FRS 102 Income Tax

This is one of a series of documents summarising the key changes to UK Generally Accepted Accounting Principles (GAAP) with the introduction of Financial Reporting Standard 102 (FRS 102).

Background

For accounting periods commencing on or after 1 January 2015, current UK GAAP has been replaced by a single standard. The transition requires all UK companies’ financial information to be prepared in accordance with FRS 102. The only exceptions will be those applying International Financial Reporting Standards (IFRS) or Financial Reporting Standard for Smaller Entities (FRSSE).

A summary of the key changes to income tax under the new standard

Income tax

This standard deals with all forms of tax, both current and deferred tax, withholding tax and VAT. Current tax For current tax, we are required to recognise a liability (asset) for current tax payable (or receivable) in respect of the current and previous periods.

If there are losses that can be carried back to recover tax in a previous period, an asset can be recognised in respect of the tax expected to be recovered.

Current tax

For current tax, we are required to recognise a liability (asset) for current tax payable (or receivable) in respect of the current and previous periods.

If there are losses that can be carried back to recover tax in a previous period, an asset can be recognised in respect of the tax expected to be recovered.

Deferred tax

In certain circumstances recognition of deferred tax will be significantly different under FRS 102.

Deferred tax will now be recognised on all timing differences. This will include revaluations or other fair value adjustments to fixed assets, including investment properties. Under FRS 19 deferred tax was only recognised on revalued property if it was intended to be sold. For property investment groups, this may result in recognition of a substantial deferred tax liability. This may materially affect the reported net assets of the entity and potentially impact upon bank covenants.

Deferred tax will also be recognised on fair value adjustments to assets acquired as a result of a business combination (excluding goodwill). This will have an impact on the goodwill recognised on business combinations. Fortunately, entities will have a choice as to whether they apply these provisions to business combinations that occurred before adoption of FRS 102.

The criteria for recognising a deferred tax asset for unrelieved tax losses remains basically the same. They can only be recognised where is it probable that there will be future profits to utilise those losses.

Other matters

There is no change to the rates used to calculate current and deferred tax. Both are calculated at rates enacted or substantively enacted at the balance sheet date.

The standard specifically prohibits discounting of future tax liabilities.

The disclosures on tax will look virtually the same, a reconciliation between the profit on ordinary activities before tax multiplied by the effective tax rate and the actual tax charge recognised in the financial statements is still required. Current or deferred tax charges (or credits) will be recognised in the same component of total income or equity as the transaction that gave rise to the charge.

Withholding tax

There is no change to the accounting treatment to withholding tax:

  • outgoing dividends are recognised including any withholding tax on dividends.
  • incoming dividends are recognised including withholding tax, which is then recognised as an element of the tax expense.
VAT
  • Turnover is recognised exclusive of VAT, including VAT imputed under the flat rate scheme.
  • Expenses will exclude recoverable VAT.
  • Irrecoverable VAT allocable to fixed assets shall be added to their cost where practicable and material.