04 May 2020

Entities will need to consider a number of matters in relation to the recognition and measurement of current and deferred tax as a result of coronavirus.

A tax expert should be consulted for advice on the tax implications in the context of the specific circumstances.

What does FRS 102 say?

FRS102 (Section 29) states that current tax should be measured at the amount of tax an entity expects to pay or recover, based on taxable profits for current and past periods, calculated using the tax rates and laws that have been enacted or substantively enacted by the reporting date. Entities are also required to recognise a current tax asset for the benefit of a tax loss that can be carried back to recover tax paid in a previous period. 

Under FRS102 deferred tax assets and liabilities must be recognised in respect of all timing differences at the reporting date. However, unrelieved tax losses and other deferred tax assets should only be recognised to the extent that they are recoverable, either against the future reversal of deferred tax liabilities or against other future taxable profits. 

Practical impact and interpretation for preparers

Current Tax 

Governments across the world have been making a number of reliefs available to businesses to reduce the impact of the pandemic on the economy. The key factor in understanding the financial reporting implication of the relief is determining whether the relief is:

  • a tax relief, accounted for in accordance with FRS 102 (Section 29);
  • a government grant, accounted for in accordance with FRS 102 (Section 24); 
  • or an item that is within the scope of another section of FRS 102. 

Key reliefs announced for UK businesses

Relief Overview Tax implications
Coronavirus job retention scheme (furloughing scheme)
The government is offering help with employees’ wages.
Payments received by a business under the scheme are to be treated as taxable income.
Employment costs will be a deductible expense as normal. PAYE and NI are accounted for as normal.
There is no further impact on tax accounting as the scheme operates as a government grant, not a tax relief.
HMRC Time To Pay arrangements (TTP) and other tax deferments such as VAT
Businesses may be eligible to defer payment of liabilities owed to HMRC.
This is a cash flow timing benefit. The impact on the reporting entity may be an increase in the year end liability because some payments are delayed.
Holiday carry forward The carry forward of holiday rules in the working time regulations have been relaxed to allow employees to carry forward holiday for 2 holiday year periods.
We may see additional holiday pay accruals.
Whilst the immediate impact is unlikely to be material, if employees can’t take their holiday within 9 months of the year-end, it won’t be allowable for tax.
For corporation tax purposes this accrual would be treated in line with the treatment of unpaid remuneration which is dealt with at Part 20 Chapter 1 CTA 2009, which means it needs to have been paid within 9 months of the year end for it to be allowable for corporation tax purposes in that period.
If it is not paid in that 9-month post year end period (eg because employees are too busy to take holidays in that period), it is allowable when paid, which will impact current and deferred tax.
Whilst this won’t affect the overall tax charge in the profit and loss account, it will affect the allocation of the charge between current and deferred tax and have a tax cashflow impact.


  • Where businesses are entitled to specific grants, such as the Retail, Hospitality and Leisure Grant, these are generally treated as taxable income by HMRC, the same as any other income arising in the entity’s’ trade. However, any specific advice regarding the grants made by HMRC should be considered in all cases, and expert advice obtained.
  • Some government reliefs may have qualifying conditions that create an element of estimation uncertainty in the financial statements. Where the receiving of a grant is uncertain, any assumptions made may be required to be disclosed as a key estimate or area of judgement in the financial statements. 

Other current tax impacts

Area Overview Tax implications
Transfer pricing
Changes in commodity price, reacting to availability in the market, may impact the relevance of previously prepare benchmarking studies used to support transfer pricing policies.
Transfer pricing may have to be revisited, impacting the entity’s tax charge.
Insurance claims (eg business interruption)
The Government declared coronavirus a notifiable disease, a key criterion to allow insurance claims. However, the Association of British Insurers has indicated that many businesses lack the appropriate cover in their policies. The general rule for any compensatory payment is that the tax treatment follows that of the sum it is compensating for. For example, compensation for loss of trade will be brought in as though trading profit in the hands of the trader, and therefore constitute taxable income.
In accordance with FRS102 (section 2), the income should be recognised when it is probable that the cash will be received from the insurer, and the amount can be measured reliably. This will usually be when the insurer has accepted liability but may be later when the amount received is subject to assessment or negotiation.
Research and development credits
One department that may be a candidate for furloughing is the research and development department.
As these employees will not be working on qualifying research and development during the period they are furloughed, this will restrict the value of the R&D credit that can be claimed.
For entities applying the furloughing scheme the credit is accounted for as a government grant, but the claim is settled by deduction from the employment taxes payable to HMRC. Therefore, any reduction in the research and development credit, will have a cashflow impact.
In addition, one of the qualifying criteria for the R&D scheme is that the recipient has to be a going concern. There may be uncertainty whether a business experiencing difficulties as a result of coronavirus will continue to qualify for the relief and therefore whether the benefit of the relief should be recognised before any claim is agreed.
Dividends received from subsidiaries
Entities may decide to distribute profits from subsidiaries to meet cash flow requirements or to maintain dividend policies.
Depending on the jurisdiction of the subsidiary, it may be that the dividend is taxable on the parent, creating a current tax liability when received.
Even when dividend income is not taxable in the hands of the parent, there may be withholding tax payable on profits distributed from subsidiaries in certain jurisdictions. This could give rise to a deferred tax liability where there is a delay between the dividend being declared (pre year-end) and being paid (post year-end).
Tax residency Travel restrictions in place globally may make it impossible for company directors to travel to the place of tax residency for Board meetings.
Whilst having to hold one Board meeting in another country due to the travel ban is unlikely to change tax status, this should be monitored, particularly if the travel ban continues for a prolonged time. This would be particularly relevant for businesses whose tax residency status is already contentious.
Where businesses are deemed resident in the UK, they may be liable to additional current tax, dependant on tax treaties in place.

