FRS 102: Deferred tax issues explained

In the current version of UK GAAP taxation is dealt with in two accounting standards: FRS 16 Current Tax and FRS 19 Deferred Tax, explains Steve Collings. 

Aspects concerning taxation are also found in FRS 17 Retirement Benefits (specifically paragraphs 71 and 72) which deal with tax relief on a company’s pension contributions and the attribution of the tax effects to the profit and loss account and statement of total recognised gains and losses. 

FRS 102 deals with taxation in Section 29 Income Tax. The scope paragraph of Section 29 confirms that income tax (for the purposes of FRS 102) includes all domestic and foreign taxes which are based on taxable profit. It then goes on to include taxes such as withholding taxes payable by a subsidiary, associate or joint venture within its scope.

Unlike FRS 16 and FRS 19 currently, Section 29 combines...

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  • Current tax
  • Deferred tax
  • Timing difference ‘plus’
  • Measurement of deferred tax
  • VAT
  • Presentation
  • Disclosures
  • Conclusion

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Comments
carnmores's picture

I maintain that DT is wholy inappropriate    3 thanks

carnmores | | Permalink

for small companies

mr. mischief's picture

Totally agree the last post    3 thanks

mr. mischief | | Permalink

it is the only part of the accounts where I say "This is just accountancy drivel so just ignore it" to clients.

Kent accountant's picture

Yep    3 thanks

Kent accountant | | Permalink

explaining DT is like explaining the tax credit on dividends - watch the eyes glaze over...

 

 

My brain glazed over just reading it................    1 thanks

Barkster | | Permalink

..not your fault Steve - it's just a mind-numbing subject !

But in words of one syllable or less, what do we have to do differently with the old CA/AIA -v- NBV-on-the-Balance-Sheet chestnut, and from when, as this is the only DT I ever come across really ??

Tom 7000's picture

Yep what Barkster said

Tom 7000 | | Permalink

can someone translate all that to  simple Geordie...

Do I need to do anything else except pull out advanced capital allowances?

Old school    2 thanks

Ian Bee | | Permalink

I agree with Barkster. For over 30 years I have always approached DT from the Balance sheet and deducted NBV from TWDV. You can then reconcile this to the depreciation and CAs in the tax comp. There may be an adjustment for non qualifying assets, but that is all DT is in most companies. 

Having worked for larger Plcs with global reach, I know that at that level DT can be more complicated but that affects relatively few companies. 

There seems to be a desire on the part of standard setters to over complicate this to distinguish between timing differences and temporary differences, though in all practical senses I cannot see what the difference really is. Not the fault of the author but it seems to be the standards themselves.

Deferred Tax.    1 thanks

musemma | | Permalink

I recall someone referring to deferred tax as a situation where 1+1 = 3. It is so difficult to explain and sometimes understand. Very complicated and prone to error/miscalculation when presenting and disclosing it on the balance sheet.

Disagree

adam.arca | | Permalink

I've got to say I disagree with the above comments.

I've always seen DT as (big company complications aside) a pretty easy issue and one that makes perfect sense in terms of matching and accruals (even though these now seemed to be dirty words for standard setters).

It's not even that complicated to explain: "CT is what you're paying; DT is the extra you should have been paying if nice Mr Taxman hadn't given you all that AIA." The difficulty comes when DT reverses.

So IMHO any accounts (for large or small company) which have a material DT liability would be incomplete unless that liability is recognised.

It's also my opinion, however, that sole trader accounts are incomplete because they do not include a provision for the tax bill arising from current year profits, and thereby overstate the "true" capital. I don't adjust for that, though, because no one else does and I don't want to disadvantage my clients. So that means I'm being inconsistent between my S/T clients and my ltd clients. The joys of accountancy...

Disagree with "Disagree"    1 thanks

TC1 | | Permalink

I find DT extremely complicated to calculate, when there are new assets every year, constantly changing WDA and AIA rules and limits, some taxes brought forward and others deferred.

It's also a nightmare taking over the accounts from someone else, either fathoming what the deferred tax entries relate to (frequently, I find the same figure every year for years) or getting DT going if it hadn't been included.

I do agree with adam.arca when he says "any accounts which have a material DT liability would be incomplete unless that liability is recognised". But the magic word is "Material", and so often, the figures aren't.  And if the inclusion of DT makes the accounts less comprehensible to the main users, is that good accounting?

 

 

DMGbus's picture

My over simplified take on DT?    1 thanks

DMGbus | | Permalink

Here's my interpretation on deferred tax (DT) as it applies to clients that I deal with:

Example figures:

£ 3,000  Book value of fixed assets per the Balance Sheet

£ 2,000  Tax written down value of Capital Allowances assets per tax comps

------------  ---------------------------  

£ 1,000  Difference - accounts value is higher than tax value ( 3000 minus 2000 )

   20%   Expected future Corporation Tax rate

£   200  Deferred tax provision ( 1000 times 20% )

====================== 

My explanation to client:  Deferred tax is how much tax you'd pay if you sold the fixed assets at their book value.

