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Is it correct that Capital Allowance occurs in the same year as the Taxation?
I have seen a lot of NPV questions in BPP kit where capital allowances occur in the same year as taxation; if taxation is in arrears then capital allowances is also in arrears BUT you said in the lease & buy lecture that capital allowances occur in the year of the purchase of machine (investment – Yr 0).
Please help me with this!
There is no such thing as year 0.
0, 1, 2 etc are points in time that are one year apart.
Time 0 is the start of the first year
Time 1 is the end of the first year / start of the second year
Time 2 is the end of the second year / start of the third year.
and so on.Capital allowance are calculated at the end of each year and so the first calculation is at the end of the first year.
The first tax saving that results is either therefore at time 1 (if there is no delay in tax) or is at time 2 (if there is a 1 year delay in tax as is more usually the case in the exam).All of this is explained in my free lectures on investment appraisal with tax.
So Capital Allowance & Taxation both are calculated at the end of each year so the first calculation is at the end of the first year (Time 1 – if there is no delay in tax)
OR
If tax is in arrears then it is at (Time 2 – if there is a one year delay in tax)I totally get this right 🙂 Thanks to you!
BUT in the LEASE & BUY example of the notes why do you put the capital allowance at Time 1 but Tax at Time 2 because as u said above that both are calculated at the end of each year so the period or TIME would have been the same?
In the example, the machine was bought on the last day of the current financial year (time 0).
Therefore the first capital allowance is calculated on the same day (time 0) and the tax saving is one year later (time 1).I do explain this in the lecture working through the example.
Sir you did not say whether what I said in my latest response is correct or not about (let me quote here)
“Capital Allowance & Taxation both are calculated at the end of each year so they occur at the same TIME, the first calculation is at the end of the first year (Time 1 – if there is no delay in tax)
OR
If tax is in arrears then ithe first calculation is at the end of the second year (Time 2 – if there is a one year delay in tax)”This is the standard for every NPV questions but for Lease n buy question we have to be careful about the wordings (but not in other ordinary NPV questions in the exam). True?
I corrected your post in my earlier reply!!!
The calculation of the capital allowances and the tax is done at the end of each year. The tax is actually payable either immediately or one year later depending on what is written in the question.
You have to be careful about the wording in all NPV questions.
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