Lease versus Buy — OpenTuition Forums

CCharlie6y ago

I have a question about the tax flows in the answer, if we buy the asset. For example 3: Why in this question, do we only show the saving on capital allowances, and not like in the previous cash flows questions, do we not show a negative flow for the cash that would be paid at the relevant tax rate? I’m assuming we would have to pay tax? I prefer the examples when you show the total outflow for the tax that would be paid in full, and then the inflow for the capital allowances we would get. On the other hand, I understand that we save the corporation tax rate on leasing the asset. The timing is tricky to work out as mentioned in your lectures. In the other cash flow questions apart from lease vs buy, what is the best advice for working out which period the tax would be saved or paid? Thank you as always.

John MoffatTutor6y ago#1

But given that we do not know the earnings from the machine (as is usually the case in the exam for lease or buy questions), we cannot possibly calculate the tax payable !!! It is irrelevant anyway because the earnings would be the same whether we lease or buy, and therefore the tax payable on the earnings will be the same. All that is different is the tax saved - either due to the lease payments or due to the capital allowances if we buy. As far as the tax timing in general is concerned, then if there is a one year delay in tax then the rule is: If there is a flow at the start of a year then the tax effect is 2 years later. If there is a flow at the end of a year then the tax effect is 1 year later. I do explain this in my free lectures. (And I do assume that you are not using the notes without watching the lectures because that would be a waste of time :-) They are lecture notes and it is in the lectures that I work through the examples and explain and expand on the lecture notes.)

SSter6y ago#2

"As far as the tax timing in general is concerned, then if there is a one year delay in tax then the rule is: If there is a flow at the start of a year then the tax effect is 2 years later. If there is a flow at the end of a year then the tax effect is 1 year later." So effectively, would the calculations for both flows (start 1st Jan/end of year 31 Dec) be calculated at the same time? For example, Time 2/The end of the 2nd Year for a cash flow occurred at the start of the first year and also for a cash flow occurred at the end of the first year, when there is a 1 year delay/arrear. I got a bit confused at the last part of the lecture.

John MoffatTutor6y ago#3

What you have written is correct. It is because taxable profits are calculated at the end of the accounting period (regardless when the flows were within the period) and then tax tax effect is 1 year after the end of th accounting period.

SSter6y ago#4

Thanks for clearing that up and for your prompt reply! Your lectures are really comprehensive and clear :)

John MoffatTutor6y ago#5

You are welcome, and thank you for your comment :-)

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