Deferred Taxation Immaterial?

Deferred Taxation Immaterial?

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Straw Poll Please.

For a number of recently acquired clients, there is no deferred tax provision in any of their (FRSSE) limited company accounts, prepared by their (various) previous accountants, although the standard note alluding to deferred tax is in each case present in the notes to the accounts. All have healthy turnover and profits, as well as timing differences on capital allowances.

eg current job had (last year's results) t/o £200k, profits b4 tax £50k, FA's £20k much of which was subject to 40% or 50% FYA's. I guess I'll follow suit by not providing for deferred tax this year. But if these were first year accounts, I would have elected to provide for deferred taxation.

So who else would bother with deferred tax on a company this size? Have I been doing too much? Will anyone actually care whether it is included or not?

Andrew
Andrew Morgan

Replies (29)

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By NeilW
01st Nov 2006 15:53

Not that difficult
Deferred tax IME is generally accelerated capital allowances, so that makes it (Net Asset value - Capital Allowance Pool Balance) * 19%. If it takes you an hour to calculate that you need to sharpen your quill pen ;-)

You need to be careful with immateriality. For the majority of clients you can produce a 'true and fair view' discounting everything as immaterial as Deferred Tax using a simple spreadsheet. That pretty much makes the accountant immaterial as well.

NeilW

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By carnmores
01st Nov 2006 16:05

By and large its a load of .......
the rules are a load of rubbish period and the greatest error of all a bit like current cost accounting , rememeber that crap, absolutely uniteligible to anyone with a sense of reality

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By JSJ54
03rd Nov 2006 08:51

Practice Assurance Visits
Have any ICAEW members who do NOT provide for DT had a PA visit?

If so, was the omission mentioned?

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By I'msorryIhaven'taclue
01st Nov 2006 17:05

Follow My Leader
Thank you to everyone who commented on this. I guess we have a split decision for Deferred Tax on CA's. But it's reassuring to know that by opting to provide (or not) one is not swimming totally against the tide.

I guess I'll continue to provide on the start-ups and, outside of materiality issues, follow-my-leader on the accounts we take over. Deferred tax can be a bit of a pointless chore alright - I've yet to come across a bank manager who understands it, let alone any directors - but I don't think I can be bothered changing accounting policies and re-jigging comparatives just for the sake of in-house uniformity. My quill isn't up for it.

Current Cost Accounting has been dropped!? Rats!

Andrew

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By NeilW
02nd Nov 2006 10:05

Reasons
For the same reason certain tarmac layers use crusher run rather than MOT-1 hardcore for the sub-base on a drive way, or over cut the top layer. They think believe it "doesn't matter".

Remember that the phrase "immaterial" is just fancy jargon for "it'll do".

NeilW

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Euan's picture
By Euan MacLennan
01st Nov 2006 15:19

Property Revaluations
The FRSSE does not require deferred tax provisions on property revaluations unless there is a binding agreement for sale.

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By JSJ54
02nd Nov 2006 09:21

Why?
When we HAVE to provide for deferred taxation are some firms not doing so?

I ask this out of genuine interest not to start an argument.

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Euan's picture
By Euan MacLennan
01st Nov 2006 13:18

Required by the FRSSE
If you are preparing accounts under the FRSSE, you must include deferred tax. If you include deferred tax as an accounting policy, you must include it or state why it is not applicable in the circumstances. If you would have included it, it is no excuse to follow the practice of a previous accountant and not include it. As you need to work out the deferred tax to decide if it is material or not, you might as well include it even if not material.

Compilation reports may deny liability for pretty well everything, but I think you would be economical with the truth and hence, exposing yourself to risk, if you sign such a report when you have not provided deferred tax.

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By MBK
01st Nov 2006 14:08

We don't provide unless material....
...on the grounds that:-

a) Clients haven't got the first idea what deferred tax is all about
b) It's a pain to do
c) It makes the balance sheet look a mess
d) Clients don't want to pay for our time in doing it.

Of course, if it is material we do provide. In this sense it is no different to any other figure in the accounts - you wouldn't bother spending an hour calculating a £2,000 accrual in a £5m turnover company would you? So why do it with deferred tax?

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By Blythe
01st Nov 2006 14:41

I agree with Jon
All practitioners should review the CT charge in the accounts, to understand the reasons why it differs from 19/30% and to consider whether disclosure is required to ensure a true and fair view.

As for actually providing deferred tax, I never have and I only would in extremis. It would deter many of my clients from even trying to understand the accounts.

Watch out for property revaluations where it is more likely to be relevant.

