How do you MAKE 40 million pounds from income tax?
I have been looking at the interim annual report of Resolution PLC, the London based life assurance company (the report is available here: http://www.resolutionplc.com/pdfs/investor_ResolutionInterimAnnualReport_2006.pdf ). In their “income statement” on page 18 there is something which I don’t understand. In the half year to 30th June they made of profit of £39.8 M from “income taxes”. The previous periods shown indicate that they expended money due to “income taxes”, as I would expect. Can anyone explain how they could have profited from “income taxes”?
The answer to the question is in the accounts that you attach…..there is a note reference [8] next to the ‘income’ figure from taxes that you refer to.
Go to note 8 to the accounts and you will see that the taxes are split into two distinctive parts.
1. UK Corp Tax – this is a £44m or so charge as you might expect.
2. Deferred taxes
These are temporary tax charges or income based on temporary differences. Although an alien concept I will attempt to explain further…
In certain situations income is earned in one period but it is not taxable in the current period – however, a future occurrence will mean that it is to be taxed in the future period. In this situation a deferred tax liability is recognised in the current year accounts……ie as an expense, even though it is only the future event that will lead to the tax being incurred.
eg Fixed assets are depreciated each year in stat accounts. If a car was depreciated over 5 yrs, in the accounts after 5 yrs it would be worth zero. However, if it’s market value is £10k, and the company pays 19% tax, then in effect selling that car would incur £1.9k tax. The accounts do not support this….so a deferred tax liability has to be recognised…..
As you can tell these are only temporary calcs each year and sometimes reversal of temporary calcs results in effect a tax surplus being recognised in a particular year.
In your accounts you have a deferred tax surplus of £80k or so.
Mr Aneesh Srivastava DD News 24112008
