Company gets an insurance payout for loss of gross profit which covers a period of 12 months from date of loss.
Payments are made almost immediately and at intervals as no dispute about loss amounts. A final settlement amount is agreed and paid for the whole of the 12 months period covered which still has some time to run. The insurance period of 12 months straddles two financial/tax years with the payments all falling within the one tax year.
The question is this. For accounting purposes we reflect it in the financial year when received. For yax purposes can we reflect the receipt over the 12 months, that is two tax years? The tax effect is the same either way but the tax payment liability is now spread ove two years. An obvious advantage.
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Tax treatment follows accounting treatment...
... subject to any rule of law to the contrary.
But why is the accounting treatment to recognise the income only when received?
I had this not so long ago!
We knew, from the insurance broker, the period that the compensation was for, which in our client's case was to compensate him for the period from the date his factory was burnt down, up to the date he expected to re open the factory.
That being the case, we included the insurance proceeds over the accounting period, spreading in accordance with the assessors best estimate as to what period and quantum it related to.
As an example, a larger amount related to the period straight after the fire, a smaller amount towards the end as he was able to genreate income (though not so profitabiltiy) by outsourcing.
As I said in my ealrier post, the taxed treatment will follow the accounting treatment - so here - in your example - if it is pro rated on a time basis - 5/12 would be to the following period.
But.... I would say, it would be possbile, like in my example, to allocate on a diffetent basis, if you can justify the argument like I could with mine!