Modelling tax

This course lesson is an easy one. We point you to a reference example on tax losses that we think you could find useful at some point in the future.

What happens to tax when a business slips into loss?

In your modelling you might be tempted to take % tax rate x £ pre-tax income = £ tax charge. But you’ll get some strange results in your model if you’re e.g. in a stress case and the business slips into loss. In the loss position, if you’re not careful about your calculation, your tax charge will become income in the model. But in most jurisdictions tax authorities don’t like handing out cash to companies that have suddenly decided to tell the world they’ve just recorded a loss. Instead what tends to happen is that the tax authority will say “wait a bit” and ask the company to ‘bank’ the tax loss so that it can offset the prior year loss against next year’s profits.

Modelling tax losses with If formulas

If you think about how you’d model this kind of situation you’re probably going to start thinking of If formulas. If profits are less than zero then the £ tax charge is zero, otherwise it’s calculated as normal. If profits are less than zero then we need to start a bank of tax losses, adding to that in bad years and drawing down on it in good years.

An example for you using shortcut Max/ Min formulas

Pretty soon you could get yourself tied in a few knots so on our Excel formulas course we’ve got a reference example showing how you could model tax losses pretty simply. Following our lesson on Min/ Max formulas we won’t be giving away any prizes for guessing why we’ve opted to use Min/ Max formulas – they’re just a shorter neater alternative to the standard If function.

We’re hoping that today’s example could be of use to you at some point in the future. At one level though, it’s really just another example of how you could use the Min/ Max formula to shortcut standard If functions.