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Hi John,
How are you? I hope you’re doing good during this pandemic. I have passed my PM from watching your lectures. Words can’t describe how thankful I am to you!
You have definitely touched many students’ lives and mine, of course as well!
My QUESTION is, if tax is payable one year in arrears, means it is in year 2, am I right?
If the question says the capital allowance will be claimed at the start of project life (year 0), does it mean we will claim the capital allowance in year 1?
In conclusion, for this question, the timing for the capital allowance will be at year 1 and tax will be paid in year 2?
Based on my understanding from your lectures, the timing for the capital allowance claimed must be the same as the year the tax is paid?
Thank you for your comments and congratulations on passing Paper PM 🙂
If tax is payable one year in arrears, then it is payable one year after the end of the accounting period.
Capital allowances are calculated at the end of the accounting period and the tax saving will occur one year later (assuming the question does say there is a one year delay).
So if an asset is purchased on the first day of an accounting period (time 0) the capital allowances will be calculated at the end of the period (time 1) and the tax saving will be one year later, so at time 2.
If on the other hand, an asset is purchased on the last day of an accounting period (time 0) then the capital allowances are calculated immediately (time 0) and the tax saving will be one year later (time 1).
In most questions it is the first of these two situations that applies. The second situation is usually only relevant in questions on lease and buy, and is explained in my lectures on lease and buy.
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