Week 4 - Deferred Tax

Question 1

Deferred tax calculations example

Answer 1

Company A earns royalty of £25k taxed on a cash received basis 20%, payment is in the next financial year

Carrying Value | Tax Base | Temporary Difference
25k | 0 | 25k

Deferred tax liability = Temporary difference x Tax Rate
To input these into the accounts:

If it’s an increase in deferred tax liability: Dr Tax Expense, Cr Deferred Tax Liability

Decrease deferred tax liability: Dr Deferred Tax Liability, Cr Tax Expense

Deferred tax liability is the difference between the one brought forward and the deferred tax liability required in the next year

Question 1

Temporary v Permanent Difference

Answer 1

Temporary requires deferred tax adjustment, Permanent DO NOT

Permanent difference: Income recognised in statements is not taxes
Expense recognised in statements is not tax deductible

These are quite rare, main example is Client entertaining. IS obviously recognisable as expense in accounts, but it is not a tax deductible expense

Temporary Difference: Income or expense in different accounting periods in the statements compared to when recognised in tax computation
e.g. Depreciating PP&E, accounts might depreciate over 20 years, but tax authority might say have to depreciate over 5 years