Opening general bad debt provision Opening unpaid pension contribution
(350,000) (80,000) ________ 1,580,000 (580,000) _________ 1,000,000
Adjusted profit for the year
Less: Losses brought forward
Taxable profits
Corporation Tax payable at 28% Deferred Tax charge at 28%
280,000 168,000 _______ 448,000
Total tax charge
2.4 The first point to make is that the above computation is not in a statutory format: it has been presented in the way set out above in order to illustrate some of the points involved. 2.5 We have grouped together the disallowed legal costs and entertaining expenditure and these have been shown as absolute adjustments. The reason for this is that these adjustments never reverse: they result in an increase in the effective rate of tax of the company. There is no corresponding benefit in another accounting period. If a company is in a market sector where it has to incur very large amounts of entertaining expenditure, equivalent to an average of 10% of accounting profits, the effective rate of tax payable by that company will not be 28% but rather 30.8% (that is 28% plus 2.8%). 2.6 There is an increase in the taxable profits of £392,000 in respect of depreciation. Depreciation is a charge to spread the costs of the fixed assets used in the company over their estimated useful life. With the exception of leased assets and purchased goodwill and intangibles, depreciation is not a deductible cost for tax purposes. In this case the depreciation is at a mixture of rates: it is 33% for computer equipment, 25% for commercial vehicles and 10% for racking and other equipment. These are rates selected by the directors, and they have decided that the above rates will be applied to the original cost of the assets on a straight line basis. This means that the cost of a vehicle is charged to the annual profit and loss account in four equal instalments. The UK tax system includes a system of capital allowances which provide a form of depreciation tax allowance for capital expenditure. In the example of Hauleigh Horsegear Limited the capital allowances amount to £362,000, and these capital allowances reduce the profits chargeable to tax. 2.7 At the end of the year the closing balance sheet includes a general bad debt provision of £270,000. Such a tax provision is not deductible for tax purposes. Only bad debt provisions which are specific and appropriate for the circumstances of the individual debtor balances are deductible for tax purposes. It is therefore necessary to increase the taxable profits by £270,000. However the opening balance sheet had a similar provision of £350,000 which was not deducted for corporation tax purposes. This is therefore deducted in the current period.
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