Deferred tax is the balance that gets rolled forward. Someone calculated it properly once, usually several years ago, and every finance team since has carried the number across and adjusted it for the obvious movements. Then a new auditor asks for the supporting schedule and the problem surfaces.
It is worth rebuilding from first principles, and it is less complicated than its reputation.
What it represents
Your accounts and your tax return measure the same transactions on different timetables. Deferred tax is the accounting entry that records the consequence of those timing differences before the tax return catches up.
If you have had tax relief earlier than the accounting charge, you owe the difference later, and that is a deferred tax liability. If you have suffered a tax cost earlier than the accounting benefit, you have relief coming, and that is a deferred tax asset.
That is the whole concept. The complexity is all in identifying the differences.
Where it comes from
A short list covers most of what a private company will have.
Capital allowances against depreciation is the big one and often the only one. Relief on plant and equipment usually runs faster than the depreciation charge, which builds a liability that unwinds over the asset’s remaining life. It reverses eventually, but a company that keeps investing keeps replacing it, so the balance looks permanent even though each component is not.
Revaluation surpluses on property create a liability for the tax that would arise on the uplift, with the entry going through other comprehensive income rather than profit.
Losses carried forward create a potential asset, subject to the recoverability test below.
Provisions and accruals that are only deductible when paid create an asset, because the accounting charge has been taken and the tax relief has not.
Fair value adjustments on an acquisition create deferred tax on the difference between the new carrying amounts and the unchanged tax base, and this one is routinely missed in a first consolidation.
Share-based payments, pension balances and intangibles recognised on acquisition each have their own treatment and are worth looking at specifically rather than assuming they net off.
Frameworks differ, and not only in wording
IFRS works from temporary differences, comparing the carrying amount of an asset or liability with its tax base. FRS 102 works from timing differences with some additions, which gets to a similar answer in most ordinary cases but not in all of them, revalued property and business combinations being the usual divergences.
If you are converting between frameworks, or reporting into a parent on a different one, do not assume the deferred tax figure travels. It is one of the more common adjustments on a group reporting pack and one of the easier ones to leave out.
The asset is the hard part
Liabilities are rarely argued about. You either have the temporary difference or you do not.
Assets are different, because recognising one requires concluding that you will have enough future taxable profit to use it. That is a forecast, and forecasts belonging to loss-making companies are exactly the ones auditors treat with most caution. A history of recent losses is treated as strong evidence against recognition, and overcoming it takes something more specific than an improving plan.
The strongest support is a taxable temporary difference already on the balance sheet that will reverse in the right period, because it does not depend on trading at all. After that, a signed contract. A three year forecast on its own is usually not enough, and the conversation goes better if you accept that early.
Partial recognition is available and underused. Recognising an asset to the extent of what is clearly supportable, rather than arguing for all of it and settling for none, is often the better outcome.
Practical advice
Rebuild the schedule once, properly, from the fixed asset register and the tax computation rather than from last year’s spreadsheet. Show the opening balance, each category of difference, the movement, the rate applied and the closing balance, with the tax base for each item stated.
Do it before the year end. Deferred tax sits at the junction of the accounts and the tax computation, which means it depends on two things that are often finished last. A schedule prepared in advance from draft numbers and then updated is a far better experience than one constructed from scratch in the final week.