Tax accounting and changes in tax laws

By Tolley
Corporation_tax_img2

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Tax accounting and changes in tax laws
  • Summary of guidance on enactment by GAAP

When calculating tax numbers for accounts it is important to be clear on when new tax laws should be taken into account.

Where a company is part of a group which produces consolidated accounts, changes in tax laws are a common difference to consider in preparing both the group accounts and the subsidiary accounts. This is often because for calendar year end companies the consolidated accounts are produced before the UK Budget announcement whereas subsidiary accounts are prepared later in the year. Hence, disclosure of changes affecting future years may be needed in the subsidiary accounts.

Given that most tax law changes that are announced are prospective in nature, this is mainly relevant from a deferred tax perspective. Preparers must consider what laws will apply when deferred tax balances unwind in future periods. For example, with the recent changes in UK corporation tax rates, companies have had to recalculate deferred tax balances based on the new lower rates. See the Computation of corporation tax guidance note for details of the latest rate changes.

See Example 1.

For clarity, this guidance note refers to changes in tax rates which are consistent with the accounting standards, however exactly the same principles apply to other changes in tax law which affect the company’s income tax liabilities and therefore any such changes should be considered in light of the guidance below. For additional discussion on assessing the implication of tax rate and law changes post Finance Act 2016, and other topical and generic year-end reporting issues, see ‘How to handle year-end reporting’ by Stephanie Hurst and Kip Linton in Tax Journal, Issue 1331, 14 (11 November 2016) (subscription sensitive).

The concept applied for measuring when a law is enacted differs between GAAPs:

    More on Deferred tax and tax disclosures under IFRS: