The principle of a deferred taxation charge or credit is that, when added to the corporation tax charge for the year, it should equal the profit before tax multiplied by the corporation tax rate. Deferred tax liabilities are the amounts of taxes payable in future periods in respect of temporary differences; a temporary difference arises when the carrying value of an asset or liability differs from its tax base. An example is expenditure on plant and machinery, a company may be entitled to full tax allowances in the year of expenditure, but depreciation will only be recognised over a period of time. The tax base will be nil, but the carrying value will be the cost less depreciation. The difference is that tax allowances have been claimed earlier than the time when depreciation is charged.
There will, of course, be other reasons why current tax is higher (or lower) than the profit before tax multiplied by the tax rate: dis-allowable items such as entertainment expenditure; different tax rates in other jurisdictions; group loss relief.
Deferred tax may arise for a number of reasons: property revaluations, losses carried forward, fair value adjustments on business combinations, share-based payments, defined benefit pension schemes and foreign currency exchange differences.
In Quorum’s course Tax in Company Accounts – IFRS, Peter Hughes takes you through the IFRS treatment of current and deferred tax and also the necessary disclosures. The course is heavily practical and includes numerous worked examples.
To learn more about Tax in Company Accounts, remember to book your place here.