I didn’t realise this the other day, but the example I produced shows something quite amusing.
The Fair Tax Mark campaign argues that disregarding deferred tax is necessary on account of some businesses unfairly deferring tax liabilities this way. So all businesses deferring tax liabilities are treated the same, regardless of the abusiveness of their behaviour.
But, back to the amusing part: this straightforward example also shows that a business can actually improve its score by deferring a tax liability.
£15m is not paid in year 1 and is paid in five instalments over years 2 to 6. By deferring the tax liability, the weighted difference suggests that this company has paid more than a fair rate (difference being “expected less actual”).
This is true even if the capital allowances arise as the result of an abusive scheme.
The explanation for this is obvious: the arbitrary annual weighting distorts the reversal in years 2 to 6. The reversal comes back with greater relevance than the origination in year 1.