2.8 The above may be a little confusing: the simplest way to understand this is to recognise that the taxable profits are increased by the increase in the general bad debt provision in the period - as such an increase is not deductible. In a similar way the taxable profits are reduced by any reduction in the general bad debt provision. In this period the general provision has reduced from £350,000 to £270,000. The net effect is a reduction in the taxable profits of £80,000. 2.9 The unpaid pension contribution works in the same way as the general bad debt provision but is probably a little easier to understand: there was an unpaid pension contribution of £80,000 at last year end and this was paid in the first month of the current year. There is an unpaid pension contribution at the current year end of £110,000 and this is paid in the first month of the following year. By adding back £110,000 and deducting £80,000, the tax deduction is equivalent to the pension contributions that have been paid in the year. Tax relief is only given in respect of pension contributions as they are paid. The net effect of these two adjustments is therefore an increase in the taxable profits of £30,000. 2.10 There is no need to make any adjustments in respect of the specific bad debt provisions: they are deductible if they are a fair reflection of the realistic losses (net of the recoverable VAT) on the recovery of the debts in question. 2.11 There are losses brought forward from earlier years of £580,000. Under the provisions of Section 393, ICTA the losses can be carried forward and set off for the purposes of corporation tax against any future profits of the same trade. In the UK tax regime these tax losses have an infinite shelf-life. This contrasts with the situation in some other jurisdictions in which tax losses cease to be available after a set period of years. These tax losses therefore reduce the taxable profits. The taxable profits are therefore £1,000,000. As the company has an associated company the profits are taxable at the full rate of 28%. The tax on these profits is therefore £280,000. 2.12 The above example assumes that there are no loan relationships and that there are no other sources of income, such as rental income. If there were any such transactions included in the profit for the year, they would need to be extracted from the trading profits and treated separately. One of the reasons for this is that the tax losses brought forward can only be used to cover trading profits. It is therefore quite common for a company to have losses brought forward which cannot be used to cover interest income or rental income in the company. 2.13 In the next chapter we explore the deferred tax charge which is shown above at a figure of £168,000. Suffice it to say that the total tax charge does make sense when compared to the profits made by the company: the profits are £1,500,000 and these are then increased to a profit of £1,600,000 once the two absolute adjustments have been made. At a tax rate of 28%, this gives a tax charge of £448,000 (£1,600,000 x 28%). The effective tax rate on the accounts profits is 448,000/1,500,000, which is 29.87%. The rate of tax has therefore moved from 28% to 29.87% due to the disallowed legal costs and entertaining expenses.
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