Hanson Products Ltd is a newly formed company. The company commenced trading on 1 January 20X1…
Hanson Products Ltd is a newly formed company. The company commenced trading on 1 January 20X1 when it purchased an item of plant and equipment for $240,000. The plant and equipment has an expected life of five years with zero residual value, and will be depreciated on a straight-line basis on cost over that period. The company’s profits before depreciation (of the plant) are expected to be $1 million each year.
Tax allowances for plant are a 40% initial allowance with an annual 25% writing-down allowance on tax written-down value in subsequent years. The company will have a life of five years and, on closure, any unused tax allowances will be allowed as a deduction from the final year’s taxable profit.
The rate of corporation tax is 20%. The company does not provide for deferred taxation.
(a) For each of the years from 20X1 to 20X5, calculate:
(i) the capital allowances,
(ii) the taxable profit,
(iii) the tax payable on the year’s profit.
(b) Discuss the advantages and disadvantages of not providing for deferred taxation.