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Why do micro-entity accounts show no deferred tax?

The standard does not allow it.

Deferred tax is the future tax effect of things already in your accounts. The micro-entity standard, FRS 105, forbids it. Your accounts show only current tax: what your company expects to pay, or get back, for this year and earlier years.

Published

At a glance

Applies to
Every company that uses the , FRS 105
Depreciation and allowances
When they differ, no tax balance is recorded for the gap
Unpaid tax
Shown at the full amount you expect to pay. It is not reduced because you pay it later

Sources

This entry is general information for directors of UK private limited companies, not advice about a particular company.

What to do

  1. Work out the tax for the year. Use the tax rates and laws set by , not ones announced afterwards.

  2. Put it in the tax line. The has a single line for tax.

  3. Record tax you can get back. That includes tax overpaid, and tax a lets you reclaim for an earlier year.

  4. Leave out deferred tax. Do not record any, whatever its size.

Sources

How it works

Your tax line shows current tax only

The tax in your accounts is "". It is the tax your company expects to pay on its for this year and earlier years.

If your company has paid more than it owes for those years, the extra is tax it can get back. This is a current tax asset.

Tax still unpaid at is a debt of the full amount you expect to pay. It is not reduced to allow for paying it later. It is shown as due within one year. The exception is if, at the year end, your company has an unconditional right to delay paying for at least 12 months.

For example

Say your company owes £3,000 of Corporation Tax at its year end, and pays it 9 months later.

The debt is recorded at £3,000, the full amount.

Your has one line for tax. Unlike other , the micro-entity format need not show profit before tax. Your balance sheet has no separate line for tax.

Sources

The detail The exact rules

paragraph 24.2: Section 24 applies to income tax comprising only current tax, and to VAT and similar sales taxes, which are not income taxes. The section "prohibits the recognition of which represents the future tax consequences of transactions and events recognised in the financial statements of the current and previous periods". Paragraph 24.7: "A micro-entity shall not recognise deferred tax."

Paragraph 24.4: a current tax is recognised for tax payable on taxable profit for the current and past periods; tax paid above the amount payable for those periods is a current tax asset. Paragraph 24.6: it is measured at the amount expected to be paid or recovered, using tax rates and laws enacted or substantively enacted by the reporting date. Paragraph 24.8: current tax assets and liabilities are not discounted. Paragraph 24.12: changes in a current tax liability or asset are presented as tax expense or income.

Paragraph 24.13: current tax assets and liabilities are only if there is a legally enforceable right to set off the amounts and an intention either to settle net or to realise the asset and settle the liability at the same time. Paragraph 24.4A: current tax is measured at the rate for undistributed profits until a liability to pay a dividend is recognised; the tax effect is recognised with that liability.

Formats: the Section C profit and loss format has the single line "Tax" (item G). Schedule 1, paragraph 6: every profit and loss account other than one prepared under the Section C format must show profit or loss before taxation. The Section C balance sheet formats have no separate tax line. The Section 24 paragraphs do not say which of the Section C headings holds a current tax liability. Paragraph 4.4: a is due within one year unless the has an unconditional right, at the end of the reporting period, to defer settlement for at least 12 months after the reporting date.

Sources

Why depreciation and capital allowances differ

Your accounts charge : the cost of a , less any value left at the end, spread over its useful life. Tax works differently.

Taxable profit starts from your accounts profit, adjusted as tax law requires. No is allowed for unless tax law provides one. Depreciation is not allowed. Capital allowances may be given instead, to deduct some or all of an item's value.

So in your tax working, you add back depreciation and take off . In any one year, the two can be different amounts.

For example

Say your company buys £3,000 of equipment, depreciated evenly over 3 years. It gets capital allowances for all £3,000 in year one.

Capital allowances in year one
£3,000
Less depreciation added back
£3,000 ÷ 3
−£1,000
Taxable profit is lower by
£2,000

In years two and three, taxable profit is £1,000 higher each year, so the gap closes.

Sources

The detail The exact rules

Corporation Tax Act 2009, section 46(1): the profits of a are calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law. Section 53: no deduction is allowed for items of a capital nature, subject to provision to the contrary in the Corporation Tax Acts.

HMRC's Capital Allowances Manual (CA20006): "Depreciation of fixed assets charged in the accounts is not allowed as a deduction in computing taxable profits. Capital allowances may be given instead." CA10020: capital allowances "take the place of depreciation charged in the commercial accounts, which is not normally deductible for tax purposes". HMRC's Income Manual (BIM37007): "you add back depreciation when you compute the taxable profits".

FRS 105 glossary: depreciation is "the systematic allocation of the depreciable amount of an asset over its ".

