AIA creates deferred tax liability? how to treat for interim dividend

AIA creates deferred tax liability? how to...

Didn't find your answer?

Hi all,

Situation:  New business, spent 80k on capital equipment all allowable under AIA this year.  Currently making about 5k a month pre tax profit.  So they should be about nil (or small loss) in terms of taxable profits by the end of the year having taken into account the 100% AIA deduction.

However - this will then give rise to a deferred tax expense?  NBV will be roughly 60k with WDV for tax of 0  therefore deferred tax expense/liability of 12k.

Shareholders want to take an interim dividend - do I need to take into account the deferred tax expense before assessing the "distributable profits" for the dividend?

If so, would you make an estimate of the year end expense and apportion it or just book it in as it is now?  (this would result in a loss at the moment)

I've been thinking about it too much and now I've confused myself!

Thanks

Replies (17)

Please login or register to join the discussion.

avatar
By carnmores
09th Jul 2014 20:15

I always get the DTs on this
There has been considerable arguement on how to account for DT in company accounts i strongly favour Dr PL Cr DT BS, though some people favour Dr DRS CR DT BS. If the company has very fast growing profits it may just be acceptable to take this approach. With the charge at £16k you must surely be able to find a way to justify the payment, how about half div half loan am sure you are aware of new restrictions on directors loans, how about a long AP to facilitate

Thanks (0)
avatar
By carnmores
09th Jul 2014 20:15

I always get the DTs on this
There has been considerable arguement on how to account for DT in company accounts i strongly favour Dr PL Cr DT BS, though some people favour Dr DRS CR DT BS. If the company has very fast growing profits it may just be acceptable to take this approach. With the charge at £16k you must surely be able to find a way to justify the payment, how about half div half loan am sure you are aware of new restrictions on directors loans, how about a long AP to facilitate

Thanks (0)
Replying to marks:
avatar
By EASy
09th Jul 2014 20:22

Errrrr...

carnmores wrote:
There has been considerable arguement on how to account for DT in company accounts i strongly favour Dr PL Cr DT BS, though some people favour Dr DRS CR DT BS.

Are you sure? Paragraph 34 of FRS 19 would appear to be pretty clear. Are you thinking of s.455 (CTA 2010) charges?

Thanks (0)
Replying to marks:
By johngroganjga
09th Jul 2014 22:06

Baffled

carnmores wrote:
There has been considerable arguement on how to account for DT in company accounts i strongly favour Dr PL Cr DT BS, though some people favour Dr DRS CR DT BS

Must say I am baffled by this. Who in their right mind would charge a DT liability to debtors rather than through the P&L and what argument would they use to justify it?

Thanks (0)
avatar
By User deleted
09th Jul 2014 21:43

Strictly going by the company law, interim accounts must be accounts that enable a reasonable judgment to be made as to the amounts of the interim dividend (s.838, CA/06). In your case this would mean something like this:

6 months in to the business:

Pre-tax        £ 30

Current tax  0

Def tax         £6

Max available for distribution £24

However, there are no criminal sanctions under the company law for dividend payments made in contravention of the CA/06 provisions.

 

 

 

 

Thanks (0)
avatar
By qwertyqwerty05
09th Jul 2014 21:57

DRS?? Thanks

ow to account for DT in company accounts i strongly favour Dr PL Cr DT BS, though some people favour Dr DRS CR DT BS. If the

Thanks (0)
avatar
By carnmores
09th Jul 2014 23:45

read back

In AWeb, anyway you have missed the main point re loans and changing AP

Thanks (0)
avatar
By carnmores
09th Jul 2014 23:48

and what if a company makes a huge profit

In first half of year and pays div then makes a loss in second

Thanks (0)
Stepurhan
By stepurhan
10th Jul 2014 09:08

Wrong thing

The Debit - Debtors, Credit - Balance Sheet is an argument put forward for s455, not deferred tax. The argument is that since s455 is repaid when the overdrawn loan is repaid, then the amount you have to hand over is simply a debtor. The counter-argument is that you are unlikely to know for sure at the time the accounts are approved that the overdrawn loan will ever be repaid. That being the case, treating the s455 would be anticipating a future uncertain event.

Deferred tax should always be posted to the profit and loss account. A new deferred tax liability will therefore reduce distributable profits.

Thanks (0)
avatar
By carnmores
10th Jul 2014 10:00

I take everyones point and I should have been clearer

I said ' I strongly favour Dr PL Cr DT BS '  so if you wish to depart from this and you can depart from any standard you like if you note it IMO. I have seen a PL charge in one year followed by a cr in the following year to drs. anyway back to the main point use a loan if possible if you are worried you domnt have enough reserves 

 

PS I had a couple of teeth out yesterday so it wasnt a rush of blood to the head

Thanks (0)
avatar
By carnmores
10th Jul 2014 21:34

Thank you Basil

i am making a good recovery but only till the next extraction in 2 weeks time. me troubling people God forbid!   i remember doing my first DTrec back in 1974 , thats 40 year ago almost to the week . Personally i have never accounted as stated , my views were meant to be clear i said i had seen it.

in this instance what would happen if in the following AP to that mentioned the asset had been sold at a loss or its tax WDV would you still provide , a colleague from years ago managed then to convince me that the provision at the year end was misleading rather than being true and fair so the charge should be moved to debtors until the end of the following accounting period and then set off against the creditor.

nobody now seems to agree i i take that on board . as you can see i am not perscriptive.

Thanks (0)
By johngroganjga
11th Jul 2014 08:34

Back to the question
Not sure what the problem is.

If you want to use interim management to evaluate the company's distributable profits yes of course you have to take tax into account. But if the company is a company that pays UK CT at 20% on its profits, the tax to be taken into account will always be 20% of the accounting profit plus the permanent differences won't it? The question of how much of that 20% will be current tax and how much will be deferred tax is a nicety that can await the preparation of the final accounts a few months later. If the OP thinks the AIA claim will result in the overall tax charge being more than it would have been if the assets in question had not been purchased he must just have got his sums wrong.

Thanks (3)
avatar
By carnmores
11th Jul 2014 09:18

Interesting point John

if the tax is deferred why should should you take it all into account now while calculating distributable reserves, lets say you estimate that the tax will be payable in 5 years time then do the accounts at the year end actually give a true and fair view , oh i remember a little green booklet called true and fair we all had to read quarterly! 

Thanks (1)
avatar
By Taxhurts
11th Jul 2014 09:54

Thanks EVERYONE!  A really

Thanks EVERYONE!  A really good selection of answers there!

@ John - just thinking outloud here and if I tweak the numbers slightly, say the AIA claim will be 80k, the NBV is 70k and the profit will be 60k,and assuming no other perm or temp diffs this will take it to a taxable loss of 10k, and create losses that can be carried forward against next year's profits.

However would also create the deferred tax charge of 14k.  Assuming enough support to be able to book the loss as a DTA (yes I know but let's just be hypothetical) then yes the tax would be roughly 12k at 20% of profit,  but if we can't book the DTA, then the tax expense at year end would be higher?

Apologies if not making sense, yet to have my morning coffee.

And please do correct me  - the tax recs in my audit days were always the least favourite part of accounts review!

As an outcome,  I'm just going to do as I usually would and take 20% off profits for any dividend distn calcs, they don't want to take loads will leave plenty in the pot, just need a higher income than their previous "accountant" had them on (633 a month - I've sorted that too along with MANY other accounting errors, fun times!) 

Thanks again everyone

 

 

 

 

 

 

Thanks (0)
Replying to J accountant:
By johngroganjga
11th Jul 2014 10:24

20%

Taxhurts wrote:

Thanks EVERYONE!  A really good selection of answers there!

@ John - just thinking outloud here and if I tweak the numbers slightly, say the AIA claim will be 80k, the NBV is 70k and the profit will be 60k,and assuming no other perm or temp diffs this will take it to a taxable loss of 10k, and create losses that can be carried forward against next year's profits.

However would also create the deferred tax charge of 14k.  Assuming enough support to be able to book the loss as a DTA (yes I know but let's just be hypothetical) then yes the tax would be roughly 12k at 20% of profit,  but if we can't book the DTA, then the tax expense at year end would be higher?

Apologies if not making sense, yet to have my morning coffee.

And please do correct me  - the tax recs in my audit days were always the least favourite part of accounts review!

As an outcome,  I'm just going to do as I usually would and take 20% off profits for any dividend distn calcs, they don't want to take loads will leave plenty in the pot, just need a higher income than their previous "accountant" had them on (633 a month - I've sorted that too along with MANY other accounting errors, fun times!) 

Thanks again everyone

 

 

 

 

 

 

That's right. It"s just 20%. Everything else, with respect, is just overthinking. Just forget about the niceties of deferred tax accounting until you get to the year end.

Bringing losses into your deferred tax calculation doesn't produce a deferred tax asset - just a smaller deferred tax liability.

Thanks (1)
By johngroganjga
11th Jul 2014 10:18

@Carnmores
Don't quite understand why you are questioning whether deferred tax should be provided for. That's one for you to take up with the standard setters I think. My response was based on the standards we have, not necessarily as you would like them to be.

I don't agree with you on theoretical grounds anyway! Do you remember the days of 100% FYAs and stock relief?

Thanks (0)
avatar
By carnmores
11th Jul 2014 10:35

@John

we dont always agree ! but i do have a point re long term DT liabilities ;-) yes i remember stock relief etc , my penchant tho was for SSandAofF just loved those especially with minority interests and of course CCAccounting , oh happy  days and that before we get onto weeks learning how to consolidated multinational accounts

Thanks (0)