the fixed assets and capital allowances are rather more opaque. However, we can confirm that the movements in respect of both the net book amount of the fixed assets and the capital allowance pools, will be consistent between the profit and loss account and the balance sheet. Such is the apparent alchemy of deferred tax accounting. 1.14 Happily there is no need for this to remain as alchemy: this occurs as the same figures are added to the capital allowance pool as are added to the net book amount of fixed assets in respect of additions. Regardless of rates of writing down allowance, the existence of long-life assets or short-life assets, the capital allowance pools will be increased in aggregate by the increase in the eligible fixed assets. In the same way, the disposal proceeds will be deducted from the capital allowance pools. The net book amount of the fixed assets will be reduced on the disposal of assets: the net book amount disposed of and the profit or loss on disposal will aggregate to the same as the proceeds. 2.1 It is very understandable that the legal profession has viewed deferred tax with a mixture of suspicion and hostility: deferred tax has been in existence for a considerable period, but there have been different accounting standards which have governed its use. 2.2 Much of the suspicion of deferred taxation, and the belief that it is entirely subjective in its application, and should therefore play no part in legal documents, is based on Statement of Standard Accounting Practice 15. This standard was wrestling with the problems arising from deferred tax accounting in times of high inflation. In the crucible of the 1970’s there were very high rates of inflation and also a front-end loading of capital allowances: 100% allowances were given in the year of acquisition of plant and equipment. In addition to this, for a period there was a tax allowance given for increases in the levels of closing stocks. These heady ingredients mixed to give a potent brew: the financial statements of companies trading in such times were showing ever-increasing deferred taxation provisions, with no apparent prospect of reversal. 2.3 The response to these challenges was SSAP 15: this enabled companies to follow a policy of partial provisioning. Provided that forecasts were produced which showed ever-increasing capital expenditure, no provision was needed for the tax arising in respect of the accelerated capital allowances. This then enabled the tax charge in the accounts to be lower than the headline rate: provided that there was a combination of relatively high levels of inflation and high levels of first year allowances, this gave a better reflection of the effective rate of tax being paid by capital-intensive companies. 2.4 The subjectivity inherent within SSAP 15 inevitably meant that it was viewed with some considerable caution: different assumptions in budgets could have a material impact on the amounts of deferred tax that were provided in the financial statements. It was therefore perhaps no surprise that the deferred tax provision was given a wide berth by those dealing with tax covenants. 2 The Accounting Standards
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