Do I recognise a deferred tax asset on cars?

I think I have a deferred tax asset that has arisen on company cars. Should I recognise the asset?

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Hi,

Please be gentle with me....nearly all my clients report under the micro entity provisions and it's been many years since I've had to deal with deferred tax!

I have a new client who have a large brought foward tax wdv in their special rate pool.  I think I've figured out that this has arisen through a few years of buying quite expensive company cars, writing them down at 10/8%, then selling them and leaving a balance in the pool relating to cars they have sold as I guess the cars have sold for less than the WDV (as well as a balance on the current cars).  Deferred tax doesn't appear to have been included in the last set of accounts, so I've been trying to work out what the figures should be, if any.  In addition, the company have purchased an electric car in the year I'm looking at.

When I compare the book value of the cars to the special rate pool, I'm seeing what I think is quite a large deferred tax asset.  The cars are being depreciated at 25% reducing balance, whereas the WDA is much lower, plus there is the residual balance of the old cars.  I have worked out the asset by comparing the NBV to the tax WDV and multiplying the difference by 19%.  My questions are a) does this make sense, i.e. would you expect a deferred tax asset on company cars and b) given that it will take a long time to get rid of the pool balance (never I guess, as they will carry on buying the directors new cars every few years which will be written down in the accounts quicker than in the tax pool) should I recognise this asset?

The electric car is giving rise to a deferred tax liability (I think) as I'm planning on taking the 100% FYA.

Am I allowed to offset the asset and the liability to give a net deferred tax asset?

I can't find any guidance anywhere specific enough to my question, so I'd really appreciate advice from people who have more experience of deferred tax and pools.  It may be that I'm doing it completely wrong!! 

Many thanks

Donna

 

Replies (4)

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Psycho
By Wilson Philips
19th Mar 2021 20:17

You should net the two off. If you end up with a deferrred tax asset you should generally recognise it only to the extent that you expect it to be realised in short order.

FRS 102 would be my starting point for more reliable guidance than that above.

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Danny Kent
By Viciuno
19th Mar 2021 20:30

Think you may be over complicating things here.

You don't recognise a deferred tax asset.

Simply take the NBV less the TWDV ( & less any carried forward losses) x 19% = deferred tax liability. We always pool all the assets together and I have never worked out DT for each asset and then offset manually. If TWDV is > NBV nothing to recognise.

Edit: What Wilson said above.

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Replying to Viciuno:
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By donnameneses
19th Mar 2021 21:26

Hi,

Thanks for responding. I have done the total NBV less the TWDV x 19% and it's an asset, not a liability. Because of the large TWDV on the cars. Well, there is an asset on the special rate pool, and a liability on the electric vehicle pool and the main pool. But the asset is bigger. Are you saying I should just leave it out completely then?

Thanks

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Replying to donnameneses:
Psycho
By Wilson Philips
19th Mar 2021 21:36

In a word, yes.

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