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In this example, we had tax savings more than the tax, so that would mean that in the CT600 we would report a taxable loss after the capital allowances.
However, as per my understanding we will not get that extra tax saving back as cash, unless we carry that loss back against the last year’s profit and request HMRC to refund the tax paid on last year’s CT600.
So, could you please advise why Sir (Tutor) added the tax saving into the total cash flow (in lecture 3, CH 8) as it should not affect the actual cash position?
We have added the tax saving to the cash flow because, in investment appraisal, we assume a “going concern” company that has other profitable income to offset the loss against, or the ability to carry back the loss to obtain a prompt refund.
Represents a reduction in future cash outflows (tax pymts) or an increase in future inflows (refunds).
It improves the overall profitability of the investment.
Ignoring it would understate the net cash flow of the project.In summary, the tax saving is treated as a positive cash flow because it represents a real cash saving—either by not paying tax on other profits or by reducing the tax paid in a previous period via a claim on the CT600.
Hope this helps
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