Writing Down Allowances Calculated Incorrectly

Does anyone else have an issue with Iris Business Tax calculating WDAs at 19.98% instead of 20%? This is happening for me on every client that I work on. There's no hybrid rate calculation shown so it's not related to a change in tax rate.

Comments

Sort of, yes

colinhigginson | | Permalink

I hadn't noticed, but I have just checked and yes, it is working out at 19.98% but it is always rounding up - so £1002 x 19.98% = £200.20 will be rounded up to £201. Even a client with a pool of over £150k only comes out about £30 different so I won't lose any sleep over it.

Agreed, I wouldn't worry too

dave_young | | Permalink

Agreed, I wouldn't worry too much for most clients but I first noticed it on a client with a pool of £4.5million so it made a fair bit of difference to their taxable profits!

Hmmmm - a whopping £900.

colinhigginson | | Permalink

Even at the full rate, that's tax of £252.

But isn't the point..

Chris Floyd | | Permalink

..that IRIS should have got this right?

How hard can it be to write a program that calculates 20% of something? And how can this turn into 19.98%.

If it was the other way round, you could put it down to rounding.  Have IRIS managed to invent 'un-rounding'?

Found the answer    2 thanks

dave_young | | Permalink

Turns out that it's because of the leap year in 2012, according to Iris's knowledge base item 10123, which states:

"With guidance from HMRC and the SDS team, where the chargeable period concerned does not coincide with a tax year or financial year, the following formula is applied in relation to each tax of financial year in which part of the period falls, and the resulting amounts are added together to find the writing-down allowance. The formula is:

(DCPY/DCP) x WDA

where
DCPY = the number of days in the chargeable period which falls within the year in question;
DCP = the total number of days in the chargeable period;
WDA = the normal writing-down allowance, i.e. the allowance to which the person would have been entitled had it not been for the phasing out of allowances.

Therefore, based on this calculation;
Accounting Period: 01/07/2010 - 30/06/2011

1st Apportionment/Tax Year: (01/07/2010 - 31/03/2011) 274/365 x 20% = 15.0137%
2nd Apportionment/Tax Year: (01/04/2011 - 30/06/2011) 91/366 x 20% = 4.9727%

WDA = 15.0137% + 4.9727% = 19.99%

Even though the WDA percentage is the same for both tax years, it is due to the fact that in the 2nd Tax there is 366 days instead of 365 days. This will always occur regardless when there is a change in the rate or not, because there are times where we will have 366 days or 365 days. Users can still choose to override the rate if they feel that this is incorrect.

Previously we were apportioning the period over 366 days if the accounting period straddled a leap year. When in fact what we should have been doing is splitting the accounting period between the leap year and the year which is not a leap year and then apportioning.

So in the example above we are now correctly using 365 days for the 2011 financial year and 366 days for the 2012 financial year. Whereas previously we would have been using 366 days for both."

 

Thanks Dave    1 thanks

Chris Floyd | | Permalink

Thank you for explaining that so well.

I had wondered if it was due to the leap year after I had posted my previous comment, but didn't get chance to work it out.

Good to know IRIS have got it correct.

That's not even half the story !

halblackburn | | Permalink

Developing your example -  by looking at the accounting period ended 30/6/2012  the relevant fractions are 275/366 and 91/365 which lead to:

((275/366)+(91/365)) x 20% = 20.0136%

so the lost percentage of the first year is recouped in the second year.

Furthermore, a slightly smaller WD % in the first year gives a larger TWDV on which to apply the second year's slightly larger WD %. So over the two year period the total WDA given is a little greater than if the WD % had been exactly 20% in each year.  Thank you HMRC.

 

Disagree I am afraid with what IRIS is doing    1 thanks

shah | | Permalink

I agree with the formula they are using 

(DCPY/DCP) x WDA

 

where
DCPY = the number of days in the chargeable period which falls within the year in question;
DCP = the total number of days in the chargeable period;
WDA = the normal writing-down allowance, i.e. the allowance to which the person would have been entitled had it not been for the phasing out of allowances.

Also agree with (01/07/10 - 31/03/2011) 274/365 too.

What I disagree with is this bit (01/04/2011 – 30/06/2011) 91/366 x 20%. I think the denominator should be 365 days using the same formula as what IRIS put up on their KB. I do not understand how can they say this is the formula and then change the value for the denominator for the second half of the accounting period? Well they could come back with the usual banter that DCP= ''Chargeable period'' is the FY. Well it is not, have a look at this http://www.hmrc.gov.uk/manuals/camanual/ca34600.htm. You should see in the example how HMRC interpreted the very same formula. 

 

 

Mixed denomiators not allowed

shirley knott | | Permalink

I quite agree with shah's comment that denominators can't be mixed and his reference to http://www.hmrc.gov.uk/manuals/camanual/ca34600.htm

It seems Iris are wrong to think DCP changes between slices of the chargeable period.  Surely the logical way to approach this is I've one period of 365, 366, or perhaps more if the accounting date has changed?, days and it needs splitting into chunks with the obvious denominator being the number of days, common to all chunks.

Do Iris still peddle their opinion?  Can they provide a reference to where HMRC give a calculation that backs them up?  If the periods straddled by the CP are both 20% then the CP is 20% too.

If I'm wrong, please correct me.  I want to understand!  :-)

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