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Group Accounts under UK GAAP

Author: Steve Collings, FCCA

ISBN: 9781526521514

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Publication Date: May 2022

Publisher: Bloomsbury Professional

Group Accounts under UK GAAP

Group Accounts under UK GAAP

This title provides accountants and auditors with easy to follow and well structured guidance on the preparation of group accounts in line with UK GAAP. Group accounts must be prepared, by law, for medium-sized and large groups. Listed companies are required to prepare their accounts in line with International Financial Reporting Standards but larger unlisted companies can prepare their statements using UK GAAP.

Groups are very common in the UK and are likely to become even more common when corporation tax rates increase in the future as there are various tax advantages to operating under a group structure.

Group structures can vary (e.g. horizontal, vertical, hybrid, D-shaped|) and preparing financial accurate financial statements can be complex as a result. While there is a lot of guidance on producing accounts under IFRS, there is every little in evidence dealing with the UK GAAP rules. This title addresses this gap.

The commentary identifies the differences between IFRS and UK GAAP in the treatment of group accounts. The differences between accounts produced pre and post Brexit are also covered. All commentary is supported throughout by the inclusion of worked practical examples based on the authors experience dealing with clients and running training courses.

Impact of the ‘mini-budget’ on deferred tax

As was widely expected, the headline rate of corporation tax in England was due to increase to 25% on 1 April 2023 for companies which generate taxable profits exceeding £250,000. Companies generating taxable profits of £50,000 or less would have been unaffected by this rate increase as they would have continued to pay corporation tax at 19%.

Chancellor Kwasi Kwarteng announced in his ‘mini-Budget’ on 23 September 2022 that the increase in corporation tax rate to 25% was being reversed, and the headline rate of corporation tax was to remain at 19%. This was, of course, welcome news for companies who do generate large profits because it saves them cash. The reversal was in response to the government’s plans to stimulate economic growth and promote investment.

The reversal of the planned corporation tax increase may not necessarily have an impact for corporation tax calculations (as it did not come into effect); but it will have an impact on deferred tax balances that are recognised in a reporting entity’s financial statements.

Deferred tax impact

Of course, for micro-entities choosing to prepare their financial statements under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, there will be no impact on deferred tax as deferred tax is prohibited under FRS 105.

For companies not reporting under FRS 105, any change in corporation tax rates will have an impact on the calculation of deferred tax in the statutory financial statements. This is because a new rate will generally be applied for deferred tax purposes before the ‘effective’ date of the new rate for corporation tax purposes, due to the ‘substantively enacted’ approach accounting standards take.

The measurement of deferred tax uses the tax rates and laws that have been ‘… enacted or substantively enacted by the reporting date that are expected to apply to the reversal of the timing difference.’ [FRS 102, para 29.12]

The term ‘substantively enacted’ is defined in FRS 102The Financial Reporting Standard applicable in the UK and Republic of Ireland as follows:

Tax rates shall be regarded as substantively enacted when the remaining stages of the enactment process historically have not affected the outcome and are unlikely to do so.

A UK tax rate shall be regarded as having been substantively enacted if it is included in either:

a) a Bill that has been passed by the House of Commons and is awaiting only passage through the House of Lords and Royal Assent; or

b) a resolution having statutory effect that has been passed under the Provisional Collection of Taxes Act 1968. (Such a resolution could be used to collect taxes at a new rate before that rate has been enacted. In practice, corporation tax rates are now set a year ahead to avoid having to invoke the Provisional Collection of Taxes Act for the quarterly payment system.)

A Republic of Ireland tax rate can be regarded as having been substantively enacted if it is included in a Bill that has been passed by the Dáil.

Hence, when a new tax rate is announced prior to the balance sheet date, but the enactment formalities have yet to be completed, the entity will need to assess whether the tax rate has become substantively enacted. This will, of course, depend on the entity’s balance sheet date.

