Attention dunderheads: Taxpayers are NOT giving businesses £93bn

A look in the ledgers of Trotter & Worstall Independent Traders

Worstall and Trotter Ltd

It's the profit, the surplus, that is taxed (however much companies may squirm to reduce that, that is indeed the basis of it). This in turn means that all costs of doing business are deducted from revenue before we calculate the profits.

Therefore, we can imagine this scenario. The Worstall and Trotter Ltd transport combination decides to purchase a new lorry for £100,000 in order to ship remarkably cheap goods around the country. Turnover in any one year is £1m and there's a £100,000 net profit on that (yes, obviously, entirely made up numbers).

So, our £100,000 on a lorry is an expense of the business that year. So, instead of there being a £100,000 profit, expenses equal revenues and thus there's no profit, no corporation tax is to be paid, right?

And if we didn't have tax laws about this sort of thing that is exactly what would happen. But we do have tax laws about this sort of thing. Only current expenses can be written off in full in their year of purchase. Wages, rent and the all important gaffer tape are indeed just expenses to be deducted from revenue.

But things which are going to be used by the business for a number of years are not. These are called capital investments. And you only get to write them off over the likely life of said asset. For the very simple reason that the taxman would like to have money today.

If we imagine that the lorry will last four years (what with Rodney and his gear changes, about right) then we're allowed to write off 25 per cent each year (it gets very much more complicated, with normal accounts different from tax accounts).

So, instead of our four-year accounts saying profits of £0, £100,000, £100,000, £100,000, our four-year accounts now say £75,000, £75,000, £75,000, £75,000.

This is not, as the mathematically inclined will note, a large change in the total amount of profits. Assuming that the tax rate is the same in each year it's also not a large change in the tax bill being paid. Like as in large meaning none.

None of this describes what happens to cash at all. This is all bookkeeping over on the balance sheet and thus affecting the P&L that way. The difference in cash flows is that we have to pay different amounts in tax each year under each system. If we don't have these special rules then we pay £0 in tax in year one.

With the special rules we pay (say the tax rate is 33 per cent) £25,000 in year one (and 2,3,4). And that's where the possible subsidy is, in the time value of money.

Because if I can keep that £25,000 for a year at 5 per cent interest then I've made £1,250. The completists, if they wish, can work out the cash flow implications and the interest at 5 per cent. The rest of us will get on with that more interesting root canal work we've got scheduled.