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By AnonymousUser
02nd Nov 2006 10:35

Who are the users of accounts?
Clients ... 99% will not see the point of deferred tax.

Banks ... Do not understand DT and are not interested.

HMRC ... No relevance to them.

Companies House ... If the accounts have the right number of pages and the correct dates they will file them.

The shareholders ... possibly but not if they are the owners and certainly not unless they are sophisticated investors.

So, who is left with any interest whatsoever? I can't actually remember the last set of accounts that I inherited that had a DT provision, so presumably I can rule out most accountants as having any interest?

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By Chris Smail
02nd Nov 2006 17:34

On the example given at the top
Assume Depn £5k CA £10k so ACA £5k DT Movement £950

Profit before Tax £50k
Tax profit £45k
Tax (ignore SmallCo) £8,550

FA NBV £15k
TWDV £10k

Job done, where is the time?

Why not stick the DT in

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By deanshepherd
02nd Nov 2006 15:08

And just to add..
"Is this a qual/unqual thing?"

Oh dear..

No Chris. It is a 'bigger picture' thing.

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By adam.arca
02nd Nov 2006 15:20

Can't agree with the cost argument as a reason for not looking at DT. As Neil has already said, 99% of the time it's simple and takes v little time. Actually proving the tax charge after you calculated the accelerated CAs sometimes takes a bit longer but, for me, that's the main reason for doing it in the first place: it's a chance to check that you haven't dropped a [***] in preparing the tax comp. I don't always provide for the DT (probably less than half the time) but I don't see that alone as a reason for not checking what the position is; in fact, I even do it on sole traders for peace of mind

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By User deleted
03rd Nov 2006 12:42

.
If you adopt the FRSSE (effective January 2005) then in accordance with FRS19 only a material charge should be disclosed. Which, for most small companies I would interpret that no provision will be calculated/made.

As an aside, due to the 5 minutes it takes we disclose, go figure ….

Jason
Holden Associates
The Small Business Blog
sbqaforum

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By Blythe
02nd Nov 2006 20:22

Why not include DT?
Because you have 5+ years of explaining why the tax charge in the P&L doesn't equal the Corporation Tax liability by a relatively small amount when you could be advising on improved accounting systems, debt collection strategies, incentivising personnel, timing of dividends, spousal remuneration, company ownership, business strategy, personal tax issues, pension contributions and, if you can be bothered, UITF 40.

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By Chris Smail
02nd Nov 2006 13:44

Always in
It is required by the standards, it's easy to do, I insist the staff put it in. It makes them think a bit about what they are doing.

Is this a qual/unqual thing? If I was doing practice visits this is the sort of thing I would look for as indicative of attitude to standards.

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By AnonymousUser
02nd Nov 2006 13:53

Chris ...
I suspect it is a high fees V reasonable fees thing! You insist upon it because it makes your staff think a bit ... I bet your clients are glad that they contribute to such a noble cause (or maybe they believe that thinking was included in the price?). Sorry, I didn't mean to be petty but sometimes if enough people don't do something (although in the rules) then it gets scrapped as a result of the widepsread non-compliance. Do you remember audits ... you know, the ones that involved printing an audit report with a whole load of disclaimers?

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By User deleted
02nd Nov 2006 15:32

DT is a useful exercise..
...for at least one of my clients. The company has over several years bought expensive assets attracting first year allowances. Putting the deferred tax in the accounts, helps the client to see the effect of the timing differences - especially when in one year (this one) there have been no major purchases, and the tax payable goes up. All as expected.

I agree that for many businesses the effect of acclerated CA's makes very little difference, and so DT is largely pointless. But in those cases where it does make a difference, it is very helpful. The same is true of depreciation - for this particular case we take extra care to consider the useful working life/expected date of replacement. It all comes down to providing the client with appropriate level of detail.

OK, and obeying the rules.......

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By I'msorryIhaven'taclue
02nd Nov 2006 16:26

Materiality
Hey, we have a line of accountants and conflicting opinions.

Even those most vehemently opposed to Deferred Tax would surely admit that, if only in extreme circumstances, they should sometimes provide for DT in FRSSE accounts - eg where the timing differences are significant relative to the Corp Tax Charge for the year. In the light of that can we not all agree that the matter is subjective - a question of materiality?

One way to move on from that starting point would be if someone were to post a hypothetical (or real) case, so we can all sup at the same font. Anyone like to volunteer a case?

This is turning out to be a most enlightening thread, deserving of cpd points. Beats working!

