Interpretation and Application of UK GAAP: For Accounting Periods Commencing On or After 1 January 2015

Chapter 11Income Tax

1. Introduction
2. Value Added Tax (VAT)
3. Income Tax
4. Deferred Taxation
5. Measurement of deferred tax
6. Discounting deferred tax balances
7. Disclosure Requirements

Introduction

It is a common known fact that the amount of tax expense shown in a company's financial statements is not necessarily just merely the amount of corporation tax that the company will pay to HM Revenue and Customs (HMRC), as to base the tax expense merely on what falls due to HMRC during an accounting period would deviate from the accruals basis of preparing the financial statements. The profit (or loss) that a company generates in an accounting period is computed through the application of the UK Generally Accepted Accounting Practice (GAAP) and companies legislation. Because of the way in which accounting profit/loss and taxable profit/loss is subjected to differing legislation, there will be items making up accounting profit/loss that are not recognised for the purposes of tax legislation, whilst other items may fall to be subjected to tax in later accounting periods.

In the light of the inherent differences between UK GAAP, the Companies Act 2006 and tax legislation there has to be a mechanism whereby the tax implications that will occur in future accounting periods, but which relate to items in the current year's financial statements, are recognised in the current year's financial statements. This mechanism is known as deferred tax and is recognised in the income statement (profit and loss ...