Capital allowance

In Blipton, the examiners answer uses the same approach to tax is we take in Paper FM (was Paper F9) where we calculate the tax on the profit before capital allowances and then bring in the tax saving on the capital allowances (or alternatively subtract the capital allowances from the cash flows, then calculate the tax on this, and then add back the capital allowances because they are not a cash flow - either approach gives the same answer as I explain in my free Paper FM lectures on investment appraisal with tax). However, Blipton was set by a previous examiner, and the current examiner always assumes (and usually states in the question) that an amount equal to the capital allowances is needed to maintain the assets. On this assumption, we subtract the allowances to get the taxable profit, then calculate the tax on this figure, but do not then need to add back the allowances because although the allowances are not a cash flow there is an equal cash flow to maintain the assets. I do explain this in my free Paper AFM lectures on investment appraisal. (If that assumption is not stated in the question (but it usually is) then you can deal with the capital allowances either way. The final answer will be different, but that is irrelevant - you would still get full marks. But as always in Paper AFM do state your assumptions always.)

In Blipton, the examiners answer uses the same approach to tax is we take in Paper FM (was Paper F9) where we calculate the tax on the profit before capital allowances and then bring in the tax saving on the capital allowances (or alternatively subtract the capital allowances from the cash flows, then calculate the tax on this, and then add back the capital allowances because they are not a cash flow - either approach gives the same answer as I explain in my free Paper FM lectures on investment appraisal with tax). However, Blipton was set by a previous examiner, and the current examiner always assumes (and usually states in the question) that an amount equal to the capital allowances is needed to maintain the assets. On this assumption, we subtract the allowances to get the taxable profit, then calculate the tax on this figure, but do not then need to add back the allowances because although the allowances are not a cash flow there is an equal cash flow to maintain the assets. I do explain this in my free Paper AFM lectures on investment appraisal. (If that assumption is not stated in the question (but it usually is) then you can deal with the capital allowances either way. The final answer will be different, but that is irrelevant - you would still get full marks. But as always in Paper AFM do state your assumptions always.)

Thank you sir.

You are very welcome :-)