- 30 Marks
Question
Nancy Nigeria Limited, a manufacturer of soaps and detergents, was incorporated on April 1, 2020, but commenced business on July 1, 2020.
At the 2023 Annual General Meeting of the company, the shareholders approved resolutions for the increase in the company’s share capital in 2024 and request for long-term bank loan in the first quarter of 2025, to fund expansion of the company’s operations.
In December 2024, the company made preliminary request to its bankers and part of the documents to be submitted included the audited financial statements and tax clearance certificate (TCC) of the last three years. The company has been paying its taxes regularly, but it is yet to request for TCC since the commencement of business.
The appointment of the company’s former tax consultants was terminated in early 2024, after the discovery by the Federal Inland Revenue Service (FIRS) of the tax consultancy firm’s professional misconduct in the annual returns filed on behalf of a client. The matter is currently before a Court of competent jurisdiction.
Your firm of tax consultants has been engaged to procure the TCC for the company, after recomputing the tax liabilities from inception to the financial year ended December 31, 2024. The Managing Director stressed that the company is willing to make additional tax payments, if a case of under-payment of taxes is established.
After accepting the engagement, your Principal Partner, during interaction with the Managing Director, opined that based on the provisions of the Companies Income Tax Act 2004 (as amended), the FIRS may consider instituting back duty audit on the company, hence the need for early preparation for their visit. The Managing Director seems not to understand the submission made by the Principal Partner.
The company has provided all the financial records necessary for the conduct of this assignment.
The following details of the statement of profit or loss were extracted from the financial records of the company for the year ended December 31, 2024:
| N‟000 | N‟000 | |
|---|---|---|
| Turnover | 145,700 | |
| Cost of sales | (66,250) | |
| Gross profit | 79,450 | |
| Other operating income | 3,000 | |
| 82,450 | ||
| Deduct: | ||
| Personnel cost | 21,000 | |
| Power and rates | 3,800 | |
| Depreciation | 5,500 | |
| Repairs and maintenance | 1,900 | |
| Allowance for doubtful debts | 5,800 | |
| Finance cost | 2,200 | |
| Donations and subscriptions | 2,450 | |
| Legal and professional fees | 4,500 | |
| Transport and travelling | 1,100 | |
| Telephone and postage | 900 | |
| Loss on disposal of a motor vehicle | 1,800 | |
| Other operating expenses | 3,350 | |
| Preliminary expenses written off | 1,200 | |
| Transfer to general reserve | 2,000 | 57,500 |
| Net profit for the year | 24,950 |
The following additional information was made available:
(i) Adjusted profit/(loss) and turnover:
| Accounting period | Adjusted profit/(loss) N‟000 | Turnover N‟000 |
|---|---|---|
| Period ended December 31, 2020 | (27,950) | 65,800 |
| Year ended December 31, 2021 | 2,600 | 90,500 |
| Year ended December 31, 2022 | 6,200 | 108,250 |
| Year ended December 31, 2023 | 12,870 | 124,600 |
(ii) Other operating income:
| N‟000 | |
|---|---|
| Excess on revaluation of industrial building | 1,300 |
| Dividend received (net) | 1,700 |
| 3,000 |
(iii) Repairs and maintenance:
| N‟000 | |
|---|---|
| Improvement to industrial warehouse | 1,000 |
| Repairs of industrial plant | 400 |
| Renewals of tools and implements | 200 |
| Maintenance of motor vehicle | 300 |
| 1,900 |
(iv) Allowance for doubtful debts:
| N‟000 | |
|---|---|
| General allowance for doubtful debt | 4,350 |
| Specific allowance for doubtful debt | 1,750 |
| Bad debt written off | 900 |
| Bad debt recovered | (1,200) |
