Deferred Tax Calculator
United Kingdom

IAS 12 deferred tax in United Kingdom: FRS 102 Section 29 (for entities not applying IFRS); IAS 12 as adopted by the UK for IFRS reporters

The UK applies IAS 12 as adopted for all entities reporting under UK-adopted IFRS, which includes all companies listed on the London Stock Exchange and many large private companies. Entities reporting under FRS 102 apply Section 29 Income Tax, which follows a timing difference approach rather than the temporary difference approach of IAS 12. The practical difference matters: FRS 102 Section 29 recognises deferred tax only on timing differences (differences between taxable profits and accounting profits that originate in one period and reverse in another), while IAS 12 catches a broader set of temporary differences including those arising from business combinations, revaluations, and share-based payments. A UK entity preparing consolidated IFRS accounts while its subsidiaries report under FRS 102 needs to reconcile these two approaches in the consolidation, which is a common source of error. The UK corporation tax rate stands at 25% (effective April 2023) for companies with profits above £250,000. A small profits rate of 19% applies to companies with profits below £50,000, with marginal relief between £50,000 and £250,000. For deferred tax purposes, IAS 12.47 requires measurement at the rate expected to apply when the temporary difference reverses. Most entities use 25%, but entities that expect to be within the small profits band when the difference reverses should use the lower rate. This requires an assessment of future profitability that many preparers skip, defaulting to 25% regardless of entity size. For banking entities, the bank surcharge of 3% (on profits exceeding £100M) creates a combined rate of 28% for banking temporary differences.

Regulatory context: Financial Reporting Council (FRC); HMRC for tax administration

The FRC has made deferred tax a recurring focus in its Annual Review of Corporate Reporting and in its thematic reviews. The 2022/23 Annual Review identified deferred tax as one of the top areas requiring improvement in IFRS financial statements. Specific findings included: inadequate disclosure of the recoverability basis for deferred tax assets, failure to use the correct rate (entities continuing to use 19% after the rate change to 25%), and insufficient detail in the tax rate reconciliation under IAS 12.81(c). The FRC expects the rate reconciliation to explain every material reconciling item individually, not aggregate them into "other" or "permanent differences." The FRC's thematic review of IAS 12 disclosures (published in its 2023 monitoring report) emphasised that entities should disclose the amount of deductible temporary differences and unused tax losses for which no deferred tax asset has been recognised (IAS 12.81(e)), and explain why the asset hasn't been recognised. The FRC found that many UK entities disclosed the aggregate unrecognised deferred tax asset but didn't break it down by type or explain the specific circumstances preventing recognition. The FRC also noted that the 2021 IAS 12 amendment on deferred tax related to leases and decommissioning obligations required enhanced disclosure, and several entities failed to provide adequate transition disclosures.

Practical guidance for United Kingdom

UK practitioners need to pay particular attention to capital allowances, which operate differently from tax depreciation in most other jurisdictions. The UK doesn't have tax depreciation in the traditional sense; instead, capital expenditure qualifies for capital allowances that are calculated on pools of qualifying expenditure. The main pool receives an 18% writing-down allowance (reducing balance), and the special rate pool receives a 6% allowance. The Annual Investment Allowance (AIA) provides 100% first-year relief on qualifying expenditure up to £1M. Full expensing (100% first-year allowance on qualifying plant and machinery) was introduced in April 2023 and made permanent in the 2024 Autumn Budget. These allowances create significant taxable temporary differences in the first year (the tax deduction exceeds the accounting depreciation) that reverse over the asset's useful life. For the deferred tax calculation, the tax base of an asset equals its tax written-down value in the capital allowance pool. Because the pool is calculated on an aggregate basis, the tax base of individual assets within the pool is an allocation of the pool's written-down value. Many UK preparers calculate the temporary difference at the pool level, which IAS 12 permits if the result approximates the asset-by-asset calculation. When setting up the calculator, use the pool's tax written-down value as the aggregate tax base for all assets in that pool.

Audit expectations

FRC inspection findings on deferred tax in UK audits include: failure to test the entity's capital allowance computation (auditors accepted the tax base without verifying it to the capital allowance pools), inadequate challenge of management's profit forecasts used for the IAS 12.24 recoverability assessment, failure to consider the impact of the rate change from 19% to 25% on deferred tax balances (entities that didn't re-measure at the new rate when it was substantively enacted in March 2021), and insufficient testing of the completeness of temporary differences (auditors focused on the largest items but missed temporary differences on provisions, share-based payments, and lease balances). Auditors should test a sample of items in the deferred tax computation back to the underlying records: capital allowance computations filed with HMRC, the lease schedule for IFRS 16 temporary differences, and the provision schedule for deductible temporary differences. The FRC expects auditors to assess whether management has identified all temporary differences, not just the obvious ones.

United Kingdom-specific considerations

The UK has several tax regime features that affect deferred tax calculations. The super-deduction (130% first-year allowance, April 2021 to March 2023) was replaced by full expensing (100% first-year allowance, April 2023 onwards). Entities that claimed the super-deduction have assets with a tax base that was reduced by 130% of the cost, which can result in a negative tax base. The deferred tax liability on these assets is larger than it would be under standard capital allowances. Full expensing reduces the tax base to zero in year one for qualifying assets, creating maximum taxable temporary differences upfront. The UK's R&D tax credit regime underwent significant reform in April 2024, merging the SME and RDEC schemes into a single merged scheme. The deferred tax treatment depends on whether the credit is treated as a reduction of tax expense or as above-the-line income. Under the merged scheme, the credit is above the line (included in operating profit), which changes the interaction with IAS 12. Loss relief rules allow trading losses to be carried back one year and carried forward indefinitely, but with a restriction: only 50% of profits above £5M can be offset by carried-forward losses. This restriction affects the recoverability assessment for deferred tax assets on losses, because even if the entity expects future profits, only a portion of those profits can absorb the losses in any given year.

Common inspection findings

The FRC found that auditors accepted management's capital allowance computations without verifying the tax written-down values to HMRC filings or the entity's capital allowance schedules.

Entities failed to re-measure deferred tax balances when the UK rate changed from 19% to 25%, despite the new rate being substantively enacted in March 2021.

Tax rate reconciliations under IAS 12.81(c) aggregated material reconciling items into "other adjustments" without individual explanation, falling short of FRC expectations.

Deferred tax assets on carried-forward losses were recognised without adequate sensitivity analysis on the profit forecasts or consideration of the 50% loss restriction.

The 2021 IAS 12 amendment on leases required entities to recognise separate deferred tax on right-of-use assets and lease liabilities, and several UK entities failed to provide transition disclosures explaining the impact.