The numbers that tax authorities might use in their tax calculation and the numbers that we might use in our set of accounts can sometimes be different. This is because the numbers are treated differently in different circumstances. Let's have a look at some examples. Here, we have a company that's made a purchase. Let's say some IT equipment. It's looking to depreciate that and it decides it's going to depreciate it over three years. The amount they spent was 90 and thus the accounting expense is going to be 30 in each of those three years. So straight line depreciation. However, the tax authorities take a different stance. They're going to allow a tax allowable deduction, which really just means a tax authority approved depreciation figure. They're going to allow a figure of 60 in the first year, then 20 in the second year, and 10 in the last year. They're allowing a front-loading of the expense. Why might they do this? Well, lots of governments like to incentivize companies to invest in their businesses. Thus, if they allow a very large expense in the first year, a large expense will reduce a company's taxable profit. And that's good because it will reduce the tax paid in the first year. You'll have to pay a little bit more in years two and three, but you get to delay that payment. And lots of companies find that a very strong incentive to invest in things now rather than later. Now, you might notice that there is thus a timing difference and we call this a temporary difference between the numbers. It's only temporary because over the long term, the total of the three years, we still get to the same number. Both sets of figures come to 90. Let's look at another example. In this example, companies maybe bought some software. It's looking to amortize the software over three years. The accounting expense again is straight line. 1200 has been spread over the three years, 400 in each year. But again, the tax authority's taken a different stance. They're going to allow you to make a tax allowable deduction, so remember that's just tax authority approved amortization, of 1200 all in the first year. So in year one, there's a very large difference between the two expenses that are allowed. But again, over the total of the three years, the same amount is being amortized away. 1200 in our set of accounts, i.e. in the income statement, balance sheet and cash flow statement, and 1200 in the tax calculation. Again, that's just a temporary difference. However, we can come to more permanent differences. A good example here is staff entertainment. Lots of companies like to spend money, maybe on an office party, maybe Christmas events. These are legitimate expenses. Actual money has been spent. That means they have to put it in their income statements. However, the tax authorities might look at this and say, we are not going to allow this as a deductible expense in your tax calculation. Why is this? Well, some employees might look at staff entertainment and think, I'd rather receive staff entertainment than a salary. On a salary, I need to pay income tax, but maybe if I receive some staff entertainment, maybe I could try and avoid paying some income tax. The tax authorities don't want to incentivize that kind of behavior. So instead, wholesale large staff entertainment is generally not allowed. So wheras the company over three years has incurred an expense of 75 and has spread it 25, 25, 25. Instead, the tax allowable deduction from the tax authorities is just 0. And over that long term, the three years, the figures do not reconcile and thus they create a permanent difference. These temporary differences and permanent differences are very important when coming up with the company's set of accounts. And we're looking at the temporary differences often leads to deferred tax.