CORRECT TO ADD BACK?

DEPRECIATION

PRESENTED BY:

Swati MotwaniSuvasmita RoutVaishali Vaishishtha

Introduction To understand, correct to add back the depreciation while preparing tax computations

Reference case : Distillery Business

The House of Lords decision, which ruled unanimously in favor of the taxpayers, i.e. add back of the net depreciation.

PREDICAMENTo Case of a distillery business- It consisted of distillation and

maturation of whiskey.

o As part of the maturation process, the whiskey was stored in casks for a number of years.

o The depreciation of the casks was included in the figure for stock.

o The effect was that the depreciation of those casks was not charged to the P&L A/C in the years that the whiskey was stored in the casks.

o When whiskey was sold depreciation was charged to the P&L A/C in that year.

TAX TREATMENT

For determining the treatment of the depreciation for tax purpose:

o Depreciation which was included in stock should not be added back in tax computation because it had been not charged to P&L A/C and was not included in PBT figure.

o When whiskey was sold , dep. was added in tax computation as it had been charged to P&L A/C.

U.K CASE LAWS U.K Tax Cases:

(1.) U.K High Court / Scottish Court of session.

(2.) U.K House of Lords.

o Judgment was delivered in House of Lords on 28 march 2007.

o Tax Payers

Mars U.K LTD. (Mars), makes confectionery and pet food.

William Grant & Sons Distillers Ltd.(Grant),makes Scottish whiskey.

The Arguments In Favor and AgainstRevenue's argument was that, the taxpayers must be deemed to have deducted the full amount of depreciation and then added a sum equal to the amount of depreciation being included in closing stock back into profits. Hence, the full amount of depreciation should be added back in the tax computation.

The taxpayer's argument was that it was only the net depreciation figure that was deducted in the computation of profits in accordance with generally accepted accounting practice. Hence, the net amount should be added back in the tax computation.

11/30/14

› (Net Depreciation) - The full amount of depreciation less the credit adjustment is referred to in this article as the Net depreciation.

› full amt. of dep. Refers to the amt. of dep. On the whiskeys sold in a year plus the amt. of dep. Of casks which are not being sold in that year.

› credit adjustment refers to the amt . Of depreciation of the whiskeys (casks) being sold in that year

› For example: lets assume full amt. of dep. Is 35000 and credit adjustment is 15,000. so net depreciation is 20,000(35,000- 15,000).

ACCOUNTING TREATMENT In computing tax, starting point is PBT.

Accounting treatment for depreciation (77 of FRS 15):

It lays year’s dep. Shown in balance sheet, should be deducted in that years P&L A/C.

Exception for a case: The depreciation charge for each period should be recognized as an expense in the profit and loss account, Exception ''permitted to be included in the carrying amount of another asset''

Carrying forward an appropriate part of the depreciation as part of the cost of stocks, to be deducted as and when the stocks are sold in a future year.

According to tax computation perspective, only net deprecation amount should be add back.

11/30/14

› UK House of Lords ruled in favor of the taxpayer in the appeal and ruled that only the net depreciation, which was in effect charged to the profit and loss account, should be added back in the tax computation. So the casks can go back to doing what they were built

› to do - protecting that precious liquid until it matures!

CONCLUSION

11/30/14

THANK YOU!!!