Tax Reconciliation

Under FRS 102 Section 29, an entity is required to show a reconciliation between the tax expense included in the P&L and the profit or loss on ordinary activities before tax multiplied by the applicable tax rate.

To satisfy this requirement the system calculates the net profit before tax by the corporation tax rate entered in the Compliance Database, advises of the tax on the net profit and asks the user to enter balances in the Compliance Database which reconcile net profit before tax to the tax charge for the year.

If there is a difference in this reconciliation, a taxation error will appear, as follows.

In (the current/ the comparative/ both) period(s), the current tax charge total does not agree with the computed tax charge as adjusted by the reconciling amounts entered in the Compliance Database.

To resolve this issue in Surf AP, follow the below examples, applying the rules to the dataset you are currently working on, figures provided are for example purposes only.

Example 1 – Standard

• Net profit before tax as calculated from the actual amounts posted to Surf Accounts Production; € 90,270.
• Corporation tax current year, as posted to nominal 501, € 13,484.
• Corporation tax rate in the jurisdiction.

1. Enter the corporation tax rate applicable for the jurisdiction for both the current and comparative year in the Compliance Database > Financial > Financial Information > Tax Reconciliation.
2. The calculation is then carried out in the current year, as follows; € 90,270 (being the net profit before tax) x 12.5% (corporation tax rate in ROI) = € 11,284
   This gives the tax on profit/ loss figure.
3. The total tax charge for the year, as posted to Nominal Code 501 is € 13,484. The difference between the total tax charge for the year and the tax on profit/ loss must be entered to the Compliance Database to resolve the issue.

The reconciling figures are entered into the Compliance Database > Financial > Financial Information > Tax Reconciliation. The amounts entered here are the effects of tax on the overall figure.

In the above example we have entered the full reconciling figure as ‘Non-Tax Deductible Expenses’. This reconciling figure would normally be split out to their correct descriptions.

To resolve this error post 2,200 for the current year and 2,916 for the comparative year in the Compliance Database > Financial > Financial Information > Tax Reconciliation > Non-Tax Deductible Expenses.

If deferred tax has been posted to the nominal ledger you must use the specific line in the Compliance Database > Financial > Financial Information > Tax Reconciliation to account for this in the reconciliation.

Example 2 – Income Taxable at 25%

In this scenario, client has rental income which is taxed at 25%.

• Total Net profit before tax as calculated from the actual amounts posted Surf Accounts Production; € 90,269.
• Net profit before tax which will be calculated at 25%, € 26,347.
• Standard Corporation tax current year, as posted to Nominal Code 501, € 13,484.
• Corporation tax rate in the jurisdiction.

1. Enter the corporation tax rate applicable for the jurisdiction for both the current and comparative year in the Compliance Database > Financial > Financial Information > Tax Reconciliation. 
2. Enter the net profit before tax amount which will be taxed at 25%, this is entered in Financial > Financial Information > Tax Reconciliation.
3. The amount of profit which will be taxed at 25% is deducted from the overall net profit. These two values of net profit are then shown separately and calculated separately.
   The calculation is then carried out in the current year, as follows:
   

   € 90,270 (being the net profit before tax) - € 26,347 (being the net profit taxable at 25%) = € 63,923

   This is the profit/ loss taxable at 12.5%.

   € 63,923 x 12.5% = € 7,990

   € 26,347 x 25% = € 6,587

   Total tax on profit = € 14,577

4. The total tax charge for the year, as posted to Nominal Code 501 is € 13,484. The difference between the total tax charge for the year and the tax on profit/ loss is what must be entered to the Compliance Database to resolve the issue.

To resolve this error post 1,093 for the current year in the Compliance Database > Financial > Financial Information > Tax Reconciliation.