Deferred Tax

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi all,

Could someone please explain deferred tax (IAS 12)? I am struggling to get my head around this one! Everything else seems straight forward but this is just beyond it!


Thanks

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Deferred Tax

    Deferred tax is the estimated tax consequence of transactions in a set of accounts. It is used when capital allowances granted in relation to corporation tax are higher than the depreciation charge in a set of accounts. It is basically an estimate of the balancing charge due on the sale of fixed assets.

    Deferred tax is simply a provision - it is not actually paid to the Revenue. The credit balance on the deferred tax account represents an estimate of tax saved because of timing differences but expected to become payable when the difference reverse themselves.

    Hope that clarifies things for you.

    Kind regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Deferred Tax

    Don't expect detailed questions on deferred tax. You will not have to calculate it, only apply it (and then only possibly).

    It is usually a credit provision, so think of it like you do the provision for doubtful debts - to increase it you must credit the provision and debit the tax charge in the Income Statement (i.e. add to the charge), to reduce the provision, reverse the entries.

    That said, Steve's words are spot on - think of deferred tax as a book adjustment to make the tax charge agree with accounting rules rather than those of HMRC.

    Good luck!

    Andrew Harrington
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Deferred Tax

    A quick way of calculating the provision is to compare the tax written down value of assets on which CA's are claimed, inc. IBA and WDA, with the NBV of the same assets. If NBV is greater, multiply this by the companies marginal tax rate and use as a provision via the P/L. Recalculate each year, with the balance passing through the P/L. If TWDV is greater then no provision is necessary.

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