation tax arises on gains and losses that are not included in P&L, then that part is not included in P&L.

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Re: The reporting of taxation on Annual report Income statements

#153937

Postby TheMotorcycleBoy » July 21st, 2018, 12:42 pm

snagga wrote:Some of the corporation tax might not actually be included in P&L. If part of the corporation tax arises on gains and losses that are not included in P&L, then that part is not included in P&L.

Ok, but it (Corporate Tax) must be recorded somewhere in the financial statement?

So as another example in this AR
https://investors.dominos.co.uk/system/ ... s-2017.pdf
we have the P&L on page 77. And an entry straight after "profit before tax" called "taxation", is the not a blend of income and corporation tax?

EDIT: Sorry I was being lazy! I spotted just prior to posting that line in question has an associated Note 11 on page 97. I went there and hey presto, lots of words, with mention of Income and Corporation tax. :)

Not only am I just curious, I'm also thinking that understanding this type of thing, could lead to understanding another corporate accounting topic "the effective rate of tax"

many thanks,
Matt (and Mel)

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Re: The reporting of taxation on Annual report Income statements

#153942

Postby PinkDalek » July 21st, 2018, 1:12 pm

Melanie wrote:Ok, but it (Corporate Tax) must be recorded somewhere in the financial statement?

So as another example in this AR
https://investors.dominos.co.uk/system/ ... s-2017.pdf
we have the P&L on page 77. And an entry straight after "profit before tax" called "taxation", is the not a blend of income and corporation tax?

EDIT: Sorry I was being lazy! I spotted just prior to posting that line in question has an associated Note 11 on page 97. I went there and hey presto, lots of words, with mention of Income and Corporation tax. :)

Not only am I just curious, I'm also thinking that understanding this type of thing, could lead to understanding another corporate accounting topic "the effective rate of tax"

many thanks,
Matt (and Mel)


You'll have now seen Note 11b on page 98, which explains the Effective tax rate for Dominos Pizza Group as well as the note At Budget 2016, the government announced a further reduction to the Corporation Tax main rate, which will have an effect on the Group’s current and future tax position. For the year starting 1 April 2020, the Corporation Tax main rate will be set at 17%. As a result, the relevant deferred tax balances have been remeasured as appropriate.

Another place to look would be the Group cash flow statement on page 81. This reflects the physical UK corporation tax paid and Overseas corporation tax paid. In this particular case, those figures are not too similar to the Tax charge in the income statement but this is not always the case.

(Many of your posts are at Investment Strategies or Share Ideas. I know this has been moved here, where the sub-header is Practical Issues. I'm wondering if the Topic should be moved again and will self report to see what the Mods for this board think)

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Re: The reporting of taxation on Annual report Income statements

#153944

Postby snagga » July 21st, 2018, 1:16 pm

Melanie wrote:
snagga wrote:Some of the corporation tax might not actually be included in P&L. If part of the corporation tax arises on gains and losses that are not included in P&L, then that part is not included in P&L.



Ok, but it (Corporate Tax) must be recorded somewhere in the financial statement?


If the Corporation Tax relates to items included in OCI (other comprehensive income), the Corporation Tax is included in OCI (I don't think that Domino's has an example of this but might be certain tax related to DB pension schemes or hedges). If the Corporation Tax relates to items charged or credited directly to equity, the Tax is taken directly to equity (for Domino's, an example is "Reduction in current tax liability as a result of
the exercise of share options"). In other cases (which is most of them), the Corporation Tax would generally be included in P&L.

Melanie wrote:So as another example in this AR
https://investors.dominos.co.uk/system/ ... s-2017.pdf
we have the P&L on page 77. And an entry straight after "profit before tax" called "taxation", is the not a blend of income and corporation tax?

EDIT: Sorry I was being lazy! I spotted just prior to posting that line in question has an associated Note 11 on page 97. I went there and hey presto, lots of words, with mention of Income and Corporation tax. :)


The start of the table on page 77 begins:
"Current income tax:
UK corporation tax:"
This is implying that "UK corporation tax" is a sub-component of what the accounting rules describe as "income tax." The phrase "current income tax" is not referring to UK Income Tax but is instead to the accounting concept.

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Re: The reporting of taxation on Annual report Income statements

#154060

Postby TheMotorcycleBoy » July 22nd, 2018, 8:02 am

snagga wrote:...
the exercise of share options"). In other cases (which is most of them), the Corporation Tax would generally be included in P&L.

That was my conclusion, thanks.

snagga wrote:The start of the table on page 77 begins:
"Current income tax:
UK corporation tax:"
This is implying that "UK corporation tax" is a sub-component of what the accounting rules describe as "income tax." The phrase "current income tax" is not referring to UK Income Tax but is instead to the accounting concept.

Ok, yes. Concepts and jargon.

Thanks for your help, so far.


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