FRS 102 Income Tax

FRS 102 Section 29 outlines how income tax should be recognised, measured and disclosed under UK GAAP, including both current tax and deferred tax. It explains how entities should recognise, measure and disclose tax balances arising from taxable profits, timing differences and other tax-related matters.

The 2024 periodic review introduced new guidance on uncertain tax treatments, requiring entities to assess whether a tax position is likely to be accepted by the relevant tax authority and reflect any uncertainty appropriately in their financial statements. The amendments also introduced new disclosure requirements relating to Pillar Two taxes.

Understanding and applying these requirements is essential for accurate and compliant financial reporting under UK accounting standards. This guide, created by Crowe UK's Financial Reporting Standards specialists, explores the key aspects of FRS 102 Section 29, including current tax, deferred tax, uncertain tax treatments and presentation requirements, helping businesses navigate their UK GAAP reporting obligations.

Current tax under FRS 102

Current tax is recognised based on the amount of tax payable on taxable profits for current and prior periods. Where too much tax has been paid, or losses can be carried back, a current tax asset is recognised.

Measurement tends to be straightforward; amounts are based on tax rates and laws that have been enacted or substantively enacted at the reporting date. This ensures the tax charge reflects the expected cash outflow or recovery. 

Deferred tax under FRS 102

Deferred tax arises from timing differences between accounting profit and taxable profit. These commonly occur where items such as depreciation and capital allowances are recognised in different periods. 

FRS 102 requires deferred tax to be recognised on most timing differences, including those arising on fixed assets such as revaluations and group-related profits. However, deferred tax assets, such as those arising from losses, are only recognised where recovery is probable. 

Deferred tax is also recognised in business combinations, with any adjustment impacting goodwill. 

Deferred tax is measured using tax rates expected to apply when the timing differences reverse, based on laws that are enacted or substantively enacted at the reporting date. 

The standard includes specific guidance in certain areas, such as: 

• revalued assets and investment property, where tax is often measured based on a sale basis 
• situations where tax rates vary depending on profit levels, requiring an average rate 
• where entities are not required to consider the effects of Pillar Two legislation when measuring deferred tax balances. New disclosure requirements relating to Pillar Two taxes have also been introduced. 

Discounting of deferred tax balances is not permitted. 

Uncertain tax treatments under FRS 102

A significant addition in the 2024 Periodic amendments to section 29 is guidance on uncertain tax positions. 

Entities must assess whether a tax treatment is likely to be accepted by the tax authority. If it is not probable, the uncertainty must be reflected in the financial statements using either the most likely outcome or an expected value approach, depending on which better predicts the resolution. This introduces greater judgement and aligns FRS 102 more closely with international practice.

Tax disclosures under FRS 102

Section 29 also addresses several practical areas. Withholding tax on distributions is generally presented consistently with the underlying income or distribution, often on a gross basis where appropriate. 

VAT is excluded from revenue and expenses where it is recoverable, and irrecoverable VAT is included in the cost of assets or expenses where appropriate. 

The standard also sets out how tax should be presented in the financial statements, requiring tax to be recognised in the same category as the underlying transaction, whether in profit or loss, other comprehensive income, or equity. 

The main areas of focus for entities are ensuring accurate recognition of current tax, appropriate assessment of deferred tax recoverability, and correct measurement using enacted tax rates.

The introduction of guidance on uncertain tax treatments is a significant development, requiring greater judgement, documentation and transparency when assessing tax positions.

Overall, while the core principles of Section 29 remain unchanged, the updates place greater emphasis on robust disclosures and the appropriate treatment of tax uncertainties. Businesses should also consider the wider implications of recent amendments across the FRS 102 framework and their impact on financial reporting processes and governance.

For organisations seeking support with the application of UK accounting standards, Crowe UK's Audit Services team can provide guidance on FRS 102 compliance, implementation and disclosure requirements.