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Can you reduce the deferred tax provision

Can you reduce the deferred tax provision by the value of the taxable loss

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We have a limited company client with a small profit £17,000 (the turnover is currently £1.5 million) which has purchased £800,000 of fixed assets, the deferred tax provision this year is circa £150,000 throwing the bottom line into disarray, I was advised that the deferred tax could be reduced by the value of the tax on the loss created. I cant follow this through, does this sound plausible. Thanks

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Psycho
By Wilson Philips
05th Oct 2021 12:07

It would be normal to offset the amount of a deferred asset arising from trading losses against liabilities arising from accelerated capital allowances (but not normally to recognise any asset in excess of that amount).

But what loss are you taking about - you say the company has a small profit.

Please don't tell me that you're talking about the post-tax loss created by the deferred tax liability.

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Replying to Wilson Philips:
By johngroganjga
05th Oct 2021 12:16

Wilson Philips wrote:

But what loss are you taking about - you say the company has a small profit.

Presumably a tax loss after AIA on the £800k capital spend.

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Replying to johngroganjga:
Psycho
By Wilson Philips
05th Oct 2021 12:42

Possibly - but it's far from clear from the question as to whether the £17k profit is an accounts profit or a tax profit.

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Replying to johngroganjga:
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By CW2012
05th Oct 2021 13:02

Yes a tax loss due to AIA

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Replying to Wilson Philips:
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By CW2012
05th Oct 2021 12:20

Please don't tell me that you're talking about the post-tax loss created by the deferred tax liability.

When you say "I "was talking about, that's the bit I couldn't follow the logic on using the tax effect of the deferred tax to reduce the deferred tax, now the point is nice and clear, I couldn't work out where this person was coming from, thank you for clearing this up.

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By johngroganjga
05th Oct 2021 12:13

I agree with the above. If you need to ask this question you can’t have done a tax reconciliation, or at least you can’t have done one which balances. I will give you the same advice I have given many times before over many years. NEVER prepare a deferred tax computation without doing a tax reconciliation at the same time.

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By adam.arca
05th Oct 2021 13:19

Agree with John, you should ALWAYS prepare a proof of tax: they're not even that difficult to do (most of the time) if you can get your hands on a template.

And, yes, the tax losses do reduce the DT (subject to WP's concerns). When I was training, these were called short-term timing differences but they've probably got a new fancy name now.

Without wishing to teach you to suck eggs, the important thing to know about DT is that it isn't just a fixed asset thing but a calculation which covers all timing differences between accounting and taxable profits, otherwise (as you have noticed) the tax charge in the accounts bears no relationship to the profit in the accounts.

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