| 5,800 |
(v) Donations and subscriptions:
| N‟000 | |
|---|---|
| Contribution to a fund created by a State Government for victims of flooding | 1,000 |
| Award of scholarship to 3 indigent students | 1,200 |
| Subscription to manufacturers‟ association | 250 |
| 2,450 |
(vi) Legal and professional fees:
| N‟000 | |
|---|---|
| Audit and accountancy fees | 1,600 |
| Legal- acquisition of long-term lease | 1,500 |
| Legal- new issue of shares | 1,400 |
| 4,500 |
(vii) Other operating expenses:
| N‟000 | |
|---|---|
| Provision of unbranded Xmas hampers to customers | 1,100 |
| Local government tenement rate | 750 |
| Income tax provisions | 1,500 |
| 3,350 |
(viii) Schedule of qualifying capital expenditure:
| QCE | Date of acquisition | Number of items | Amount N’000 |
|---|---|---|---|
| Industrial building | May 15, 2020 | 1 | 15,000 |
| Non-industrial building | June 6, 2020 | 2 | 8,000 |
| Furniture and fittings | June 16, 2020 | 10 | 2,400 |
| Industrial plant | July 1, 2020 | 1 | 12000 |
| Motor vehicles | July 1, 2020 | 3 | 7,500 |
| Motor vehicles | July 1, 2022 | 2 | 6,000 |
| Furniture and fittings | September 1, 2022 | 2 | 600 |
| Industrial plant | October 1, 2024 | 1 | 18,000 |
(ix) A motor vehicle assigned to the General Manager, which cost N3 million at the date of purchase on July 1, 2022, was sold for N1.2 million on December 31, 2024.
Required: As the newly engaged Tax Consultant, you are to draft a report to the Managing Director showing/stating the:
a. Adjusted profit for the year ended December 31, 2024 (7 Marks)
b. Company’s tax liabilities for the relevant assessment years (ignore minimum tax computations) (20 Marks)
c. Provisions of the CITA 2004 (as amended) on back duty audit
Answer
JASCOBAN & Co (TAX CONSULTANTS)
Mowe, Ogun State
Date:
The Managing Director Nancy Nigeria Limited Enugu
Dear Sir,
RE: Computation of Adjusted Profit and Tax Liabilities for the Relevant Assessment Years We refer to your request on computation of adjusted profit for the year ended December 31, 2024 and tax liabilities for 2021, 2022, 2023, 2024 and 2025 assessment years. Our comments are as follows:
a. Adjusted profit for the year ended December 31, 2024 As shown in the attached appendix 1, the adjusted profit of the company for the year ended December 31, 2024 is N43,300,000.
b. Tax liabilities for 2021- 2025 assessment years Appendix 2 presents the report of the companies income tax and tertiary education tax payable for 2021 through 2025 assessment years, while that of capital gains tax is in appendix 3.
c. Provisions of the CITA 2004 (as amended) on back duty audit i. The CITA 2004 (as amended) provides for the conduct of back duty audit to be conducted on a taxpayer if for instance the tax returns earlier submitted is suspected to contain errors or omissions, with deliberate intention of the taxpayer; or failure to disclose in full any income or earnings in the returns submitted. ii. The principal Act allows the tax authority to go back as far as 6 years before the year of examination. iii. During the course of the audit, the records of the taxpayer are audited to examine the truth in the information that were earlier produced in the annual returns. iv. The tax computation is reviewed based on the findings from the audit exercise. This is compared with the results in the tax computations earlier submitted. v. The taxpayer is mandated to pay if there is shortfall in the amount of tax liabilities earlier made in form of additional assessment. vi. However, this additional assessment arising from this audit is subject to the objection and appeal procedures.
We hope this report adequately represents the mandate given to us. Should you require further clarification, we will be glad to address it.