 

Now, I see nothing mysterious or complicated here.

Yes, it's not as easy as I outlined if there are assets not subject of capital allowances or if there are tax losses carried forward - but these two added facets don't take more than 60 seconds to factor into the calculations.

 

Now, if anyones still confused or having difficulties, then they need to think back to the days of Stock Relief where added calculations had to be made.

 

 

 

Simples

TC1 | | Permalink

Thank you, DMGBus.  Even I can understand that.  Why did no-one explain it to me like that before?

Tom 7000's picture

@adam.arca    1 thanks

Tom 7000 | | Permalink

Why are you doing balance sheets for sole traders....and worrying about capital accounts

Quote em fixed fees, give em a P and L, smash it into the TAX return and off it pops with a bill for  £300 and a  thanks very much for a mornings work.

 

If its big enough to need a balance sheet, incorporate it charge em £400 for doing so and triple their fees ...but it will save you more in tax sir...routine

 

But then,,,,what do I know...

Tom

adam.arca | | Permalink

Tom 7000 wrote:

Why are you doing balance sheets for sole traders....and worrying about capital accounts

Quote em fixed fees, give em a P and L, smash it into the TAX return and off it pops with a bill for  £300 and a  thanks very much for a mornings work.

 

 

Erm, perhaps because I'm old school and like to do the job properly?

 

Tom 7000 wrote:

If its big enough to need a balance sheet, incorporate it charge em £400 for doing so and triple their fees ...but it will save you more in tax sir...routine

 

But then,,,,what do I know...

 

Erm, maybe because being a limited company isn't just about the tax? Plus, when I incorporate a sole trader business, it's usually for a lot more than £400 because there's usually a lot more to consider than what that fee level can bear.

Help

Nelly | | Permalink

Please can someone help me,

Just got my first limited company for two years 2012 and 2013 accounts

Please see below how I have presented the account for 2012

P&L account:

Sales:39794

Cost of sales:19375

Gross profit: 20419

Distribution costs:908

Administration costs:18053

Operating profit: 1458

Interest payable and similar charges: 208

Profit before taxation:1250

 

Balance sheet:

Office equipment:795

Depreciation:199

Net book: 596

Cash at bank and in hand: 2653

Creditors amounts falling due within one year:1999

Total net assets (Liabilities): 1250

 

Capital and Reserves

Profit and loss account:1250

Please can someone guide me for the adjustment I am suppose to do before filling the accounts on CT600.

 

The accounts for the year 2013

Sales:155161

Cost of sales:104217

Gross profit: 50944

Distribution costs:2274

Administration cots:38426

Operating profit:10244

Interest payable:297

Profit on ordinary activities: 9947

 

Balance sheet:

Office equipment up to 2013:1445

Accumulated depreciation: 560

Net book value: 885

cash at bank and in hand: 52107

Creditors amounts falling due within one year: 42704

Total net assets(liabilities): 10288

 

Capital and reserves 

Profit and loss: 10288

Please your input about the adjustments I am suppose to do before filling ct600 would be more appreciated!

How much I am going to put on Capital and reserves AC74,AC76 on CT600 2012 and 2013?

I have done it but I just need someone to double-check for me before I fill it.

Thank you

Thank you.

 

 

 

Not wholly inappropriate for SMEs

andrew.mitchell | | Permalink

People's eyes may glaze over when you try to explain deferred tax to them, but I recently had the other side of the coin.

Instead, I had to explain to a client why, despite making a loss of £11,000 in their 2013 accounts, the company still had to pay nearly £5,000 Corporation Tax. Having provided for deferred tax in 2012, it was much easier to show that they had saved £11,600 tax in 2012 by claiming Annual Investment Allowances but had to pay £6,800 extra in 2013 when they sold some of those assets and incurred a balancing charge. By accounting for the deferred tax, the total tax charge in the 2012 accounts and particularly the net credit in 2013 reflected much more accurately the results in the accounts. 

carnmores's picture

while we are on pointless incomprensible

carnmores | | Permalink

Accounting nonsense lets all hear it for current cost accounting OMG there went another month of my life on examining the absurd

carnmores's picture

@andrew

carnmores | | Permalink

What pissed your client off was not the PL charge but the cash out lay one suspects

Well yes, he was more    1 thanks

andrew.mitchell | | Permalink

Well yes, he was more interested in the cash flow than the technicalities of deferred tax, but my point was

a) It wasn't difficult to explain and he was happier when he understood that it was because he had saved tax the previous year, and

b) In the age of AIA's, Deferred Tax is very relevant to SMEs.

carnmores's picture

no no no

carnmores | | Permalink

its not , its all about informing them of possible liabilities rather than DT per se IMO. and what do you do if you have any sole traders do you DT them?