Deferred Tax

Deferred tax assets should only be recognised to the extent that they are recoverable. coronavirus has impacted the profitability of many businesses in many sectors, through inability to trade or commodity price increases. This could lead to businesses generating losses for the financial year, or an increase in losses where businesses were already loss making.

Businesses should consider tax planning opportunities including:

  • loss relief available in group scenarios; or
  • disclaiming capital allowances or other allowances available. 

Where losses cannot be used, a potential deferred tax asset is created, which must be considered for recoverability.  

FRS 102 (Section 29.7) states that the very existence of unrelieved tax losses is strong evidence that there may not be other future taxable profits against which the losses can be relieved. Careful consideration should be given to whether there is sufficient supporting evidence that any unrelieved tax losses, or other deferred tax assets, will be recoverable in the future. 

The recognition of deferred tax assets are usually supported by profit forecasts produced by management, demonstrating that it is expected that sufficient taxable profits will be generated in the future to relieve the losses, These forecasts should be reassessed and updated for changes expected during the pandemic, and as the business recovers. The revised forecasts should reflect the expectations at the reporting date and demonstrate the recoverability of not only new deferred tax assets created due to losses generated during the pandemic, but also any historic deferred tax assets previously recognised. The assumptions made should be consistent with other assessments including the impairment of non-financial assets and going concern. 

Remember there are special tax rules for carried forward losses and so you should consult with a tax expert to ensure deferred tax assets for such losses will be recoverable. 

Where deferred tax assets are not considered recoverable, they should not be recognised on the balance sheet. Where previously recognised deferred tax assets are no longer considered to be fully recoverable, they should also be derecognised to the extent that they are no longer recoverable. The impact of the deferred tax charge should be recognised in the Statement of Comprehensive Income, or the Statement of Other Comprehensive Income. 

This assessment of deferred tax assets is not limited to deferred tax assets recognised in respect of carried forward losses but should be considered for all deferred tax assets eg those recognised on a defined benefit pension scheme liability.

Other deferred tax implications

Relief Overview Tax implications
Impact of changes in the carrying value of other assets and liabilities
It is likely the coronavirus will impact the carrying value of:
  • assets (eg investment property, property plant and equipment or intangibles); or
  • liabilities (eg provisions and defined benefit pension scheme liability).
Where impairments of assets are processed, or value of liabilities are altered, the relevant deferred tax impact of the movements should be considered.
Subsidiaries in other jurisdictions
Governments around the world have implemented reliefs for struggling businesses.
Subsidiaries may have taken advantage of such reliefs which will need to be appropriately reported in the consolidated financial statements.
Any government reliefs which have been taken by subsidiaries should be scrutinised and expert advice taken, to assess whether there are current or deferred tax implications for the consolidated financial statements.
If funds are remitted from overseas subsidiaries in the form of dividends that are subject to withholding tax, there may be deferred tax implications.
  • For entities with reporting dates ending before or in December 2019, the effects of coronavirus will likely be a non-adjusting post balance sheet event. The assessment of the recoverability of deferred tax assets should only include the impact on future profitability that existed at the reporting date. However, disclosure may be required to provide readers with information about the impact of coronavirus on the carrying value of the deferred tax asset recognised at the reporting date where there has been a significant effect since that date. 
  • A corporation tax rate of 19 per cent was substantively enacted on 11 March 2020, a revision from the previously substantively enacted rate of 17per cent. This will result in remeasurement of deferred tax assets and liabilities in financial statements for periods ending after this date resulting in a potential increase in the value of deferred tax assets and liabilities carried on the balance sheet.  There will be no adjustment to deferred tax balances in financial statements for periods ending before this date but if the impact is significant it should be disclosed as a non-adjusting post balance sheet event.

Disclosures in the financial statements

In order to show a true and fair view, for the reader of the financial statements to understand movements in the financial statements, and to distinguish the impacts of Coronavirus from other changes, it may be necessary to disclose the following:

  • an explanation of changes in the applicable tax rate compared to the prior period;
  • the amount and expiry date (if any) of any carry forward tax losses;
  • the nature of evidence supporting the recognition of deferred tax assets when the entity has suffered a loss in the current period; and
  • the impact of events and circumstances arising after the reporting date on the assets and liabilities recognised in the balance sheet at the reporting date.

Our advice

Entities should consider the following:

  • revising assessments for the recoverability of any deferred tax assets, updating for up to date estimates of the impact of the pandemic, both during the lockdown and the recovery periods;
  • reassessing tax planning opportunities in light of the changes of circumstance, and obtain expert tax advice where necessary;
  • regularly reviewing latest Government releases to take advantage of available reliefs;
  • considering the substance of reliefs utilised carefully, to distinguish between government grants (accounted for in accordance with FRS 102 (Section 24)) and tax reliefs; and 
  • ensuring adequate disclosures are made in the financial statements to provide a reader with a sufficient understanding of the changes in the tax position. 

For more information please contact Paul Merris and Lee Marshall.

Paul Merris
Partner, Head of Financial Reporting Advisory
Lee Marshall
Lee Marshall
Partner, Head of Accounting and Business Advisory
Paul Merris
Partner, Head of Financial Reporting Advisory
Lee Marshall
Lee Marshall
Partner, Head of Accounting and Business Advisory