Yours faithfully, Dean Jayeola
Appendix 1: Adjusted profit for the year ended December 31, 2024
| N’000 | N’000 | |
|---|---|---|
| Net profit as per accounts | 24,950 | |
| Add back: | ||
| Depreciation | 5,500 | |
| Improvement to industrial warehouse | 1,000 | |
| General allowance for doubtful debts | 4,350 | |
| Legal- acquisition of long lease | 1,500 | |
| Legal- issue of shares | 1,400 | |
| Loss on disposal of motor vehicle | 1,800 | |
| Provision of unbranded xmas hampers | 1,100 | |
| Income tax provisions | 1,500 | |
| Preliminary expenses written off | 1,200 | |
| Transfer to general reserve | 2,000 | 21,350 |
| 46,300 | ||
| Deduct: Non-taxable items | ||
| Excess on revaluation of industrial building | 1,300 | |
| Dividend received (net) | 1,700 | 3,000 |
| Adjusted profit | 43,300 |
Appendix 2: Computation of tax liabilities for 2021-2025 assessment years
| N’000 | N’000 | |
|---|---|---|
| 2021 assessment year | ||
| Basis period: 1/7/20 – 31/12/20 | ||
| Adjusted loss | 27,950 | |
| Capital allowance for the year | 17,376.25 | |
| Capital allowance utilised | Nil | Nil |
| Unutilised capital allowance c/f | 17,376.25 | _____ |
| Total loss c/f | 27,950 | |
| Companies income tax @ 20% | Nil | |
| Tertiary education tax @ 2% of adjusted profit | Nil | |
| 2022 assessment year | ||
| Basis period: 1/1/21 – 31/12/21 | ||
| Adjusted profit | 2,600 | |
| Unrelieved loss b/f | 27,950 | |
| Loss relieved | (2,600) | (2,600) |
| Unrelieved loss c/f | 25,350 | |
| Capital allowance for the year | 4,752.5 | |
| Capital allowance b/f | 17,376.25 | |
| Capital allowance available | 22,128.75 | |
| Capital allowance utilised | Nil | Nil |
| Unutilised capital allowance c/f | 22,128.75 | |
| Total profit | Nil | |
| Companies income tax @ 20% | Nil | |
| Tertiary education tax @ 2.5% of N2,600,000 | 65 | |
| 2023 assessment year | ||
| Basis period: 1/1/22 – 31/12/22 | ||
| Adjusted profit | 6,200 | |
| Unrelieved loss b/f | 25,350 | |
| Loss relieved | (6,200) | (6,200) |
| Unrelieved loss c/f | 19,150 | |
| Capital allowance for the year | 8,742.5 | |
| Capital allowance b/f | 22,128.75 | |
| Capital allowance available | 30,871.25 | |
| Capital allowance utilised | Nil | Nil |
| Unutilised capital allowance c/f | 30,871.2 | |
| Total profit | Nil | |
| Companies income tax @ 30% | Nil | |
| Tertiary education tax @ 2.5% of N6,200,000 | 155 | |
| 2024 assessment year | ||
| Basis period: 1/1/23 – 31/12/23 | ||
| Adjusted profit | 12,870 | |
| Unrelieved loss b/f | 19,150 | |
| Loss relieved | (12,870) | (12,870) |
| Unrelieved loss c/f | 6,280 | |
| Capital allowance for the year | 5,592.5 | |
| Capital allowance b/f | 30,871.25 | |
| Capital allowance available | 36,463.75 | |
| Capital allowance utilised | Nil | Nil |
| Unutilised capital allowance c/f | 36,463.75 | |
| Total profit | Nil | |
| Companies income tax @ 30% | Nil | |
| Tertiary education tax @ 3% of N12,870,000 | 386.1 | |
| 2025 assessment year | ||
| Basis period: 1/1/24 – 31/12/24 | ||
