What Is Deferred Tax?
Thats deferred tax. Your company may have a deferred tax asset or a deferred tax liability. Find out everything you need to know with our guide to deferred tax explained, right here. Deferred tax liability is simply the name given to temporary differences between the tax noted on your balance and your actual tax paid or unpaid. Deferred tax asset vs. deferred tax liability  Depending on the nature of your tax, it can be a deferred tax liability or a deferred tax asset, both of which will appear on your companys balance sheet. Deferred tax assets: An item on the balance sheet that shows overpayment or advanced payment of tax. Deferred tax liability: An item on the balance sheet that shows unpaid tax. While one counts as owed and one counts as paid, its possible to have one without the other, so it may be that your company books feature only deferred tax asset entries and no deferred tax liability entries, or the other way around. A deferred tax liability occurs when a businesss income for a set period is different from whats been recorded on their tax return. This can be because the tax doesnt need to be paid yet, rather than a genuine failure to pay. Even if the tax is not yet due, the taxed item still needs to be added to the balance sheet, which is where the discrepancy occurs. Deferred tax liability example  Deferred tax liability cases most commonly involve the depreciation of fixed assets. For example, Company A decides to purchase new machinery and chooses a depreciation method that allows them to have higher deductions now and lower deductions in the future. Alternatively, they could have spread the depreciation of this new asset evenly across its whole life cycle. As the company has opted for a higher deduction  thus less tax  their income for this period will be higher than future tax periods. However, this is only temporary. In the future, the deductions will be lower. This temporary difference will still show on the balance sheet as a liability, even though it balances out over the life of the asset. A deferred tax asset happens when a company overpays its tax or pays it in advance. By doing so, they ensure a tax break in the future and decrease their tax liabilities. Many larger companies must pay UK corporation tax based on forecasted profits for a certain period. If these do not prove accurate once that period has passed, a refund is due. HMRC can send the deferred tax payments to the company bank account or let you use it to pay off other taxes, such as VAT. Generally speaking, no one should aim to purposefully overpay on tax, as it can be complicated to claim back tax unless you can prove your business will not be able to benefit from a tax cut in the future. For example, if your company has suffered from falling profits in one tax period (and would be due a tax return) but then successfully closes half a dozen contracts, HMRC may not grant you a refund on the basis that you are on the road to financial recovery. No, deferred tax is a widespread business occurrence, so you shouldnt worry that HMRC will come knocking at your door if you find you have some on your balance sheet. Its essential to report your figures accurately and make sure any liabilities are paid in the future and any assets refunded or put towards future tax. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.