The different types of tax accounting

The term ‘tax accounting’ is a very broad and encompasses many different accounting disciplines. There are many different areas of tax accounting and whilst the general practice accountant will have a basic awareness of each area, it is unreasonable for the general practice accountant to be a specialist in all tax accounting areas. There are regular updates, changes in legislation and changes in applicable rates therefore the world of tax accounting is dynamic and fast moving. A tax accountant must keep abreast of these changes and the fast and frequent changes makes it even harder for the general practice accountant become an overall tax specialist.

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 Many accountants will start their career in general practice and then focus on a specific area of tax accounting before becoming a specialist in that particular area. Becoming a specialist involves additional training, additional work experience and having to sit even more accountancy examinations. Because of the additional work required a general practice accountant needs to be entirely sure that the tax accounting path is the one for them. Even if the general practice accountant decides to specialise and sit more examinations, and then decides the world of tax is not for them the knowledge learned will prove very useful in general accountancy practice, therefore it is not a totally pointless exercise.

So, once the general practice accountant has decided to specialise in tax accounting the next decision is what tax accounting discipline to specialise in, and since there are so many different tax accounting disciplines to choose from making the final decision is not always an easy task. So, what tax accounting disciplines are there to choose from?

Income tax accounting

Income tax accounting is assisting individuals with their personal tax affairs and typical tasks will include drafting the personal tax computation and preparing the income tax returns.

The type of clients in this area of tax accounting will be individuals with several sources of income, such as earned income, investment income, dividend income and rental income. Your typical employee will not need to prepare a self assessment tax return as all income is taxed at source through the pay as you earn regime.

Business tax accounting

Business tax accounting involves dealing with the taxation affairs of an unincorporated business, such as a sole trade or partnership. Unlike a limited liability company, an unincorporated business is not a separate legal entity therefore the business profits are added to the taxable income of the proprietor or partners.

This role involves preparing the business accounts and then using these to prepare a business tax computation to calculate the taxable profits. When calculating the taxable profits you will need to consider the capital allowances regime, which is very complex in some industries such as construction and holiday letting. The taxable profits are then transferred to the proprietor’s or partners’ income tax accounting computation.

Because of the interdependence between the business and personal tax accounting computations you will find the same tax accountant will deal with the income and business tax accounting affairs of the proprietor or partners.

Corporate tax accounting

Corporate tax accounting is dealing with the corporate tax affairs of an incorporated business, such as a limited liability company.

This role primarily involves preparing the year end corporation tax computations and returns, and then submitting them to the taxman. Preparing a corporation tax return is not always an easy task as there are many different rules to consider, which often change.

Dealing with capital allowance claims is another important role in corporate tax accounting. In order to minimise the corporate tax liability the specialist needs to ensure all relevant capital allowances are being claimed. The capital allowance rules are complicated and there are severe penalties for getting it wrong, therefore it is a task for a specialist corporate tax accountant.

Value added tax accounting

Value added tax accounting is dealing with the VAT affairs of an incorporated business or a limited liability company. The range of potential VAT services is huge and the work may involve preparing the quarterly (or monthly) VAT returns from the core accounting records to filing the VAT return for the client to delaing with the VAT man on the clients behalf to dealing with VAT claims in complex areas such as new builds.

Payroll tax accounting

Payroll tax accounting involves preparing the payroll and calculating the pay as you earn liability, the employee’s National Insurance Contributions liability and the employer’s National Insurance Contributions liability, together the payroll taxes.

Payroll tax accounting can be done manually using published tax tables, or it can be processed on a computerised payroll software package, which will calculate the payroll tax liabilities for you. Whilst the payroll software package will calculate the tax liabilities for you the reports still need to be checked for accuracy. The quality of the reports will depend on the accuracy of the data input therefore payroll tax accounting is not an easy job even if a payroll software package is used.

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Tax planning

Tax planning involves dealing with the taxation affairs of individuals, businesses and limited liability companies. The objective of tax planning is to review the client's affairs and identify ways to minimise and defer the client's various liabilities. No one likes paying the taxman and if you can save your client some money, no matter how big or small the amount, your clients will always be appreciative.

There are different areas of tax planning such as choosing the best time to buy and sell assets in order to maximise available allowances, the best time to make gifts to maximise available allowances, the best time to make payments, the best time to dispose of assets to heirs etc. etc.

Tax accounting is a diverse specialism and, as you can see, there are many areas of tax accounting to focus on and specialise in. Tax accounting is a career that allows you to really get to know your clients and their business affairs. In order to do the best for your clients you need to get under their skin and find out about every aspect of their finances, which ioften very interesting.  Tax planning allows you to do the best for your clients and save them some money, which is very rewarding.