The AccountingWEB guide to deferred tax considerations

Steve Collings offers a refresher guide to deferred tax rules and considerations for those preparing financial statements.

A UK resident company is chargeable for corporate tax on its profits wherever they arise, other than dividends received from other UK companies, and this liability is accounted for as a current liability – it’s all very straight forward.

Continued...

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RebeccaBenneyworth's picture

And another thing!

RebeccaBenneyworth | | Permalink

Looking at the example in relation to capital allowances, it is very common to simply compare the accounts written down value with the tax written down value to arrive at the timing difference for deferred tax purposes, and as this article highlights, with the return of AIA, we are back into deferred tax provisions.

However, you will need to be very careful about cars purchased after 1 April 2009. When the car is sold for considerably less than the tax written down value there is no longer a balancing allowance, so the remaining cost stays in the pool to be given by way of WDA - potentially at only 10% reducing balance. As I have shown in this article, this leaves an increasing "rump" of expenditure in the pool, which will essentially continue to increase, representing future capital allowances or a deferred tax asset. But the tax effect of this will only really unwind when trade ceases and it is given as a balancing allowance, so I would further propose that this should therefore not be recognised, as it does not meet the conditions.

So the technique of providing on the difference means that a deferred tax asset which should not be recognised is effectively set off against the liability. What companies will need to do in future is to segregate the accounts and tax WDV's of their cars (ugh) to avoid this leading to an understatement of the deferred tax liability.

carnmores's picture

bah humbug

carnmores | | Permalink

i would like to find somewhe a deferred tax calculator and reconciliation - that can be done manually or on excel - any pointers

Will it add value for small clients?

Anonymous | | Permalink

My clients are all very small; all of them being private companies paying the small companies rate of CT and mostly living off cash flow. What value will it add if I calculate their deferred tax and put it in the accounts, bearing in mind the cost of this to the client?

raybackler's picture

FRSSE and Deferred Tax

raybackler | | Permalink

The FRSSE (April 2008) says that:

"As stated in the Foreward to Accounting Standards, accounting standards, including the FRSSE, need not be applied to immaterial items."

I only use the FRSSE, as being a CIMA Member in Practice I don't have any clients that require an audit or are above the FRSSE thresholds, but this quote appears to apply to all accounting standards.

It follows that if Deferred Tax for a business entity is small under any accounting standard it can be ignored.  Under the FRSSE, if the business enity has less than £6.5m turnover etc and adopts the FRSSE, then it too can ignore Deferred Tax.

So the only thing to worry about is whether the amount is material or not.  I certainly think Deferred Tax of less than £100 can be ignored on these grounds for all business entities and for larger businesses this materiality will depend on the size of the organisation.

What do others think?

Ray

 

Deliberate ommision

Anonymous | | Permalink

We have the deliberate policy of ignoring DT for small incorporated bodies unless the result is significant as we found that no stakeholder (ie CH, HMRC or the client) (a) cared, much least (b) understood what it was, and we spent an awfully long time computing it, explaining it and generally being precise anoroak accountants, but to no absolutely no value to the client. I should point out computing it takes only a few minutes,  its the time spent explaining it that is the real issue. All clients, no matter how non-accounts literate will read at least three lines - turnover, profit and tax.  If the tax line is not the same as the tax return questions will be raised by most clients - and quite rightly too.

We have been considering it in more detail in the past 18 months, but have only really put it in where its clearly material, that is to say there are profit distribution issues or the figures are significant, depsite the fact the FRSEE gives no exemption on this area for materiality.

For very small clients AIA actually removes the DT issue for the simple reason that we are expensing a lot more PC equipment (which has also fallen in price to low levels for most clients) straight through to the P&L account as there is no longer any tax risk in doing so. Small clients seem to like this approach as it matches closer to their often cash based understanding of the business. Obviously easier for us too.

 

carnmores's picture

£100 you must be joking

carnmores | | Permalink

materiality is usually a derivative of turnover or net assets if i remember correctly - but anything under  a £1000 should not trouble the scorers - client doesnt usually get it anyway and as you only have to show a balance sheet under abbreviated accounts who knows and can tell about it anyway - bloody useless large tinctures all round

Note to the accounts

bhafan | | Permalink

I totally agree that immaterial amounts of deferred tax should be ignored as its inclusion adds no benefit or relevance to the accounts. However, does anyone know if it is necessary to add a note to the accounts disclosing that deferred tax has been ignored because of its immateriality?

Steve Collings's picture

Materiality

Steve Collings | | Permalink

Hi,

The second paragraph of the article says "....may become a material component of a company's financial statements".  Clearly if deferred tax is immaterial and wouldn't result in the financial statements being misleading then there's no point providing for it.  In some cases however, deferred tax may become material and this article aims to highlight that practitioners need to be considering the impact of deferred tax given HMRC's AIA.  Just because an item of capital expenditure may be written off in full under HMRC's AIA, there is still a requirement to recognise an asset in the balance sheet.

Kind regards

Steve

deferred tax

twickers | | Permalink

one of the best articles I have read on the site/ and wonderfully honest comment....