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.
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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.....
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.
That makes little sense.
I'd like to understand it too.
But them's the rules © and we're stuck with them.
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.
Sorry to flush this out. It was important in order to gauge the size of the iceberg beneath the surface of the water.
Please pardon if this question sounds silly, I'm trying to make a head or tail of this not being proffesional accountant.
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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?
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.