- September 1, 2021 at 8:04 pm #633872
If one year delay in Tax (i.e. Tax is in arrears):
1) If First CashFlow is on first day of accounting period then First Tax-effect is at Time 2
2) If First CashFlow is on last day of accounting period then First Tax-effect is at Time 1
For (1) that means if any cashflow occur on the first day of accounting period then first Tax or Tax-saving would be at Time 2 such as the lease payment which occurs at the start of the year so the tax-saving on lease payment would be at Time 2;
For (2) that means that if any cashflow occur at the last day of accounting period then first Tax or Tax-saving would be at Time 1 such as when machine was bought on last day of the year so the tax-saving on Capital Allowance would be at Time 1;
3) We have to look for each cashflows whether they occur on first day or last day of accounting period so it can be decided that tax effect will be on Time 2 (if first cashflow occur on first day) or Time 1 (if first cashflow occur on last day) according to the rule that you gave in your video.
Please explain if you find me wrong!September 2, 2021 at 7:16 am #633905
Tax is always calculated on the last day of the accounting period. If tax is payable one year in arrears the the tax cash flow is one year after the end of the accounting period.
If a cash flow is on the first day of an accounting period then the tax flow is 2 years later.
If the cash flow is on the last day of an accounting period then the tax flow is 1 year later.
Usually when a machine is purchased it is purchased on the first day of an accounting period (time 0) and so the first tax saving on the allowances is at time 2.
In this example the machine is purchased on the last day of the current accounting period (time 0) and so the first tax saving is sat time 1.September 2, 2021 at 10:03 am #633951
Thanks for your answer 🙂 You’re Great.
Please comment on these questions too.
1) It could be any cash flow whether Lease payment; Capital Allowance; or any other cash flow and we have to look whether if the first cash flow is on first day then tax effect is on Time 2; Otherwise it is on last day then tax effect is on Time 1 BUT I wanna know it is for any cash flow (right?)
2) If any cash flow says that it occur on the first day then its tax effect would be on Time 2
3) However, if any cash flow says that it occurs on the last day then its tax effect would be on Time 1
4) Any cash flow can be given in the exam question and we have to see whether it effectively happen on first day or last day of accounting period and then their tax effect would be either at Time 2 or Time 1.
This is what i have understood from your answer. Is it correct way sir?September 2, 2021 at 3:40 pm #633997
1. The rules apply to any cash flow, but what you have typed is not correct. Read my previous reply again.
2. That is correct.
3. That is not correct. Read the third paragraph of my previous reply.
4. True, although as I make clear we always assume that operating flows occur on the last day of an accounting period and that the initial investment occurs on the first day of an accounting period, unless told otherwise (and lease buy questions are the most likely place to be told otherwise, as in my lecture example.)September 2, 2021 at 10:18 pm #634048
Thanks for your continuous help SIR, I admire your energy.
1) If we have current financial starts at 1 Jan 2017 being Time 0 then any cash flow which is payable at the end of the first year would be on 31 Dec 2017 at Time 1 because one day difference would not make any problem so we pay it at 31 Dec 2018 at Time 2because tax is in arrears
2) Just like the machine was bought on the last day of the accounting period so the tax is immediately calculated on the very last day 31 Dec 2016 at Time 0; So similarly if any cash flow is on the last day of the current financial year it would be treated same and its tax effect would be on Time (exactly like the Tax-saving on CA)?
Is that correct too?September 3, 2021 at 8:31 am #634097
1 is correct
2 is also correct assuming in the last sentence you intended to write ‘Time 1’.
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