Change in corporation tax rates: impact on Deferred Tax
The measure
Legislation will be introduced to bring in a phased decrease in the rate of corporation tax commencing with a reduction to 27% on 1 April 2011 and further reducing by 1% per annum until it reaches 24% on 1 April 2014. This will have an effect on deferred tax assets and liabilities included in the accounts. There will be a similar effect arising from the reduction in the small companies' rate.
Who will be affected?
Companies reporting deferred taxes for UK taxable entities in their financial statements under most accounting systems including UK Generally Accepted Accounting Principles ('UK GAAP'), US Generally Accepted Accounting Principles ('US GAAP') and International Financial Reporting Standards (IFRS).
When?
Under both UK GAAP and IFRS, the changes will arise for balance sheet dates falling on or after substantive enactment of the Finance Bill 2010 which is generally understood to be following the third reading in the House of Commons. For US GAAP filers, the changes will apply to balance sheets falling on or after the date of Royal Assent.
Under IFRS, International Accounting Standard 12 'Income Taxes', states that deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Similar rules exist within UK GAAP.
Therefore to the extent that the phased rates are included in the Finance Bill 2010, deferred tax calculations will require detailed scheduling of reversals of deferred tax assets and liabilities to enable the appropriate tax rate to be applied.
The rate changes will reduce the value of deferred tax assets and liabilities held on the balance sheet and impact the effective tax rate for the period in which the first balance sheet falls following the substantive enactment (or enactment for US GAAP purposes) but will also considerably increase the complexity of the calculation.