Sources

Why no tax is recorded on the gap

A company using another UK standard, , records deferred tax on "". These are gaps between taxable profit and accounts profit. They arise because income and costs are taxed in different years from when the accounts show them.

Capital allowances given before or after the depreciation are one example. So in the example above, an FRS 102 company would record deferred tax on the £2,000 gap.

The micro-entity standard is based on FRS 102. Its rules are adapted to meet the law for micro-entities, and to reflect their simpler nature and smaller size. On this point the two differ: FRS 105 forbids deferred tax. So a micro-entity records none, however large the gap. Its fixed assets stay at cost, less depreciation and any loss in value.

Sources

The detail The exact rules

FRS 102 paragraph 29.6: deferred tax is recognised on all timing differences at the reporting date, except as required by paragraphs 29.7 to 29.9 and 29.11A. Timing differences are "differences between taxable profits and total comprehensive income as stated in the financial statements that arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in financial statements". Paragraph 29.8: deferred tax is recognised when the tax allowances for the cost of a fixed asset are received before or after the depreciation of the fixed asset is recognised in profit or loss.

FRS 105 overview (iii): FRS 105 is based on FRS 102, with its accounting requirements adapted to satisfy the legal requirements for micro-entities and to reflect their simpler nature and smaller size. Paragraph 24.7: "A micro-entity shall not recognise deferred tax." Paragraph 2.38: are measured at cost less accumulated depreciation and accumulated .

Sources

Consequences

If you get it wrong

Watch for these mistakes.

  • Adding deferred tax. The standard forbids it, whatever its size.

  • Reducing unpaid tax because you pay it later. It stays at the full amount.

  • Treating overpaid tax as a cost. It is tax your company can get back, an asset.

  • Using a rate announced after your year end. Use the rates set by .

Sources

Less common situations

Your company makes a trading loss. If the loss can be carried back to get back tax already paid, that tax is a asset.

Your company can claim to set a against its total profits of the of the loss, the "loss-making period". The claim can also set what is left against profits of the 12 months before that period.

No claim is possible if, in the loss-making period, the is carried on wholly outside the UK. The claim must be made within 2 years of the end of the loss-making period, or later if HMRC allow.

Your company owes tax and is also owed tax. Set one against the other only if you have a legal right to do so and mean to settle them together.

Sources

The detail The exact rules

Paragraph 24.5: a recognises a current tax asset for the of a tax loss that can be carried back to recover tax paid in a previous period.

Corporation Tax Act 2010, section 37: if a company carrying on a trade makes a loss in the trade in an accounting period, it may claim relief by deducting the loss from its total profits of the loss-making period and, if the claim so requires, of previous accounting periods so far as they fall (wholly or partly) within the 12 months ending immediately before the loss-making period begins. The for any period is the loss so far as it cannot be deducted for a later period, so the loss-making period comes first. No claim can be made if, in the loss-making period, the trade is carried on wholly outside the UK. A deduction for an earlier period is allowed only if the company carried on the trade in that period, and not wholly outside the UK. The claim must be made within two years after the end of the loss-making period, or such further period as an officer of HMRC allows. The relief is subject to restriction or modification under other provisions of the Corporation Tax Acts.

Sources

Worked example: Bramley Studio Ltd

Bramley Studio Ltd's profit before tax for 2026 is £27,500. Its tax is £5,225, leaving £22,275. Its for 2026 is £1,800, and its are also £1,800.

Say its only income is its , and there are no other tax adjustments.

From accounts profit to taxable profit, 2026

  • Profit before tax

    £27,500

    From the accounts

  • Add back depreciation

    £1,800

    Not allowed for tax

  • Less capital allowances

    −£1,800

    Given instead of depreciation

  • Taxable profit

    £27,500

    The same as accounts profit, because the two amounts are equal

Sources

Tax in the 2026 accounts

  • Tax in the profit and loss account

    £5,225

    All current tax

  • Tax owed at 31 December 2026

    £5,225

    Part of creditors due within one year of £9,700. The full amount, not reduced

  • Deferred tax

    £0

    Not allowed

Sources

Here the allowances equal the depreciation, so there is no gap. If Bramley's allowances had been higher, an company would record on the difference. Bramley, using FRS 105, would still record none.

Sources

Not covered here

How the tax figure is worked out, and how are calculated. See which rate of Corporation Tax your company pays, the Annual Investment Allowance, fixed assets and depreciation and when to pay Corporation Tax.

Where this comes from

68 official sources. Open a group to see them.

The law 18 sources
HMRC 13 sources
GOV.UK 15 sources
Companies House 1 source
FRC 21 sources

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