Third, there is the problem of determining what tax charge is to be considered. Deferred tax has to be ignored. It is quite literally made up and is, of course, never paid, so it must be discounted, entirely. But what we also know is that historically the current tax provision in most accounts is also overstated. I first noted this in 2006 and more recent evidence suggests that the trend continues. Companies over-provide for their current tax and then release their provisions when their tax avoidance proves to be effective. So the tax provision in the accounts of a company for any one country may also not be the right basis for determining an acceptable effective tax rate by jurisdiction.

Is cash paid the right basis, then? It may be, but critically this has to relate to a year rather than be the sum paid in a year. This will take time to calculate, and be subject revision.

Isn’t the second paragraph just saying that we do in fact have to use some measure of deferred tax?

13 thoughts on “Umm”

  1. It’s almost as if he has read what we wrote last week about his blundering around in company accounts. Read but not fully understood

  2. “I first noted this in 2006”. I first noticed it in about 1992 when I was being taught for my accountancy exams – you make provisions prudently (ie towards the upper end of the estimated range) so your deferred tax and other unrealised liabilities are always a bit on the high side. Put it another way – if your provisions DON’T cover the actual sums you fork out then you will have some explaining to do.

    This is taught to the babbies in Accountancy 101 so it’s not exactly noteworthy. It’s akin to saying “Debits are on the left – I first noted this in 2006” and is just as stupid.

  3. If you believe the only reason companies don’t pay enough tax is tax avoidance, then sure, have a global minimum tax charge. Knock yourself out.

    If, on the other hand, you believe there are some genuine reasons why companies might not be paying much tax. Say, for example, brought forward losses, R&D tax credits, capital allowances in excess of depreciation, credits given against employee stock options, or the substantial shareholding exemption, then the global minimum tax is a fantastically stupid and shit idea.

    Oh, and it only works for the Americans because they tax on a global basis. It won’t work anywhere else.

  4. To answer your question, no, I don’t think so. He seems to be wanting reporting of the actual tax charge in a year, as oppose to the estimated charge. Deferred tax is explicitly tax not paid, but I don’t know why he says it is never paid… my company has deferred tax liabilities because we have to declare profits well in advance of getting cash and, therefore, paying tax. We will pay that tax when we get that cash.

    His demand is still stupid. He accepts that the number will be subject to revision (because the companies he’s fussed with can’t calculate their tax by the financial reporting deadlines) so he seems to be saying that the current process of estimating and washing variances out in subsequent periods is terrible and instead we should estimate and wash variances out in subsequent periods.

  5. @ Tim
    Deferred tax is the difference between the tax that would be due if the tax authorities followed IFRS (or GAAP or GAAS, as appropriate) in calculating tax liabilities and the tax that actually is due under local legislation. The largest single item is usually the difference between the depreciation charge and the capital allowance on fixed assets.
    It is, of course, payable over the period of use of the assets.
    It is ridiculous (as in “inviting ridicule”) to say that deferred tax is never paid.

  6. John77 is right, of course. However, what can happen is that a company builds up DTLs and then fails, so in that sense they’re never paid. The exercise of how to make a bankrupt company pay more tax is left to the reader.

  7. He still has not explained why (a) taxing is a good thing in and of itself (save MMT claptrap) or recognised that (2) how corporate taxes are mostly incident on customers, employees and owners – in that descending order.

  8. @ aaa
    If the company is bankrupt then it has losses exceeding its accrued undistributed profits which eliminate its liability to corporation tax. So the DTLs are not only unpaid but undue.
    The exercise of how to get HMRC pay a refund of corporation tax to the liquidators to share among the unsecured creditors is one that should be occasionally attempted.

  9. I’m not an accountant, but in running a professional engineering firm that was a cash basis tax payer but still prepared financial statements, I always thought that the deferred tax was a bit of a nonsensical liability. One with no creditor. However, I learned differently in a severe down year. Our financial revenues and profits were way down, and we had to cut staff and salaries, but early that year we collected a lot of receivables from the prior good year. Suddenly our taxable income was not so low and the deferred tax liability became real.

    In our case the depreciation difference between book and tax accounting was not as significant as the timing difference between accrued revenue recognition and the collection of those revenues. A growing firm with its larger revenues and receivables at the end of the year can keep the deferred tax account growing, but when you shrink it can bite.

  10. usually best to ignore his wibblings!

    Deferred tax is no more than timing differences that are likely to reverse in the future. Could be an asset or liability, and often is both. One quite common one is tax losses carried forward, but as has been pointed out, the accounting charge for asset use is often different from the tax charge, but most companies would expect to get full allowance for asset costs, where such costs are allowable.

    The calcuation depends on the accounting rules being followed, and of course given we are talking about future events, there is likely to be an element of guesswork – tax rules change fairly regularly but more to the point so do circumstances.
    Of course the thing about tax avoidance is that in general the aim is to create a permanent difference, so it won’t reverse and you wouldn’t include it in the deferred tax charge. If it was speculative and likely to reverse I would have thought you would account for it in the current tax charge rather than the deferred tax charge, and perhaps keep your fingers crossed. Certainly you would most likely be obliged to make full disclosure, and HMRC may well challenge it under one or more of the avoidance provisions.

    The thing about the current tax charge is that it will be based on a realistic estimate of the tax that is likely to arise on the taxable profit, calculated from the reported profit in the accounts. But that is about tax on profit, not when that liability is likely to be paid. These days companies paying corporation tax will probably pay it in installments, with the first one being before the actual tax charge is known. You used to get a period of grace but HMRC are charged with wringing more blood out of taxpayers.

    The other thing to note is that HMRC tend to make eyewatering assumptions about how the rules apply, and many businesses caught in this will have little choice but to settle liabilities early and then get them back if the courts rule for them. This is true of many taxes, not just corporation tax, and would most likely also apply to avoidance schemes where HMRC have made a determination. Although HMRC have wide ranging powers, tax legislation is just legislation, and courts are the ultimate arbiter – although this is usually time consuming and expensive.

    And finally, the ultimate tax liability is determined by either agreement or assessment. Not by the tax numbers included in the financial statements.

  11. Below the line, Ritchie says this:

    Why require that even the remotest risk of a liability be accrued when no there is no likelihood it will be paid?

    That is not true of contingent liabilities

    So why deferred tax?

    Equally, one might wonder why accrue for the undiscounted costs of carbon elimination on the balance sheet when there is no likelihood that it will be paid?

  12. TBF back in the day, the UK used partial provision of deferred tax, where you made an assessment of what would be payable. But that was just too subjective for international accounting standards so we went back to full provision

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