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Deferred Tax Balance

Deferred Tax Balance

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I have a balance brought forward from 2010-11 for deferred tax and am now completing the 2011-12 accounts for my client.  I understand what deferred tax is and where is comes from but have not dealt with it properly before.

The balance is £111.25 and my question is does this balance need to be released somehow or even paid for that matter?  What do I do with this £111.25 from the previous year?

Thanks

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By mikeyban
10th Mar 2013 21:15

Hope this helps
In a nut shell deferred tax is the difference between tangible fixed assets in the accounts and the written down value in the comp.

Normally the cap allowances balance is less due to AIA's etc.

To simplify, this difference multiplied by 20 percent small co rate CT is the balance that needs to be shown in the balance sheet with the difference between this amount and the amount brought forward is the adjustment to the tax figure in the P& L account.

This is the simplified summary and obviously there are quirks.

Good luck as always.

Thanks (1)
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By MrDSGrace
10th Mar 2013 21:40

Thanks for your answer.

I understand everything you said but my query still remains.

This balance is brought forward from 2010-11 and I am now completing 2011-12.  What happens with this balance for this year?  Do I need to journal it somewhere?  Does it need to be paid, as it is "deferred tax"?  Does it stay sitting in the balance and added to each year?

The deferred tax for this year is about £65 so does this just get added to the £111.25 and the balance just grows throughout the life of the company?

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By mikeyban
10th Mar 2013 21:46

Hi there

what is the difference between closing fixed asset value and closing capital allowances balance?

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By MrDSGrace
10th Mar 2013 21:56

Well,  all this information

Well,  all this information was received from the previous accountant and there is nothing showing a capital allowances balance??!!  

Apologies for being dense on this subject.

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By mikeyban
10th Mar 2013 22:06

Ok
Not sure the circumstances here but deferred tax is an accounting adjustment and no money exchanges hands.

The difference ( cannot really ascertain what the difference is here) if it is an increase is extra on the tax figure in the P& L if it has decreased on opening balance it reduces the tax figure by the difference.

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By MrDSGrace
10th Mar 2013 22:20

Ok.....I have realised (just by looking back through paperwork) what has happened and this explains what I need to do.

At the end of 2011 the NBV was £545.  This clients year end is 31st Oct.

The deferred tax is as follows;

545*151/365 @ 21%

545*214/365 @ 20%

The above gives a total of £111.25

The deferred tax b/fwd in 2011 was £152.67 and the difference of £41.42 was charged to the 2010-11 P&L.

So, taking into account the above I need to do the same for this year and any increase gets added to the corporation tax and any decrease reduces it.

Thanks for your help!

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Replying to ireallyshouldknowthisbut:
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By mikeyban
10th Mar 2013 22:28

Pleasure!

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By MrDSGrace
10th Mar 2013 22:43

Sorry....can I just check....

So, the NBV of the fixed assets at 31 October 2012 is £843

I have done the same calculation as above (although only using the 20% rate) and my deferred tax comes to £168.60. 

168.60 (111.25) is 57.35 which is to reduce the corporation tax, right?

Thanks again.

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By mikeyban
11th Mar 2013 07:59

Early on a Monday .....surely it will increase deferred tax (liability) to £168 ish so the difference will be the tax liability in the accounts.

The tax in P/l will be

CT actually payable plus difference between last years d tax bal and this years d tax balance as long as it has increased.

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By MrDSGrace
11th Mar 2013 10:01

Yes!  That is in a round

Yes!  That is in a round about way what I was saying/thought.

Thanks for your confirmation.

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Replying to mfbrown185:
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By andy.partridge
11th Mar 2013 10:15

Actually no

MrDSGrace wrote:

Yes!  That is in a round about way what I was saying/thought.

The effect is the opposite of what you said

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By MBK
11th Mar 2013 13:23

But why all the hassle ....

.... for an immaterial figure the client doesn't understand.

Write it off! Dr Deferred Tax Provision Cr Deferred Tax P&L.

It just ain't worth it for £100 odd.

 

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By La BoIS Saint
13th Mar 2013 12:13

Why on earth is anyone even thinking of including a deferred tax balance for a hundred quid! Costs more in accounting time than the provision!

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By raybackler
13th Mar 2013 14:04

Immaterial items

Accounting standards do not need to be applied to immaterial items.  Deciding on the level of immateriality depends on the scale of the business and the effect on the true and fair view requirement for accounts preparation.  Deferred tax is a "fresh air adjustment" as usually no money changes hands, so I have always treated it as immaterial where a couple of hundred pounds are involved.

If we take the example of a PC bought for £600 getting full tax relief under the AIA and depreciation of 33.33%, the depreciation is £200 at the end of year 1 and the net book value is £400.  The deferred tax is 20% of £400 = £80.  This will reduce to £40 at the end of year 2 and zero at the end of year 3.  If the PC is sold at any time, then there would be a balancing charge, so if it was sold for £100 at the end of year 2, £20 of corporation tax would be payable and the deferred tax of £80 would be eliminated a year early.  These are hardly earth shattering numbers and the risk of a material tax liability arising is very small.

The scale of the asset purchase and the risk of early disposal involving a large tax fluctuation are the key things to take into account when deciding whether a deferred tax amount is material enough to include in the accounts.

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By thegable
14th Mar 2013 09:30

Tax Pennies

Unbelievable...you're arguing the toss for buttons..write it off and unless future calculations show £000's happily ignore.

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By cfield
17th Mar 2013 11:18

Smoothing the tax charge

The main purpose of deferred tax (apart from providing for future tax bills) is to smooth the tax charges in the P&L a/c from one year to the next, so you don't get an unnaturally low charge in one year followed by a few years of unnaturally high ones. You should be getting a figure close to 20% of profit before tax each year for a small company below the £300k profits mark.

Take a small builder who's just bought his first van for £25k which he expects to keep for 5 years (and then scrap). His profit before tax is £50k per annum. The AIA on the van would be worth £5k in Year 1 but depreciation would be added back so the tax bill would be adjusted by £1k per annum for Years 1-5.

That means Year 1 tax would be £6k instead of £10k (ie 12%) whilst Year 2-5 tax would be £11k (22%). Over the 5 years, tax would be £6k + £11k x 4 = £50k which of course is £50k x 20% x 5 years, or an average of £10k per annum (20%).

Deferred tax enables you to show the average tax charge of £10k per annum (20%) in the P&L a/c rather than whatever weird figure might be shown in the tax comp. It makes no difference to the actual tax bill. You still pay the weird figure in the tax comp, not the P&L figure. It is purely an accounting adjustment. This usually takes a bit of explaining to clients, but put like that, most can see the logic behind it.

Where the percentage tax charge is relatively unaffected by the ongoing effects of capital allowances and depreciation, it follows that deferred tax is immaterial and there is no need to adjust for it. Materiality thus depends on profits as well as the deferred tax figure itself.

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