Deferred tax
Deferred tax is an accounting adjustment that matches tax to the period in which profits are reported. It arises when the rules for accounting profit and taxable profit recognise income or costs at different times. It is not a current tax bill or refund.
Simple example
You claim faster tax relief on a machine than in your accounts. Taxable profit is lower now, but accounting profit is higher. The difference creates a deferred tax liability that unwinds as the accounting depreciation catches up.
Deferred tax can be a liability (more tax to pay later) or an asset (tax relief to come). It sits on the balance sheet and reverses in future periods when the timing differences unwind. It affects profit for the period but not your cash flow right now.
Common sources of deferred tax include:
- Different rates or methods for depreciation in accounts versus capital allowances for tax.
- Revenue recognised in accounts before it is taxable, or expenses deductible for tax before they are recognised in accounts.
- Provisions and accruals that are not tax-deductible until paid.
- Unused tax losses or allowances carried forward.
