FRS 105 paragraph 24.7 says a micro entity shall not recognise deferred tax, so the tax line in its profit and loss account is current tax only: the corporation tax actually payable for the period. The FRC banned it because deferred tax is complex and, with so few notes, readers could not tell current and deferred tax apart. The result is that the tax charge can look unusually low or high compared with accounting profit whenever capital allowances, losses or other timing differences are significant.

What exactly does FRS 105 say about tax?

Section 24 of FRS 105 applies to income tax made up only of current tax, and to VAT. Paragraph 24.2 states that the section prohibits the recognition of deferred tax, which the glossary defines as tax payable or recoverable in future periods as a result of past transactions or events. Paragraph 24.7 repeats the ban in one line, and paragraph 14.1(b) applies it again to trade and asset acquisitions, so no deferred tax is recognised on assets bought as part of a business either.

What remains is straightforward. Under paragraph 24.4 a micro entity recognises a liability for tax payable on taxable profit for the current and past periods, and an asset if it has paid more than it owes. Paragraph 24.6 measures that liability using the tax rates and laws enacted or substantively enacted by the reporting date, paragraph 24.8 forbids discounting it, and paragraph 24.12 presents changes in it as tax expense. In the statutory profit and loss format for micro entities, all of this sits on a single line, item G Tax, in Schedule 1 Section C to the Small Companies Regulations.

Why did the FRC ban deferred tax for micro entities?

The basis for conclusions to FRS 105 gives the reasons. Paragraph 19(a) says deferred tax was prohibited because it is a complex area and the lack of disclosure in micro entity accounts would make it impossible to distinguish current from deferred tax. Paragraph 20 records that some respondents wanted deferred tax permitted or required, but the FRC concluded that without additional disclosure the benefits did not exceed the costs. Paragraph 17 explains the wider approach: FRS 105 avoids accounting policy options and mandates the most straightforward option.

Part of the usual need for deferred tax has also been removed elsewhere. Micro entities cannot revalue assets or use fair value accounting (basis for conclusions paragraph 15), so the deferred tax that FRS 102 requires on revaluation gains, explained in deferred tax on revaluations, never arises.

How does the ban change the tax charge in practice?

The biggest effect comes from capital allowances. Depreciation charged in the accounts is not deductible for tax, and capital allowances are given instead (HMRC Capital Allowances Manual CA20006). The annual investment allowance, currently up to £1 million, gives relief for the whole cost of qualifying plant in the year of purchase, while the accounts spread the cost over its useful life. Under FRS 102 the difference is a timing difference on which deferred tax is recognised (paragraph 29.6). Under FRS 105 nothing smooths it out.

Worked example

Illustration only. A company with no associated companies and 12 month accounting periods makes £45,000 a year before depreciation. In year 1 it buys equipment for £30,000, claims the full cost under the annual investment allowance and depreciates the equipment over five years at £6,000 a year. Accounting profit is £39,000 every year. Profits stay under £50,000, so the small profits rate of 19% applies.

Year Taxable profit FRS 105 tax charge (current only) Tax as % of accounting profit FRS 102 tax charge (current plus deferred)
1 £15,000 £2,850 7.3% £7,410
2 to 5, each £45,000 £8,550 21.9% £7,410
Total £195,000 £37,050 19.0% £37,050

Under FRS 102 the company would set up a deferred tax liability of £4,560 in year 1 (19% of the £24,000 by which the equipment’s carrying amount exceeds its tax written down value) and release £1,140 a year after that, so the charge is a steady 19%. Under FRS 105 the same total tax is charged over five years, but the year 1 accounts show a much higher profit after tax and the following years a lower one. Anyone comparing years, or judging how much is safe to pay out as dividends, needs to know this.

What about tax losses?

Paragraph 24.5 requires a current tax asset for a tax loss that can be carried back to recover tax paid in a previous period. Under section 37 of the Corporation Tax Act 2010, a company can set a trading loss against total profits of the loss making period and, if it claims, the previous 12 months, so a refund due from a carry back appears as an asset.

A loss carried forward is different. Its future value is a deferred tax asset, which FRS 105 does not allow. A micro entity with a large loss carried forward will show no asset for it, and in the year it uses the loss, the tax charge will be low or nil against a healthy accounting profit.

Does the ban change how much corporation tax is paid?

No. Deferred tax is an accounting estimate of future tax; it never enters the corporation tax computation. The company’s liability is worked out on its taxable profits at the rates for the financial year. For the financial year beginning 1 April 2026, the small profits rate is 19% for profits up to £50,000, the main rate is 25% for profits over £250,000, and marginal relief applies between those limits (see marginal relief). What FRS 105 changes is only how the accounts present tax: the current tax figure is the whole charge.

What happens when a company moves into or out of FRS 105?

A company moving from FRS 102 to FRS 105 must, in its opening balance sheet at the date of transition, not recognise items that FRS 105 does not permit (paragraph 28.7(b)) and must take the adjustments to equity reserves (paragraph 28.8). Any existing deferred tax liability or asset is therefore removed through reserves, not through the profit and loss account.

A company leaving FRS 105 does the reverse and recognises deferred tax on all timing differences at its date of transition to FRS 102. That process is covered in moving from FRS 105 to FRS 102, and the FRS 102 rules themselves in FRS 102 Section 29: deferred tax.

Can a micro entity choose to account for deferred tax anyway?

Not within FRS 105. The prohibition is a recognition rule, not a disclosure exemption, and FRS 105 contains no option to override it. FRS 105 paragraph 1.3 does allow additional information to be included, with regard to the related requirements of FRS 102 Section 1A, but it does not permit a different measurement of the tax charge. A company that wants its accounts to show deferred tax must leave the micro entity regime and use FRS 102, usually with Section 1A. The trade offs are set out in choosing between FRS 105 and FRS 102 Section 1A.

What mistakes come up most often?

  • Carrying a deferred tax provision forward from earlier FRS 102 accounts into micro entity accounts.
  • Recognising an asset for losses carried forward, when only a carry back refund qualifies.
  • Treating a low tax charge in a year of heavy capital spending as a sign that profits are understated, or the reverse in later years, without looking at the capital allowances.
  • Using the expected future rate rather than the rate enacted or substantively enacted at the reporting date for the current tax liability.
  • Reading the reserves in micro accounts as free of future tax, when no provision is made for tax that will fall due as timing differences reverse.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

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.