Uncertain tax treatments under FRS 102

From accounting periods beginning on or after 1 January 2026, FRS 102 paragraphs 29.17A to 29.17C tell a company how to account for a tax position HMRC may not accept. The company assumes HMRC will examine the position with full knowledge; if acceptance is probable it books tax as filed, and if not it reflects the uncertainty using either the most likely amount or a probability weighted expected value.

The basic mechanics of current tax are in accounting for current tax. This page works through how the uncertain tax rules are applied in practice, what they do to deferred tax and losses, and how they connect with HMRC’s notification regime.

What is an uncertain tax treatment?

The FRS 102 glossary defines it as a tax treatment where there is uncertainty over whether the relevant taxation authority will accept it under tax law. Its example is a treatment that relies on an interpretation of the law that differs from the way the authority is known to interpret it. Typical UK examples are a deduction for a payment HMRC might see as capital, a transfer pricing position, a claim to a relief whose conditions are arguable, or the timing of income.

The rules were added by the Periodic Review 2024. The FRC’s Basis for Conclusions (B29.22) says they are based on IFRIC 23 Uncertainty over Income Tax Treatments, the IFRS interpretation on the same subject.

How does a company apply the rules step by step?

1. Choose the unit of account. Paragraph 29.17A requires the company to consider each uncertain treatment separately or together with others, depending on which approach better predicts how the uncertainty will be resolved. Several related transfer pricing adjustments that HMRC would examine as one package may be assessed together; an unrelated capital allowances claim would be assessed alone.
2. Assume full examination. Paragraph 29.17B requires the company to assume HMRC will examine amounts it has a right to examine, with full knowledge of all related information. The chance that HMRC will not open an enquiry, or will not spot the point, is ignored.
3. Ask whether acceptance is probable. The glossary defines probable as more likely than not. If HMRC is probably going to accept the treatment, taxable profit, tax bases, losses, credits and rates are measured consistently with the return as filed or planned.
4. If not probable, measure the uncertainty. The company uses whichever of two methods better predicts the resolution: the most likely amount, meaning the single most likely outcome in a range, or the expected value, meaning the sum of probability weighted amounts across the range.
5. Reassess each period. Paragraph 29.17C treats the effect of new facts or information, such as an HMRC enquiry letter, a tribunal decision in another case or the closing of an enquiry window, as a change in accounting estimate under paragraphs 10.14D to 10.18.

Which measurement method should be used?

The standard leaves the choice to judgement about which method better predicts the outcome. Where the dispute is effectively all or nothing, such as whether a single payment is deductible, an expected value can produce a figure that could never actually arise, so the most likely amount will usually be the better predictor. Where several outcomes are realistic, such as a negotiated transfer pricing settlement, an expected value usually reflects the position better.

Worked example

Illustration only. Assume a 25% corporation tax rate, the main rate given on GOV.UK.

Issue A. A company deducted an £800,000 settlement payment. HMRC’s published guidance suggests it may be capital. The directors judge that HMRC would probably not accept the deduction and that the outcome is binary. The most likely amount is full disallowance: additional tax of £200,000.

Issue B. The company charges a management fee to an overseas affiliate and expects any HMRC challenge to end in a negotiated adjustment. Its assessment of the extra tax:

Outcome	Extra tax	Probability	Weighted
Accepted as filed	£0	30%	£0
Partial adjustment	£100,000	50%	£50,000
Full adjustment	£200,000	20%	£40,000
Expected value			£90,000

Acceptance as filed is only 30% likely, so not probable. With a spread of outcomes the directors use the expected value and increase the current tax liability by £90,000. The two issues are unrelated and are assessed separately under paragraph 29.17A. Total additional current tax: £290,000.

Does the uncertainty affect deferred tax and losses?

Yes. Paragraph 29.17B applies the same approach to tax bases, unused tax losses, unused tax credits and tax rates, not just to current taxable profit. If a company has losses and an uncertain deduction would only reduce those losses rather than create a tax payment, the uncertainty changes the losses carried forward and therefore any deferred tax asset recognised for them. The same judgements about HMRC acceptance must be used consistently for current and deferred tax. See deferred tax under FRS 102.

What has to be disclosed?

Section 29 has no separate note for uncertain tax treatments, so the disclosure comes from general requirements:

• Paragraph 8.6 requires disclosure of the significant judgements made in applying accounting policies, which can include judging whether HMRC is likely to accept a treatment.
• Paragraph 8.7 requires disclosure of key sources of estimation uncertainty with a significant risk of material adjustment within the next financial year, including the nature and carrying amount of the liability.
• Paragraph 29.26(b) lists adjustments for current tax of prior periods as a component of the tax charge, which is where a revised estimate often shows.
• Paragraph 10.18 requires disclosure of the nature and effect of a change in estimate, which applies through paragraph 29.17C when the assessment changes.

Small companies applying Section 1A have fewer mandatory notes, but the Basis for Conclusions (B1A.8) confirms they follow the same recognition and measurement requirements as larger entities. The measurement rules above therefore apply in full. See Section 1A.

How does the accounting interact with HMRC notification?

For large businesses the accounting provision can itself trigger a tax filing duty. HMRC’s uncertain tax treatment rules apply to companies whose relevant UK turnover exceeded £200 million or whose UK balance sheet total exceeded £2 billion in the previous financial year (manual page UTT12100). One of the two notification triggers is that a provision has been recognised in the accounts to reflect that a different tax treatment may be applied to a transaction (UTT13050). HMRC’s example at UTT13100 shows that recognising the provision in a later year’s accounts, after the return has been filed, still requires notification, with the deadline based on the year in which the provision is recognised.

So the paragraph 29.17B assessment and the HMRC notification review should be done together. The thresholds, exemptions and penalties are explained in notifying uncertain tax treatments.

How is the change applied on transition?

Paragraph 1.37(b) makes the rules effective for accounting periods beginning on or after 1 January 2026, with early application only if all the Periodic Review 2024 amendments are adopted together. Paragraph 1.68 gives two options: full retrospective application under paragraph 10.12 if possible without hindsight, or recognising the cumulative effect as an adjustment to opening retained earnings at the date of initial application without restating comparatives. The FRC’s Basis for Conclusions explains the second option was given for entities that could only apply the rules using hindsight. Other changes in the same package are summarised in FRS 102 2026 amendments.

What mistakes come up?

• Allowing for detection risk. Reducing a provision because HMRC is unlikely to look is not permitted; full examination is assumed.
• Using expected value for an all or nothing issue, giving a liability that matches no possible outcome without considering whether the most likely amount predicts better.
• Bundling unrelated issues so that a strong position offsets a weak one.
• Releasing a provision too early. The release should follow new information, such as an enquiry closing or the enquiry window passing, and is accounted for as a change in estimate.
• Treating a revised estimate as a prior period error. Paragraph 29.17C directs it through the change in estimate rules, not restatement, unless there really was an error. See accounting policies, estimates and errors.

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• HMRC’s Litigation and Settlement Strategy
• VAT on cosmetic and aesthetic treatments

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• GOV.UK: Corporation tax rates
• GOV.UK: Manual page UTT12100
• GOV.UK: Manual page UTT13050
• GOV.UK: Manual page UTT13100

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.