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John Moffat.
John Moffat.-
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Syed Ahsan Ali
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Could you please tell me about the Timings of Taxation & Capital Allowance (TAD).
I know that Time 0, Time 1 and so on are not years but rather points in time that are 1 year apart.
Time 0 is the start of the first year
Time 1 is the end of the first year / start of the second year
Time 2 is the end of the second year / start of the third year
So on and So forth…1) Tax is calculated at the end of the accounting period which is [Time 1] (obviously one-day difference doesn’t make any difference at all) and if tax is one year in arrears then the tax cashflow is one year after the end of the accounting period [Time 2].
2) If the machine is bought on the first day of an accounting period at [Time 0] then the first TAD is calculated at the end of the year at [Time 1] and the tax-saving occurs one year later at [Time 2]
3) If the machine is bought on the last day of an accounting period at [Time 0] then the first TAD is calculated immediately at [Time 0] and the tax-saving occurs one year later at [Time 1]
Can you please correct me if I am wrong anywhere and also explain what does the tax-saving refers to? Is this the tax saving that we received on lease rentals?
John Moffat
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All is correct (assuming that tax is payable one year in arrears).
The tax saving on tax allowable depreciation (capital allowances) is nothing to do with leasing. The taxable profit is reduced by the TAD and therefore tax is saved.
If an asset is leased instead of being bought, then the lease payments reduce the taxable profit which results in a saving of tax.
This is all explained in my free lectures on investment appraisal with tax, and on lease versus buy.
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