ACCA Advanced Taxation (ATX) Practice Exam

What type of evidence is required for proper tax record keeping?

1. Only tax returns

2. Invoices from suppliers

3. Receipts, contracts, and financial statements

4. Loose papers with transactions

The correct answer is: Receipts, contracts, and financial statements

For proper tax record keeping, the correct type of evidence required includes receipts, contracts, and financial statements. This comprehensive documentation is crucial because it provides concrete proof of income, expenses, and contractual obligations, which supports the accuracy of reported financial information to tax authorities. Receipts serve as evidence of purchases and expenses incurred, ensuring that any deductions claimed on tax returns are substantiated. Contracts detail agreements with clients, suppliers, or partners, demonstrating the business relationships and financial obligations that may affect taxable income. Financial statements summarize the overall financial position and performance of a business, offering a clear picture of profits, losses, and financial activities, which are vital for tax calculations. Reliance on only tax returns, invoices from suppliers, or loose papers with transactions would not provide the comprehensive and reliable documentation needed to comply with tax regulations effectively. Tax returns alone lack the underlying proof of transactions, while invoices are typically specific to purchases and may not capture all necessary details across various financial activities. Loose papers can lead to ambiguities, making it difficult to establish a clear audit trail, which is essential in case of scrutiny by tax authorities.