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Hi Sir
In the December 09 Paper (ASOP Co), a lease versus buy question, it doesn’t specify what date the Machine was purchased, would we still take it that it was purchased at T0 and got a capital allowance at T0 and therefore there’d be 5 capital allowances claimable and so five years of tax savings (for the for years of the project life) ending in T5, because the tax is paid in the year the profits are made?
I think the question I am looking at has been amended in my question bank and so can’t determine if this was an OTQ or Section C question!
Thank you
Given that they need the machine whether they lease it or whether they buy it, both start at the same time, which is always time 0 (now). You would always assume that they buy at the start of the first year (time 0) unless specifically told differently.
Time 0 is the start of the first year.
The capital allowances will be calculated at the end of the first year, which is Time 1 (time 1 is a point in time 12 months after time 1, and is therefore the end of the first year and start of the second year).
Because there is a 1 year delay in tax, the first tax saving on capital allowances will therefore be one year later at time 2.In total there will be 4 capital allowances (3 years at the writing down allowance of 25% reducing balance, and the last year being the balancing allowance or balancing charge). The tax effects will all be delayed 1 year and so will be first at time 2 and last at time 5.
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