In the UK, Bills are read three times in the House of Commons prior to going to the House of Lords. The House of Lords can debate the future tax rate, but cannot propose changes to it. After the Bill has passed through the House of Lords it is sent for Royal Assent. In light of this procedure, it is reasonable to conclude that a Bill approved in the House of Commons and only awaiting passage through the House of Lords and Royal Assent procedures, is substantively enacted. Parliamentary Bills can be tracked by using this link.

Under the original plans, the 25% rate of corporation tax became substantively enacted on 24 May 2021. Hence, deferred tax balances for balance sheet dates ending on or after 24 May 2021 were remeasured at 25% or at the marginal rate where taxable profits were expected to fall between £50,001 and £250,000. Companies that were expected to generate taxable profits of £50,000 or less continued to measure deferred tax balances at 19% so there was no effect on such entities.

The mini-Budget on 23 September 2022 reverses the planned corporation tax increase but it is important to emphasise that for deferred tax purposes, the enactment process for the reversal does not happen straight away and remeasurement at 19% will only happen once the headline rate of 19% has been substantively enacted. At the time of writing, the timing of the legislation required to reverse the increase was unknown, but the link provided above should allow interested parties to keep a track of the developments in this area.

Conclusion

Companies whose taxable profits are expected to exceed £250,000 will continue to measure deferred tax using the 25% tax rate until the headline rate of 19% becomes substantively enacted. Companies whose taxable profits were not expected to exceed £50,000 will continue measuring deferred tax using 19% and companies whose profits will fall in the mid-range will continue applying the marginal rate until the headline rate is substantively enacted.

Impact of the ‘mini-budget’ on deferred tax

As was widely expected, the headline rate of corporation tax in England was due to increase to 25% on 1 April 2023 for companies which generate taxable profits exceeding £250,000. Companies generating taxable profits of £50,000 or less would have been unaffected by this rate increase as they would have continued to pay corporation tax at 19%.

Chancellor Kwasi Kwarteng announced in his ‘mini-Budget’ on 23 September 2022 that the increase in corporation tax rate to 25% was being reversed, and the headline rate of corporation tax was to remain at 19%. This was, of course, welcome news for companies who do generate large profits because it saves them cash. The reversal was in response to the government’s plans to stimulate economic growth and promote investment.

The reversal of the planned corporation tax increase may not necessarily have an impact for corporation tax calculations (as it did not come into effect); but it will have an impact on deferred tax balances that are recognised in a reporting entity’s financial statements.

Deferred tax impact

Of course, for micro-entities choosing to prepare their financial statements under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, there will be no impact on deferred tax as deferred tax is prohibited under FRS 105.

For companies not reporting under FRS 105, any change in corporation tax rates will have an impact on the calculation of deferred tax in the statutory financial statements. This is because a new rate will generally be applied for deferred tax purposes before the ‘effective’ date of the new rate for corporation tax purposes, due to the ‘substantively enacted’ approach accounting standards take.

The measurement of deferred tax uses the tax rates and laws that have been ‘… enacted or substantively enacted by the reporting date that are expected to apply to the reversal of the timing difference.’ [FRS 102, para 29.12]

The term ‘substantively enacted’ is defined in FRS 102The Financial Reporting Standard applicable in the UK and Republic of Ireland as follows:

Tax rates shall be regarded as substantively enacted when the remaining stages of the enactment process historically have not affected the outcome and are unlikely to do so.

A UK tax rate shall be regarded as having been substantively enacted if it is included in either:

a) a Bill that has been passed by the House of Commons and is awaiting only passage through the House of Lords and Royal Assent; or

b) a resolution having statutory effect that has been passed under the Provisional Collection of Taxes Act 1968. (Such a resolution could be used to collect taxes at a new rate before that rate has been enacted. In practice, corporation tax rates are now set a year ahead to avoid having to invoke the Provisional Collection of Taxes Act for the quarterly payment system.)

A Republic of Ireland tax rate can be regarded as having been substantively enacted if it is included in a Bill that has been passed by the Dáil.

