How To Make Profits And Pay No Tax - Case Study #2

Or why it is sometimes difficult to understand a company's tax bill.....

Take a company which has made a £100k profit BUT £85k of this is from selling an asset, such as a specialist equipment.

If the asset originally cost £100k in 2012 was depreciated in the accounts by £95k, the accounts would show a 'book value' of £5k as the company expected it to be obsolete pretty quickly. Happily they happened to find a buyer in eastern Europe willing to pay £90k for this particular model. Therefore, proceeds of £90k - 'book value' of £5k = a profit of £85k in the company's accounts.

For corporation tax purposes, in this year the 100% tax allowance was low and had been used on other assets. This asset could only claim tax allowances of 18% reducing balance, the 'normal' rate at the time. The 'tax value' is therefore £54k (£100k - £18k - £15k - £13k).

When the asset is sold, the £90k proceeds are offset against the £54k so that overall the company only claims allowances on its net spend of £10k (£100k - £90k). Some of its earlier capital allowances are reversed and £36k (£90k - £54k) is charged on the company. Happily the company can offset this by claiming 100% allowances on the replacement asset costing £60k.

Overall, the company has made a large profit but its tax bill is £Nil:

• Profits in the accounts are £100k, but taxable profits have become tax losses of £9k
• (£100k profits - £85k asset book profit + £36k reversal of tax allowances - £60k new tax allowances).

By looking at the accounts you'd expect its tax bill to be:

• 20% of £100k = £20k tax due.

After these adjustments there is a tax refund of:

• 20% of a £9k loss = £2k refund from the year before.

These are a very particular set of circumstances to illustrate that the profit in your accounts isn't always a good indication of the tax that's due.