Money

UK companies/tax losses: deferred gratification


After leading the charge for lower corporate tax rates, Britain is set to push up the rate from 19 per cent to 25 per cent in 2023. Combined with a new tax break to encourage investments, the impact will vary wildly between companies,

A rise in the rate of tax companies pay on their profits is not all bad for companies with big deferred tax assets (DTAs). Those are past tax losses carried forward to set against future tax bills. They become more valuable as rates rise. Deferred tax liabilities will also, less helpfully, expand.

Accounts will have to reflect this when the change is enacted, probably in July. Companies are already assessing the impact. Edinburgh-based asset manager Standard Life Aberdeen expects the rate rise to increase the deferred tax assets and deferred tax liabilities by £19m and £9m respectively; there will be a £10m increase in the tax credit in the income statement.

The significance of such changes is debatable. Four-fifths of SLA’s £66m deferred tax liability relates to intangible assets acquired through business combinations. Such liabilities are rarely crystallised.

But DTAs can be important. Italy recently approved measures allowing banks undertaking mergers to cut their bills by turning DTAs into tax credits. The lenient regulatory treatment of deferred tax assets propped up the Japanese banking sector until 2003, when auditors refused to sign them off for lender Resona. 

In the UK, auditors should also prepare for arguments. A lot of companies have racked up losses in the pandemic. But they should only be recognised to the extent that it is “probable” there will be profits to offset them. That could be a pointer to vulnerability. Weaker companies are more likely to want the asset on their balance sheet.

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The new “super deduction” — a 130 per cent capital allowance — presents another potential deferred taxation pitfall. In the next couple of years, many companies will pay greatly reduced bills. After that, there will be a big bump in tax charges. Investors should factor this into their cash flow forecasts. Nasty surprises lie in store for the unwary.

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