Deferred Tax: What is it? And How is it Calculated?

Deferred tax occurs due to the difference between accounting profit and taxable profits.

For example, depreciation is an allowable expense and can be deducted when calculating accounting profit.

However, depreciation is added back when calculating taxable profits and tax allowances such as AIA can be claimed instead.

This creates a temporary difference between the accounting value of items and their comparable taxable values.

These temporary differences can result in either a deferred tax asset (the taxable value is higher than the accounting value) or a deferred tax liability (the taxable value is lower than the accounting value).

How is it calculated

The deferred tax is calculated as the temporary difference multiplied by the corporation tax rate (adjusted for marginal relief if applicable).

Tangible fixed assets often have different accounting and taxable values

Other sources of deferred tax may also include:

• impairment losses

• financial assets where the gain is not taxable until sale

• share-based payments

• pensions

Why it matters

Deferred tax is important in accurately reflecting a company's financial position which is why it should be properly recognised on the balance sheet (statement of financial position). It also impacts net income through the tax expense section of the statement of profit or loss.

Points to note:

Deferred tax assets for unused tax losses should only be recognised to the extent that it is probable there will be future taxable profits available to use against.

Deferred tax does not need to be calculated for micro entities applying FRS105.

This document is a simplified helpsheet and careful research should be completed if you are unsure.

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