Finance act 2015 anyone familiar?
Discussion
In the accounts for northern power grid holdings for the year to 31 Dec 2015, the effective rate of taxation is 8.3%
"The effective tax rate before adjusting for the impact of the changes in tax rates by the finance act 2015 would be 18.3%"
How did the company get that much saving from that finance act?
"The effective tax rate before adjusting for the impact of the changes in tax rates by the finance act 2015 would be 18.3%"
How did the company get that much saving from that finance act?
Short answer: FA2015 reduced the Corporation Tax rates which reduced their Deferred Tax liability which they credit to the P&L.
Long answer: A company's accounting profit is calculated after deducting depreciation. However, in the calculation of taxable profit, depreciation is not deducted and instead companies are given capital allowances to write down the investment for tax. The rate at which assets are written down for tax is often faster than the rate they are depreciated at for accounting purposes. For example, their main asset is the distribution system, which they depreciate over 45 years whereas as a long life asset they are probably claiming the capital allowances in the special rate pool of 8% (ie written down over 12.5 years). Hence 'accelerated tax depreciation'.
The result is that their taxable profit is initially lower than their accounting profit (for the 12.5 years) but once the asset is fully written down for tax, the situation reverses (the next 32.5 years). This timing difference is recognised in the accounts as a Deferred Tax Liability - that is the deferred tax due in the difference between depreciation and capital allowances.
The tax rate used to calculate deferred tax is the rate expected to apply when you reverse the taxable differences. Hence the opening DT balance was probably calculated at the previously expected rate of 20%. However FA 2015 enacted cuts in the Corp Tax rate to 19% from April 2017 and the 18% from April 2020 (since accelerated to 17% in FA 2016). As a result, this has reduced the deferred tax liability. The large credits you see in the tax reconciliation and deferred tax note is the impact of changing from 20% to a mix of 19%/18%.
Effectively: Opening DT balance - ((Opening DT balance / .20) * .19)
It has a relatively large impact on the tax reconciliation since ther asset base is very large compared to annual profits.
Long answer: A company's accounting profit is calculated after deducting depreciation. However, in the calculation of taxable profit, depreciation is not deducted and instead companies are given capital allowances to write down the investment for tax. The rate at which assets are written down for tax is often faster than the rate they are depreciated at for accounting purposes. For example, their main asset is the distribution system, which they depreciate over 45 years whereas as a long life asset they are probably claiming the capital allowances in the special rate pool of 8% (ie written down over 12.5 years). Hence 'accelerated tax depreciation'.
The result is that their taxable profit is initially lower than their accounting profit (for the 12.5 years) but once the asset is fully written down for tax, the situation reverses (the next 32.5 years). This timing difference is recognised in the accounts as a Deferred Tax Liability - that is the deferred tax due in the difference between depreciation and capital allowances.
The tax rate used to calculate deferred tax is the rate expected to apply when you reverse the taxable differences. Hence the opening DT balance was probably calculated at the previously expected rate of 20%. However FA 2015 enacted cuts in the Corp Tax rate to 19% from April 2017 and the 18% from April 2020 (since accelerated to 17% in FA 2016). As a result, this has reduced the deferred tax liability. The large credits you see in the tax reconciliation and deferred tax note is the impact of changing from 20% to a mix of 19%/18%.
Effectively: Opening DT balance - ((Opening DT balance / .20) * .19)
It has a relatively large impact on the tax reconciliation since ther asset base is very large compared to annual profits.
ninja-lewis said:
The result is that their taxable profit is initially lower than their accounting profit (for the 12.5 years) but once the asset is fully written down for tax, the situation reverses (the next 32.5 years). This timing difference is recognised in the accounts as a Deferred Tax Liability - that is the deferred tax due in the difference between depreciation and capital allowances.
I can see that happening for that particular asset but I assume they would be looking at investing in other assets during the 12.5 year period?Deferred tax adjustments occur for other reasons besides the difference between Capital Allowance rates and Depreciation Rates. In fact, in any set of accounts there may be quite a few figures showing in the published accounts which refer to items where the accounting treatment is different to the tax treatment. Any of these can give rise to a Deferred Tax adjustment.
This is especially true in large companies because they may have all sorts of complex financial arrangements in place.
This is especially true in large companies because they may have all sorts of complex financial arrangements in place.
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