Hence, when a new tax rate is announced prior to the balance sheet date, but the enactment formalities have yet to be completed, the entity will need to assess whether the tax rate has become substantively enacted. This will, of course, depend on the entity’s balance sheet date.

In the UK, Bills are read three times in the House of Commons prior to going to the House of Lords. The House of Lords can debate the future tax rate, but cannot propose changes to it. After the Bill has passed through the House of Lords it is sent for Royal Assent. In light of this procedure, it is reasonable to conclude that a Bill approved in the House of Commons and only awaiting passage through the House of Lords and Royal Assent procedures, is substantively enacted. Parliamentary Bills can be tracked by using this link.

Under the original plans, the 25% rate of corporation tax became substantively enacted on 24 May 2021. Hence, deferred tax balances for balance sheet dates ending on or after 24 May 2021 were remeasured at 25% or at the marginal rate where taxable profits were expected to fall between £50,001 and £250,000. Companies that were expected to generate taxable profits of £50,000 or less continued to measure deferred tax balances at 19% so there was no effect on such entities.

The mini-Budget on 23 September 2022 reverses the planned corporation tax increase but it is important to emphasise that for deferred tax purposes, the enactment process for the reversal does not happen straight away and remeasurement at 19% will only happen once the headline rate of 19% has been substantively enacted. At the time of writing, the timing of the legislation required to reverse the increase was unknown, but the link provided above should allow interested parties to keep a track of the developments in this area.

Conclusion

Companies whose taxable profits are expected to exceed £250,000 will continue to measure deferred tax using the 25% tax rate until the headline rate of 19% becomes substantively enacted. Companies whose taxable profits were not expected to exceed £50,000 will continue measuring deferred tax using 19% and companies whose profits will fall in the mid-range will continue applying the marginal rate until the headline rate is substantively enacted.

Steve Collings FCCA

Steve Collings FCCA is a director at Leavitt Walmsley Associates, Chartered Certified Accountants based in Sale, Cheshire where he trained and qualified. Steve is the author of several titles for Bloomsbury Professional including Group Accounts under UK GAAP, Financial Reporting for Unlisted Companies in the UK and Republic of Ireland and Financial Statements: Presentation and Disclosure Requirements. Steve has close connections with various professional bodies producing authoritative material, articles and courses and represents the Association of Accounting Technicians on the CCAB and Technical Partners Committee at the Financial Reporting Council.

FRC issues update to the periodic review

On 29 September 2023, the Financial Reporting Council (FRC) issued a project update on its periodic review of UK and Ireland accounting standards.

FRED 82 Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review was published on 15 December 2022 and comments on this Exposure Draft closed on 30 April 2023.

Among other amendments, FRED 82 proposes significant changes in the areas of lease accounting (but not for FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime) and revenue recognition (for both FRS 102 and FRS 105). It is doubtful that the FRC will abandon these significant proposals and have confirmed in their project update that they are continuing work in these areas. Notably, for on-balance sheet lease accounting, the FRC are reconsidering how the model is proportionate and understandable for preparers of financial statements under FRS 102. For example, by perhaps clarifying the scope of the recognition exemption for leases of low-value assets.

In respect of the changes to revenue recognition and the introduction of a five-step model approach similar to that in IFRS® 15 Revenue from Contracts with Customers, the FRC have received support for the proposals. However, there is some concern about the proportionality of the amendments in FRS 105. In this respect, the FRC are continuing to work on the five-step model approach to revenue recognition in light of the feedback they have received and are seeking further simplifications to ensure the revenue recognition principles in FRS 105 remain proportionate.

Effective date

The FRC originally planned to require the amendments arising from the periodic review to be effective for periods commencing on or after 1 January 2025. This date has now been delayed so the amendments arising from the periodic review will not have an effective date before 1 January 2026. The FRC expect to publish the final amendments to FRS 102 and other FRSs in the suite of UK and Ireland GAAP in the first half of 2024.

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