Temporary differences

By Tolley in association with Nick Watson
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The following Corporation Tax guidance note by Tolley in association with Nick Watson provides comprehensive and up to date tax information covering:

  • Temporary differences
  • Calculation of temporary differences
  • Tax rate to apply
  • Exemptions applicable
  • Notes in relation to specific types of temporary differences
  • Recognition of deferred tax assets

Calculation of temporary differences

The temporary difference arising in respect of an asset or liability is calculated by comparing the carrying value of that asset or liability with its tax base.

IAS 12 uses the concept of taxable or deductible temporary differences. Whether a temporary difference is taxable or deductible can be calculated as follows:

AssetsCarrying value* - tax base If result is:
Positive = Taxable temporary difference
Negative = Deductible temporary difference
LiabilitiesTax base - carrying value*

Taxable temporary differences give rise to deferred tax liabilities. The deferred tax liability equals the taxable temporary difference multiplied by the appropriate tax rate.

Deductible temporary differences give rise to deferred tax assets. The deferred tax asset equals the deductible temporary difference multiplied by the appropriate tax rate.

*In the context of consolidated accounts, it is important to note that the carrying value used in the above calculations is that in the consolidated rather than individual company accounts.

Tax rate to apply

The tax rate applicable for these calculations is the one that the entity expects to be applicable when the temporary difference unwinds. There are specific rules in relation to the circumstances to be taken into account when considering changes in tax laws (see the guidance note Tax accounting and changes in tax laws).

Specific guidance is given in IAS 12 in relation to the circumstances where the rate of tax applicable to a company varies depending on whether the profits are distributed to the parent. In such cases, IFRS requires that the tax rate selected is the one that would apply to undistributed earnings.

Examples of

More on Deferred tax and tax disclosures under IFRS: