Just finalising accounts for a small limited company with Fixed Assets at £12,000 compared to tax wdv of Nil.
So, potentailly £2,000 of deferred tax required.
It appears we have not calculated deferred tax before on this client.
I just wondered as a 'straw poll' this afternoon - do members always provide for deferred tax however small the balance is?
Thanks for any responses or guidance.
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Yes of course you provide unless the amount is trivial.
I would have thought that £2,000 for a company like you describe would certainly not be trivial.
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I would take a view on it depending on the size of the profits and potential users of the accounts.
Eg sole owner £300k profit with reserves of £500k, who cares.
3 owners, £25k profit and dividends taken out down to £100 in reserves, absolutely.
Will it be realised?
I'd also consider how likely it was to crystallise. Most of our small companies only have computers and they're 'never' sold for anything so I never include deferred taxation. Likewise smaller bits of plant or vans which are rarely worth much when sold.
However clients like agricultural contractors or ground workers have more substantial items of plant and often sell them so we would include a deferred tax provision.
I always include it.....
That said, I'm a big fan of the flow-thru method of accounting for deferred tax. But I'm probably in a minority of one.
Deferred Tax
Without wishing to start a Friday afternoon riot, I haven't done a deferred tax calculation in 25 years (which I think is akin to the "flow-through" method of accounting). I always provide a disclosure note saying that "no provision for deferred tax has been made since the director(s) are of the opinion that no liability will crystallise in the foreseeable future".
In my experience a company rarely sells a fixed asset (at a notional tax cost) without replacing the said asset so any liability is pushed further and further into the future. I believe my stance may be vindicated shortly under the new FRS102 (or its small company equivalent) reporting requirements when I think deferred tax may be an optional matter.
I think some people are confused about what deferred tax is. Whether a company sells its fixed assets at the end of their lives is nothing to do with it. It's not a provision for tax on balancing charges arising on sale. It's just tax on timing differences pure and simple. Any company which claims AIA on an asset purchase which it depreciates over more than one year Ipso facto has a timing difference. Accountants who don't provide for tax on that timing difference, unless of course the tax is an immaterial figure, are misleading their clients and other readers of the accounts about the true financial position of their companies, and of course overstating distributable profits.
In general
If your accounts say they comply with the FRSSE then, unless you say so/why in the acc pol note, deferred tax should be shown and this will continue into FRS102 and will also apply to revalued assets (I believe).
So best start doing Micro Entity accounts, no def tax need be shown from next year.
Unless I am missing something isn't the so-called flow through method of accounting for deferred tax just another name for a policy of deliberately not providing for deferred tax?
Yes. The Flow Through method is just 'not bothered to provide'.
Like I've said, I prefer the flow through method, for the simple reason it's well.... ahhh... simple. It also never really crystalises because each year new assets are being bought (computers etc) such that it just pushes the liability further and further away.
That said, I always calculate it, enjoy calculating it and always provide. I understand the reasons why it exists, and though I don't agree with it, this is all higher level fluff that I'm not going to get changed (nor do I really care enough to want to change).
Plus, the flow through method doesn't really work with deferred tax assets resulting from losses c/f (or at least is harder to justify).
No deferred tax
Life will be easier for you from 2016 - FRS105 has done away with deferred tax for micro companies from 2016 onwards!!
Done away with?
Life will be easier for you from 2016 - FRS105 has done away with deferred tax for micro companies from 2016 onwards!!
It hasn't done away with deferred tax. It just does not require it to be provided for, which is not the same thing at all.
What's the difference??
It hasn't done away with deferred tax. It just does not require it to be provided for, which is not the same thing at all.Life will be easier for you from 2016 - FRS105 has done away with deferred tax?? for micro companies from 2016 onwards!!
Not too sure what you mean. FRS105 doesn't require deferred tax computation, and that means it has been done away with for micro companies.
Well I'll say it again then. Providing for deferred tax has been done away with for micro companies, but until the tax system is changed to abolish all timing differences it will still exist, but not appear on the balance sheet of companies who choose not to provide for it.
Clear now?
What is the argument, my lord?
Providing for deferred tax has been done away with for micro companies,
Have I said anything other than the above, in my posts above?
Yes you said deferred tax itself had been done away with, not just the requirement for certain companies to provide for it.
Beat me to it
Hey RL, I've tried for years to get that word into an Accountingweb post, perfect, I would have just said; "get over yourself, it's the weekend, loosen that tie"
Simple
If we make company accounts too simple, directors will start thinking they're up to filing their own accounts.
Oh - hang on a minute ........