I'm very sorry for the long post but just can't get my head round this.
Company P owes 100% of S1 and S2. All three companies have the same accounting reference date. In 2020 P made a profit of £100K, it also has b/f losses of £160,000 for which a deferred tax asset of £30,400 was recognised in the accounts.
In the same period S1 and S2 made a loss. It was decided that S1 will surrender £20K of its losses and S2 - £80K. P will not utilise any of its losses b/f. P and S2 accounts are prepared under FRS102 and S1 – FRS105 so no deferred tax in S1.
I’m now a bit confused about the accounting entries.
Scenario 1. P make a payment to S1 and S2 in respect of the losses up to the value of the losses. S1 £20,000* 19% = 3,800 S2 £80,000*0.19 = 15,200
During the year P provided S1 and S2 with loans which are very unlikely to be repaid. Any repayments will be offset against the loan accounts.
Accounting entries in P (FRS102)
CRCorporation tax liability 19,000
DR Ct Liability - Payment to S1 and S2 19,000
CR S1 and S2 loan accounts19,000
DR Tax expense account (PNL) 19,000
Company S2 (FRS 102)
CR Tax expense account (PNL) 15,200
DR Loan account P 15,200
Company S1. As the accounts are prepared under FRS105 and there is no provision for deferred tax. What would be the entries? Same as S2? Would PNL show as if the company received a tax refund?
Scenario 2. No payments are made for group relief.
Accounting entries in P (FRS102)
CR Corporation tax liability 19,000
DR Tax expense account (PNL) 19,000
Company S2 (FRS 102)
CR Tax expense account (PNL) 15,200
DR Deferred tax asset 15,200
Company S1 (FRS105) – no entries?
How would I clear corporation tax liability account in P and deferred tax asset account in S2?
If I debit CT liability account in P £19,000, where would the other entry go? CR CT tax expense account on PN making it NIL?
Sorry for the long post and thank you for your help
Replies (5)
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With apologies for not having read the entire post in detail
- if you're preparing parent and subsids under different standards, you're making life more complicated for yourself.
- you have to decide whether companies will be paid for group relief surrendered. All that means is that the receiving company 'pays' tax and the surrendering company gets a 'refund'. (that's normally an internal decision)
- Payment for surrender can be beneficial as surrendering companies have higher retained earnings and so are more able to pay dividends upwards.
Lots of things in there..
- if entity is going to be dissolved, where does the hypothetical deferred tax arise? On the basis its fixed assets, what will happen to them? You need to think about the disposal price and see whether any actual tax liability arises
-to clear DT balances it's simply dr DT, cr P&L tax charge.
I think more generally, I'd look at your end position (ie entity about to be dissolved) and how the current balances end up being cleared. From what I'm reading, I think you're actually very close to working out what to do. A clear head after the weekend and it will all fall into place.
I know you are asking about the accounting treatment but is group relief available here? If P has its own b/f losses (assuming same trade) is it not required to use these first?
Edit: just checked you can use or not use them as you wish. See CTM04860.