Section 24 – Income Tax

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Section 24 – Overview

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Section 24: Income tax

Summary

Section 24 deals with the recognition, measurement and disclosure of current and deferred tax, VAT and withholding tax on dividends.

What is new when compared to previous GAAPs – General?

Deferred tax is not permitted to be recognised under Section 24. The contrasts with FRS 102 and FRSSE/old GAAP which requires deferred tax to be recognise on timing differences at each reporting period (FRS 102 goes further than old GAAP/FRSSE and requires deferred tax on revalued amounts and on fair value uplifts on initial recognition in business combinations). This will result in transition adjustments for most companies on transition.

No disclosures required in the financial statements other than those relating to contingences with regard to taxation. This contrasts with FRS 102/FRSSE/old GAAP which requires a tax reconciliation and many more disclosures.

The tax authorities issued guidelines on how the adjustments posted on transition which effect corporation tax should be dealt with. The Irish Revenue have confirmed that the majority of adjustments which have fallen out for tax purposes will be taxable/tax deductible over a 5 year period starting in the first year of preparing the financial statements under FRS 105 (e.g. if the first year preparing financial statements under FRS 105 is 31 December 2016 then 1/5th of the adjustment will be taken into account in the YE 31 December 2016 tax computation and the remaining amounts included in the tax computation over the following four years unless the company ceases in which case it is taxable/tax deductible in the last year).

Where this arises an adjustment will be required on transition to show the correct corporation tax liability/asset under FRS 105 as the prior year comparatives must be prepared as if FRS 105 had of applied from inception.

What is new when compared to FRSSE/old GAAP?

Discounting is not permitted under Section 24 whereas under FRS 19 (old GAAP)/FRSSE this was permitted. Hence where deferred tax was previously discounted there is likely to be a transition adjustment to reverse the effect of discounting.

What is new when compared to FRS 102?

FRS 105 does not require the close company surcharge to be recognised in the year it arises assuming that a dividend would be paid within 18 months of the year end to avoid it or there was no distributable reserves which allowed the company to avoid paying it.

Under Section 29.14 of FRS 102 the close company surcharge is required to be provided for in the year to which it relates unless a dividend is declared pre-year end regardless of whether a dividend will be paid to avoid this surcharge.

What is different when compared to FRSSE/old GAAP?

Under section 17, equity and liabilities, current tax on any share issue costs recognised in equity need to posted to equity whereas under old GAAP/FRSSE this was posted to the tax line in the profit and loss.

Other standards affecting Section 24 where differences arise:

Section 14 provides an exemption from restating previously recognised goodwill under old GAAP. However, where this exemption is claimed, there is still an adjustment required to derecognise the deferred tax on any fair value adjustments on business combinations with the corresponding entry to profit and loss reserves.

What are the key points?

Current tax is recognised for the tax liability for the current and past periods.

Deferred tax is not permitted to be recognised on any timing differences on the balance sheet (e.g. deferred tax should not be recognised on losses carried forward, accrued pension payments, revaluations, differences in tax written down value and book value etc. etc.)

Close company surcharge not required to be provided for in the year it arises where it is probable that a dividend will be paid to avoid it or there is no distributable reserves to allow a dividend to be paid.

Current tax is measured using rates enacted or substantively enacted at the balance sheet date.

When different rates apply to different levels of profit, use an average expected rate.

No discounting of current tax.

VAT or similar taxes which are not income taxes are excluded from turnover, expenses are shown net of VAT.

Dividend and interest should be included inclusive of withholding taxes, excluding other taxes.

What do accountants need to do?

Be aware of the differences between old GAAP/FRSSE/FRS 102 and Section 24 so appropriate transition adjustments can be determined.

Advise clients of the need to derecognise deferred tax on transition to FRS 105 including the derecognition of any movement on deferred tax recognised under previous GAAP in the comparative periods financial statements (applicable to entities transitioning from FDRS 102 and old GAAP/FRSSE). This includes any deferred tax recognised in OCI/STRGL/revaluation reserve/fair value reserve/profit and loss.

For entities transitioning from FRS 102 that has investment income, assess the impact of the derecognition of the close company surcharge accrual at and since the date of transition and the derecognitoion of the related movement in the P&L/P&L reserves as this is not required to be recognised under FRS 105 where it is probable the close company surcharge will be avoided.

Assess the impact on distributable reserves as a result of the adjustments discussed above.

Advise client on how any transition adjustments which effect corporation tax will be taxed i.e. immediately, over a period of 5 years or whether other special tax rules apply on transition. Examples of the areas which are likely to create a corporation tax adjustment (i.e. an adjustment to the corporation tax liability/asset and corporation tax charge) are:

Holiday accruals not previously recognised (applicable to entities transitioning from FRSSE/old GAAP) – corporation tax asset will need to be created.
Lease incentives where the prior year comparative on transition releases the lease incentive over the life of the lease when previously it was accounted for under old GAAP/FRSSE up to the first break clause/market rent review, a corporation tax asset will need to be recognised;
Allocation of deemed financing element of sales made on unusual credit terms (straight line as opposed to being under an effective interest method under FRS 102);
Adjustment to capitalise material transaction costs in line with Section 9;
Where intangibles/goodwill is allowable for tax purposes, adjustments to accelerate amortisation;
Recognition of loyalty schemes under FRS 105;
Recognition of government grants on an accruals basis as opposed to a performance basis (applicable to FRS 102 entities transitioning)
Recognition of year end foreign currency balances at the contracted rate as opposed to the year end spot rate;

Advise clients on the need to ensure that the preliminary tax for 2016 (assuming the first year of FRS 105 financial statements is for the year ended 31 December 2016) needs to incorporate any additional tax payable as a result of adopting FRS 105 in 2016 where the tax cannot be based on the prior year liability, to include the effect of transition adjustments.

Advise clients on the need for companies to incorporate the new assets, liabilities, income and expenditure into IXBRL tagging for tax purposes so that they are appropriately classified and have appropriate taxonomy.

What do Companies need to do?

Review the balance sheet of the entity and assess the impact of the derecognition of deferred tax and the close company surcharge at the date of transition to FRS 105 based on the differences highlighted.

Be aware of the possibility of additional tax being payable as a result of transition adjustments and incorporate these into the preliminary tax calculations.

Quantify the impact tax adjustments will have on distributable reserves.

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