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Hi professor,
I would like some clearance regarding Taxation timing in Dcf
In case of lease/buy we assume that cash flows that arise at the beginning of a period (in advance) are taken to arise at the end of the previous period that is time 0.
When taxation comes into play we assume that tax is accounted for at the beginning of time 1(because the 1 day difference is irrelevant) so that if tax is in arrears the first allowance will be received in time 2. (time 1 we do the claim and time 2 we receive it)In the case that cash flows arise during the year these are assumed to occur at the end of the year (end of time 1) so that if tax is in arrears the first tax allowance will also be received in year 2 (time 1 we do the claim and time 2 we receive it).
However I have come across some questions that are an exception to this rule stating that tax allowance is allowable when cash flows occur. In this case if cash flows arise at the beginning of the period the first tax allowance will be in year 1 since in time 0 we do the claim and in time 1 we receive the refund, if on the other hand cash flow arises during the year the first tax allowance will be received in time 2 since in time 1 we do the claim and in time 2 we receive it.
Can you please advise if my reasoning is correct and if these type of “tricks” are common?Thanks in advance for your guidance
Your reasoning is correct, and that is why it is so important to read the question carefully.
It is also vital to show your workings neatly because each part is marked separately and so even if you have misread or made a mistake in the tax timing, then you will still get most of the marks if you have done everything else correctly – provided that the marker can follow what you are doing.
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