FRS 105 Deferred Tax / Accrual basis

Deferred tax forbidden => only cash basis?

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I read in FRS105 deferred tax is not allowed. Does that mean that I have to use cash basis?

Please pardon if this question sounds silly, I'm trying to make a head or tail of this not being proffesional accountant.

Replies (14)

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By Wanderer
27th Jan 2019 20:39

Does that mean that I have to use cash basis?
-> No

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By andy.partridge
27th Jan 2019 21:21

Question back. Do you know what deferred tax is?

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Replying to andy.partridge:
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By kkl
28th Jan 2019 10:32

andy.partridge wrote:

Question back. Do you know what deferred tax is?


I believe I do, but please correct me. Isn't it tax asset or liability stemming from temp differences between book income and taxable income? E.g. from prepaid expense or unearned revenue?

As to professional service, I agree.

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Replying to kkl:
Flag of the Soviet Union
By thevaliant
28th Jan 2019 12:49

No, it is not.

Deferred tax arises from temporary timing differences on tax. The most common are depreciation charges v capital allowances, and losses carried forward. It has nothing* to do with accruals and prepayments.

I'm not going to suggest you need an accountant (though you might well) but I would ignore deferred tax.

* Well, pension accruals and salary bonus accruals not paid within 9 months cause DT to arise... probably others too.....

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Replying to thevaliant:
RLI
By lionofludesch
28th Jan 2019 12:57

thevaliant wrote:

No, it is not.

Deferred tax arises from temporary timing differences on tax. The most common are depreciation charges v capital allowances, and losses carried forward.

To be fair, I thought it was a decent stab.

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Replying to thevaliant:
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By kkl
28th Jan 2019 18:35

Thanks. I'd still like to understand it better.

I know the tax differences often arise from differences between depreciation method for financial reporting vs tax allowance.

I thought any time the revenue or expense is recognized in different periods for finacial reporting (accrual basis) vs tax reporting (cash basis) it also leads to DTA / DTL.

I've read under FRS105 deferred tax is not permitted, so I started to wonder how does this work then, does it require no temporary differences to be there at all? That makes little sense.

Thanks for your insights, I'd be grateful for direction to where I could read more about it.

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Replying to kkl:
RLI
By lionofludesch
28th Jan 2019 22:10

kkl wrote:
That makes little sense.

I'd like to understand it too.

But them's the rules © and we're stuck with them.

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Replying to kkl:
Flag of the Soviet Union
By thevaliant
29th Jan 2019 15:01

Your error is in assuming that financial reporting uses an accruals basis and that tax reporting uses a cash basis.

They do not. Corporation tax should be calculated on the accounting profit (under the accruals basis), BUT the government (rightly) do not accept that certain expenses under the accounting basis are allowable (either permanently or temporary). Permanent differences you simply don't worry about. Add them back to the accounting profit, end of story.

But things like depreciation aren't allowable. If it was, EVERYONE* would depreciate all assets VERY aggressively to claim tax relief as soon as possible. So the government give you capital allowances instead. First the AIA, and then 18% WDA thereafter**.

So an asset you depreciate over five years SL, could take years to claim capital allowances on (actually, an infinite amount of time - but lets not go there) - or no time at all, if it falls under the AIA.

You need to see a worked example really, which I'm not going to post because I've better things to do this afternoon (like look at this accruals list)***.

* Well, mostly everyone
** And it's even more complicated than that really
*** 'Better' is very subjective though

Full disclosure - I'm a FIRM believer in the flow through method for deferred tax.

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Replying to kkl:
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By andy.partridge
28th Jan 2019 13:06

Sorry to flush this out. It was important in order to gauge the size of the iceberg beneath the surface of the water.

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Replying to andy.partridge:
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By kkl
28th Jan 2019 17:39

That's ok, I'm doing my best not to make it an ice-berg, just a frost-covered boat.

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By Accountant A
28th Jan 2019 01:37

kkl wrote:

Please pardon if this question sounds silly, I'm trying to make a head or tail of this not being proffesional accountant.

https://www.accountingweb.co.uk/about-accountingweb
"AccountingWEB.co.uk is the largest independent online community for accounting and finance professionals in the UK"

There may be other matters that you are not aware that you need professional advice on. Good professional advice is worth the very modest cost. Accounting standards are not written with a lay audience in mind. Why waste your valuable time trying to do a specialist's job when you can pay someone to advise you while you get on with running your business?

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Replying to Accountant A:
ALISK
By atleastisoundknowledgable...
28th Jan 2019 08:50

That’s a nice way of putting it.

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Replying to atleastisoundknowledgable...:
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By Accountant A
28th Jan 2019 15:46

atleastisoundknowledgable... wrote:

That’s a nice way of putting it.

I'm losing my touch.

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RLI
By lionofludesch
28th Jan 2019 13:00

I don't know why not having deferred tax implies to you that you'd need to use the cash basis.

Cash basis is not permitted for companies of any size.

I would echo A's comments regarding professional advice.

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