| Adjusted profit | 43,300 | |
| Balancing charge on disposal of vehicle (W3) | 825 | |
| 44,125 | ||
| Unrelieved loss b/f | 6,280 | |
| Loss relieved | (6,280) | (6,280) |
| Unrelieved loss c/f | Nil | |
| 37,845 | ||
| Capital allowance for the year | 15,482.75 | |
| Capital allowance b/f | 36,463.75 | |
| Capital allowance available | 51,946.5 | |
| Capital allowance utilised | (37,845) | (37,845) |
| Unutilised capital allowance c/f | 14,101.5 | |
| Total profit | Nil | |
| Companies income tax @ 30% | Nil | |
| Tertiary education tax @ 3% of N44,125,000 | 1,323.75 |
Appendix 3: computation of capital gains tax on disposal of the motor vehicle
| N’000 | |
|---|---|
| Sales proceeds | 1,200 |
| Less: Cost of acquisition | 3,000 |
| Capital gains | Nil |
| Capital gains tax@10% | Nil |
Appendix 4: Capital allowances schedule
| Industrial building IA 15% AA 10% N‟000 | Non-ind building IA 15% AA 10% N‟000 | Furniture & fittings IA 25% AA 20% N‟000 | Indust plant IA 50% AA 25% N‟000 | Motor Vehicle IA 50% AA 25% N‟000 | Cap. Allow N‟000 | |
|---|---|---|---|---|---|---|
| 2021 A/Y | ||||||
| Cost | 15,000 | 8,000 | 2,400 | 12,000 | 7,500 | |
| IA | (2,250) | (1,200) | (600) | (6,000) | (3,750) | 13,800 |
| AA | (637.5) W1 | (340) | (180) | (750) | (468.75) | 2,376.25 |
| Inv. Allowance | ________ | _______ | ________ | (1,200) | ________ | 1,200 |
| 17,376.25 | ||||||
| 2022 A/Y | ||||||
| TWDV | 12,112.5 | 6,460 | 1,620 | 5,250 | 3,281.25 | |
| AA | (1,275) W2 | (680) | (360) | (1,500) | (937.5) | 4,752.5 |
| 2023 A/Y | ||||||
| TWDV | 10,837.5 | 5,780 | 1,260 | 3,750 | 2,343.75 | |
| Addition | 600 | 6,000 | ||||
| IA | (150) | (3,000) | 3,150 | |||
| AA | (1,275) | (680) | (450) | (1,500) | (1,687.5) | 5,592.5 |
| 8,742.5 | ||||||
| 2024 A/Y | ||||||
| TWDV | 9,562.5 | 5,100 | 1,260 | 2,250 | 3,656.25 | |
| AA | (1,275) | (680) | (450) | (1,500) | (1,687.5) | 5,592.5 |
| 2025 A/Y | ||||||
| TWDV | 8,287.5 | 4,420 | 810 | 750 | 1,968.75 | |
| Disposal | (375) W3 | |||||
| 1,593.75 | ||||||
| Addition | 1,000 | 18,000 | ||||
| IA | (150) | (9,000) | 9,150 | |||
| AA | (1,360) | (680) | (450) | (2,999) | (843.75) | 6332.75 |
| 15,482.75 | ||||||
| c/f | 7,777.5 | 3,740 | 360 | 6,751 | 750 |
Workings (1) 2021 Y/A (AA) Industrial building This is a case of 6 months in the basis period, hence annual AA = Cost-IA x 1/2 n = (15,000 – 2250) x 1/2 10 = N637.5
(2) 2022 Y/A (AA) Industrial building This is a case of 12 months in the basis period, hence annual AA = Cost-IA n = 15,000 – 2250 10 = N1,275
(3) 2025 Y/A (Disposal of motor vehicle)
| Motor vehicle IA 50% AA 25% N‟000 | |
|---|---|
| Cost | 3,000 |
| IA | 1,500 |
| AA (for 3 years)= 375 x 3 | 1,125 |
| Total capital allowance claimed up to date of disposal | 2,625 |
| TWDV at disposal (cost – total capital allow) | 375 |
| Sales proceeds | 1,200 |
| Balancing charge (sales proceeds – TWDV) | 825 |
- Topic: Tax Administration and Dispute Resolution, Taxation of Companies
- Series: MAY 2025
- Uploader: Samuel Duah