Is this actually true though?

That identity requires that the opening corporation tax liability, plus the corporation tax liability for the year (wherever it is scattered in the accounts, which is an issue I will come to), less the corporation tax paid, must equal the closing corporation tax liability. This is a simple statement of fact that must be true.

That opening liability is an estimate of the future liability, no?

The closing one also.

And if the estimates – say tax law has changed, or a court case elsewhere has crystallised a surmise about what tax is payable etc – have changed then this statement of fact about the identity is not true.

I don’t have the technical knowledge to know whether this is true or not. So, some of you do. So, is it true?

As an example. Take a not Cadbury, not Vodafone, before the ruling on CFC on EU subsidiaries. The company lists in its estimates of tax to be paid – subject to that confirmation of the law – that tax is payable on the profits in that CFC controlled EU subsidiary.

Through comes the news that Cadbury wins, that Vodafone is free and clear. The closing tax estimate is now clear of that potential taxation of the CFC controlled EU subsidiary while the opening one included it.

Have we, or have we not, just shown that the identity doesn’t hold?

And if tax laws change every year, as they do, and court cases are won and lost with HMRC every year, then estimates of future tax payments will change in this manner every year?

6 thoughts on “Is this actually true though?”

  1. Spud’s definition is not quite right. You have to include adjustments for prior year estimates and you also have to include deferred tax before the identity becomes complete

  2. And actually, most accountants would derive the cash tax paid from this identity, which runs counter to Spud’s assertion. Because tax is paid in instalments, especially in consolidated accounts, some companies getting loss relief etc, it can be tricky to see just how much tax has been paid across the group. You might not believe or expect it but I promise you that it is true. The opening and closing liabilities, being guesses, are much easier to compute. I see that he doesn’t seem to refer to the tax charge for the year – another guess – so that’s another thing he has missed out.

    It should be, subject to Murphy’s law:

    Opening liability plus current year charge minus closing liability = cash tax paid

    Deferred tax and adjustments added and subtracted to everything on the left hand side of the identity

  3. Thirdly, (fists thumping wildly) It also helps if companies within the group pay group loss relief to the loss-making companies, otherwise things get very complex very fast

  4. There should be a separate note (or, sometimes two) on tax which would explain things to anyone except Richard Murphy. The impact on deferred tax figure resulting from changes in forecast tax rates as well as changes in the law should be shown.
    The accounting identity is opening tax due less tax paid in year plus tax due on profits in year plus or minus changes due to changes in laws/legal status equals tax due at end of year.
    This can be messed up by adding or subtracting subsidiaries so “consolidation/de-consolidation” should be included in “legal status” alongside change of domicile.

  5. Murphy demands that group accounts make the tax position clear for HIM. The accounts are not drawn up for him though, they are there for the investors. Of course there is an accounting identity. Within that, however, the tax position, just like every other contributing cost and income stream, may be really quite difficult to discern without further detailed notes. For tax, these details are provided confidentiallly jto fiscal authorities and not to Richard Murphy.
    He could never be able to produce the authoritative report he purports to provide. It seems there is only one identity that always, always holds: Richard Murphy + ‘funder’ =grift.

  6. As corporations have two distinct systems to report taxes to investors and another taxes to the authorities, entirely legal and agreed to, this guy who can’t get his head around that fact wants to introduce another system even further removed from any usefulness for what purpose.

Leave a Reply

Your email address will not be published. Required fields are marked *