Many small companies applying FRS 102 for the first time this year, for accounting periods beginning in 2016, are struggling to get to grips with some of the very different rules that apply in respect of deferred tax.

In some respects, the rules under old and new GAAP in this area are very similar, for example deferred tax on accelerated capital allowances and the recognition of deferred tax assets.

Here are 10 different aspects to watch for, which can very easily be missed:

  1. Investment property revaluations require deferred tax

Under old UK GAAP, deferred tax was only provided on revaluations of investment property and investments where there was a binding commitment to sell the asset at the year end. That all changes under FRS 102 as deferred tax is automatically provided for on all revaluation gains.

2. Indexation counts for investment property revaluations 

The standard’s requirement (paragraph 29.15) to ‘use tax rates and allowances that relate to the sale of the asset’ mean that, when providing for deferred tax on investment property and investment revaluation gains, indexation should be factored in.

3. Realised or unrealised?

Revaluation gains on investment properties and investments go the profit and loss account but are unrealised – and so is the deferred tax. It would be harsh to say that a revaluation gain was unrealised but to then charge realised profits with the related deferred tax!

4.  Don’t forget tangible assets

Revaluation gains on tangible assets – or property, plant and equipment (PPE) as it’s now called –  are still optional under new UK GAAP, but deferred tax is needed here too. However, because the revaluation gain in this case still goes to the revaluation reserve, the deferred tax must follow it there and thus appear in ‘other comprehensive income’.

5. Adjust on transition

The new rules on deferred tax will apply going forward but adjustments will also be needed on transition. This includes where a company has chosen to carry on using a previous policy of revaluation of PPE, or to use fair value as deemed cost (paragraph 35.10c of FRS 102) or revaluation as deemed cost (paragraph 35.10d of FRS 102) when transitioning.

6. Watch reserve transfers

Most companies that revalue tangible assets (PPE) do an annual reserve transfer in respect of excess depreciation. This option is still relevant under new UK GAAP, but the transfer will be reduced (where relevant) by the reduced deferred tax charged in respect of accelerated capital allowances. Where a company has revalued upwards, the difference between depreciation and capital allowances (i.e. the timing difference) is lower than where it hasn’t. This difference should be taken into account when making the annual reserve transfer.

7. Indexation might count on PPE revaluations too

As mentioned above, indexation is always relevant for deferred tax on investment property and investment revaluations because it must be measured using tax rates and allowances that apply to the sale of the asset. It could be relevant for PPE revaluations as well, where the asset concerned is non-depreciable or where the company intends to sell it at the end of its useful economic life.

8. Deferred tax can arise on capitalised R&D

Where a company has capitalised R&D which attracts R&D tax credits, deferred tax will be provided because the timing of the expense for accounting purposes (via amortisation) and for tax purposes differs. Any excess relief provided over and above the amount spent by the company will be a permanent difference.

9. Deferred tax can arise with share options

Under FRSSE, a ‘disclosure only’ approach was allowed when accounting for share options (e.g. where a company has an EMI scheme). This is no longer possible for small companies under FRS 102. Also, the way a share option is valued and accounted for under FRS 102 is different from the way HMRC treats it. This means that any accounting in this area will typically trigger the need to create a deferred tax asset, because the actual tax relief comes later than the related P&L charge.

10. Avoid deferred tax – do micro!

Although micro entity accounts (FRS 105) are not everyone’s cup of tea and many companies won’t qualify (the turnover qualification threshold is £632K), FRS 105 totally prohibits deferred tax! For an easier life, this might be the way forward for some!