Comments

  1. avatar says

    Hello sir,
    I am still a lil stumped when it comes to timing of the tax benefits. Could you please tell me if I am right with respect to the following?
    1) If the machine is bought on the first day of t0 and tax is paid a year in arrears, then the first Capital Allowance (CA) benefit accrues in t2
    2) If the machine is bought on the last day of t0 and tax is paid a year in arrears, the the CA benefit occurs in t1
    What if the machine is bought on the first day of t0 and tax is paid in the same year?! Will the CA be part of t0 cash flows?
    And what if the machine is bought on the last day of t0 and tax is paid in the same year? When will the CA benefits accrue?
    This is one area that has been troubling me!
    Will be indebted if you could sort this out!
    Thanks a ton, and YOU ARE AMAZING!!!

    • Avatar of johnmoffat says

      t0 is a point in time – not a year. You mean year 0, year 1 etc.

      1) If the machine is bought on the first day of t0 and tax is paid a year in arrears, then the first Capital Allowance (CA) benefit accrues in t2
      2) If the machine is bought on the last day of an accounting period and tax is paid a year in arrears, the the CA benefit occurs at time 1

      If the machine is bought on the first day of an accounting period and tax is paid in the same year the CA benefit occurs at time 1 (the CAs are not calculated until the end of the year, which is in 1 years time)

      If the machine is bought on the last day of an accounting period and tax is paid in the same year the CA benefit occurs at time 0.

      • avatar says

        So sir, if the machine has a life of 4 years, and it is bought on the last day of the accounting year, and tax is paid in a year in arrears, why do we consider 5 years of tax benefit?!
        Could you please elaborate situations in which we will consider an extra year of CA benefit?
        Thanks :(

      • Avatar of johnmoffat says

        If you buy on the last day of an accounting period, then you get capital allowances for that year and for each of the four years that you are using it.

        However it is unlikely that you will ever have this situation except in a lease and buy question

      • avatar says

        So,
        If an asset has a life of 4 years, is bought on the first day of the year, and tax is paid in a year in arrears, then we will consider tax benefits from the years y2-y5.

        If it has a life of 4 years, is bought on the last day of the year, tax is paid in arrears, then tax benefits accrue from y1-y5

        If it has a life of 4 years, is bought on the first day of the year, tax is paid in the same year, then CA benefit accrues from y1-y4

        If it has a life of 4 years, is bought on the last day of the year, tax is paid in the same year, then CA benefit accrues from y0-y4
        Am I right?
        Please sort this out! Thanks a lot in advance!

  2. avatar says

    Mr Moffat
    I was trying to do Guestion 9 Ballet plc from the practice questions. I would like to know for a question like this how will i know that the increased costs production starts in the first year and also why the capital allowances start in year 0. I would also like to know why was tax not calculated but instead full capital allowances and tax savings were included.
    Thank you

      • Avatar of johnmoffat says

        The question says that currently production is 10,000 tonnes but that it is growing at 5% p.a.. This implies that next year (i.e. year 1 in the appraisal) the production will be 5% higher (and then 5% higher again in year 2 and so on).

        The writing down allowance is only there as part of workings (to calculate the tax saving) – it has not been included in calculating the net cash flow. So, for example, the net cash flow at time 1 is 0.250 – 0.050 – 0.315 + 0.083 = (0.032)
        Tax has been calculated – but as in my lectures it has been calculated in two parts – the tax on the operating flows (at time 2, 0.315 x 33% = 0.104); and the tax saved on the capital allowances (at time 1, 0.250 x 33% = 0.083).

        Finally, the question says that the machine will be in working order immediately prior to the next financial year. This implies that it was bought in the current financial year, and so capital allowances will be given now – time 0 – and the benefit of the tax saving will be one year later i.e. at time 1.

  3. avatar says

    I’ve just come across Open tuition, and i have to say i am really impressed.

    I am currently a member of Interactive Study, however i will be using Open Tutition as a platform to study whilst at work on my lunch break.

    Nicely put together.

  4. avatar says

    I really appreciate the way u make it easier for us to understand not just learning by heart or reading in the book. I like the last part where you analyse the NPV whether to accept or reject some ideas where in my head frankly speaking but I did not that I am right, Thank you very much Sir

  5. avatar says

    I am enjoying the lectures.
    I however dont get the way the lecturer writes in capital letters all through;ideally capital letters are used for the headings and rest of the stories in small letters

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