1.7.2 In earlier years the capital allowances will have exceeded the depreciation charge. So that these years did not gain the benefit of a lower tax charge, and knowing that the reverse would apply in the future, the reduced tax charge of that earlier year was increased by a deferred tax charge. The opposite now applies and there is a deferred tax credit of £30,000 (£392,000 - £362,000) at 28% which is £8,400.
1.7.3 The closing bad debt provision is £270,000 but the opening bad debt provision was £350,000. The difference between the two is £80,000. As this provision was not treated as deductible for tax purposes when it was created, its release is similarly non taxable. A general bad debt provision should always reverse at some stage: it is either released to the profit and loss account, giving a tax-free boost, or it is allocated against specific debts, at which point it becomes a deductible provision. 1.7.4 When the general bad debt provision was created there was a charge in the profit and loss account but no tax relief granted. Therefore this triggered a deferred tax credit, in recognition that this credit would reverse when the general bad debt provision was released. There is a partial release in the current year and this therefore leads to a deferred tax charge of £80,000 at 28% which is £22,400. 1.7.5 The unpaid pension contribution works in a similar way: this is £110,000 at the year end and was £80,000 at the prior year end. By adding back the closing unpaid contribution and deducting the opening unpaid contribution the charge in the accounts is effectively switched from a matching or accruals basis onto a cash basis. Therefore the pension contributions which are deductible are those paid in the year which are £30,000 (£110,000 less £80,000) lower than those which were charged in the year. This therefore leads to a deferred tax credit of £30,000 at 28% which is £8,400. 1.7.6 The final adjustment for the year is in respect of the tax losses brought forward: these were £580,000 at the last year end. The Company had made losses in the two earlier years: the directors therefore recognised a tax credit in the accounts of the two years in which these losses had arisen. If they had not done this, the Company would have made a loss before taxation, with no tax credit in respect of those losses. Now that the losses are being utilised there is a deferred tax charge, which is computed as £580,000 at 28% which is £162,400.
1.8 We can therefore summarise the ingredients of the deferred tax charge in the year:
Gross
Net at 28%
Depreciation in excess of capital allowances
(30,000)
(8,400)
Decrease in general bad debt provision
80,000
22,400
Increase in unpaid pension contribution
(30,000)
(8,400)
Use of tax losses brought forward
580,000
162,400
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