Andrew

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By Snappy
03rd Nov 2006 17:39

Deferred tax immaterial?
Andrew

Like you I have wondered about this. Question must also be how useful is it?
It may not be immaterial, but who understands it and pays attention to it and does it improve the quality of information? Certainly small business owners don't understand and I've not met a banker/funder who is interested in deferred tax. As mentioned by someone earlier HMRC not interested either.

One crazy example of usefuleness at a higher level is when I recently came across accounts of company I was dealing with. They reported a net profit of £11m for the year , £6m of which was a deferred tax credit. So what do you say to 95% of people looking at the figures - did they 'make' £11m profit last year or £5m? How should an investment in this company be judged?

We should stick to providing useful reliable information which people understand and can use, not conceptual academic nonsense just to comply with rules. Of course lemmings may differ.

Iain

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By I'msorryIhaven'taclue
04th Nov 2006 01:21

Lemmings Provide Conceptual Academic Nonsense?
Iain,

Interesting example. I guess that in your example company most investors would base their performance evaluations on pre-tax profits. Those valuing the company's worth might have expected the £6m deferred tax credit to have been included in the previous year's B.S. You may have shot off your own foot with that particular example.

James, having missed out his DT comp working papers, had an ICAEW practice assurance visit and wasn't made to stand in the corner and face the wall. I started the thread by asking "Will anyone actually care whether it is included or not?" We should all be grateful to James (and his ICAEW visitor) for providing the answer.

I suppose DT all boils down to materiality. Chris posted some example figures earlier, containing inter alia a DT movement of £950 in FRSSE accounts. A fellow pedant - it's a relief to know I'm not the only one - he advocates inclusion of DT in the accounts. So, based upon Chris's tax figures and a healthy Bal Sheet, and assuming these are SmallCo Ltd's first-year accounts, who else would lean towards making the DT provision (or not) for:

i) Chris's DT creditor of £950 (sufficiently material to warrant a DT provision)?
ii) how about if the DT creditor was x 10 ie £9,500?
iii) finally, if a £950 DT creditor but with a balance sheet total of only £900?

Straw poll - no right or wrong answers; it'll be interesting to learn what others are up to. Allow me to kick-off:

i) In the light of this thread, exclude DT provision
ii) include DT provision
iii) include DT provision

Andrew

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By User deleted
04th Nov 2006 13:30

Interesting
A very interesting debate, it's nice to know I'm not alone in leaving it out for many of the reasons already given, and it's a similar situation with companies taken over from other practices, only one having a provision (DT £906, BS reserves £18k, client no idea what it was).

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By Chris Smail
06th Nov 2006 11:49

Materiality?
Should we not be including the question 'Is this material to the tax charge?' as well as to the whole accounts.

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
08th Nov 2006 00:23

Did someone mention UITF 40?
Don't forget to provide for deferred tax on the adjustment income as part of the prior year adjustment!
The tax on the adjustment income then comes out of the deferred tax provision as the income comes into charge under the spreading provisions. (i.e. debit deferred tax credit current liability each year) It's pretty likely that the DT provision (and potentially the profit effect each year) WILL be material in this case.
Only necessary for Limiteds, of course, when there is a requirement to process the tax charge when you put through a prior period adjustment - the timing difference arises because it is taxable in another period - or indeed more than one when spreading applies.

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By carnmores
08th Nov 2006 11:09

How can us mere mortals disagree with Rebecca
but it really is a nonsense

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By I'msorryIhaven'taclue
08th Nov 2006 16:28

Thats as Maybe, Rebecca......
... always assuming that anyone actually cares what the accounts say or what you have written in the notes.

BTW, If the phrase above has a familiar ring to it that's because I remembered it from one of your lectures.

In fact, I frequently rely on those wise words for guidance. They're lodged forever, along with other words of wisdom from past mentors such as: (whilst aborting a failed attempt to balance a client's sales ledger) "always remember the ultimate control account is the balance sheet"; and (on the 'phone to a client) "If you don't pay me I'll mess up your tax".

Andrew

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
08th Nov 2006 19:46

It was a little tongue in cheek ...
But last week I answered a question from a delegate in a large company with adjustment income of over £1 million which was significant ( i.e. more than just material) in relation to the profits of the year. Failing to match the tax charge with the prior year adjustment significantly distorts the tax charge for the year in relation to profit and makes rubbish of the accounts.

Yes, I agree in a small company nobody is interested, (least of all the client) and surely the effect of short term timing differences cannot be material - 40% or 50% FYA vs depreciation must be only a few quid, but in the context of UITF 40, it will be for some!

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By SJBarrow
23rd May 2014 16:52

Zombie thread but interested in current opinions

I've just come across this zombie thread and thought it was an interesting read, so wondered if years later, opinions remained the same?

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