Under FRS 102 paragraph 29.7 a company can recognise a deferred tax asset for unrelieved trading losses only to the extent it is probable, meaning more likely than not, that the losses will be recovered against reversing deferred tax liabilities or other future taxable profits. The standard warns that the existence of unrelieved losses is itself strong evidence that future profits may not be available. In practice you need reversing liabilities or convincing evidence that the cause of the losses has gone.

What does FRS 102 actually say?

Paragraph 29.7 states that unrelieved tax losses and other deferred tax assets shall be recognised only to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits. It then adds, in brackets, that the very existence of unrelieved tax losses is strong evidence that there may not be other future taxable profits against which the losses will be relieved. The glossary defines probable as more likely than not.

So the test has two possible sources of recovery, and they are not equally strong. Reversing deferred tax liabilities are mechanical and largely certain. Future profits depend on forecasts, and the standard deliberately puts a loss making company on the back foot when it relies on them. The wider framework is set out in our page on FRS 102 Section 29.

A small company using Section 1A applies the same test. Paragraph 1A.1 says all requirements of the standard, including recognition and measurement, apply to small entities unless specifically excluded.

Is it current tax or deferred tax?

Start by working out what the loss can do now. Section 37 of the Corporation Tax Act 2010 allows a trading loss to be set against total profits of the same accounting period and, if the claim requires, the previous 12 months, with the claim made within two years of the end of the loss making period. Paragraph 29.4 of FRS 102 says the benefit of a loss that can be carried back to recover tax already paid is a current tax asset, not deferred tax.

Only the part left over after any current year and carry back claims is carried forward, and that is what the deferred tax question is about. For losses arising in periods beginning on or after 1 April 2017, section 45A carries the unrelieved amount forward and allows a claim to set it against total profits of later periods, provided the company continues the trade. HMRC’s guidance on trading losses explains the restriction on carried forward losses: broadly a deductions allowance of up to £5 million plus 50% of profits above it. The tax mechanics are in our page on company trading losses.

Which evidence counts most?

Reversing deferred tax liabilities

The strongest support is a deferred tax liability that will reverse in periods when the losses can be used. A common example is accelerated capital allowances: as the assets are depreciated, taxable profit will exceed accounting profit, creating profits for the losses to absorb. Check that the liability relates to the same company and the same tax, and that the reversal falls in periods when the loss rules let the losses be used. The interaction with full expensing is explained in deferred tax and full expensing.

Forecast taxable profits

FRS 102 does not list the factors to weigh. IAS 12, the international standard, gives a useful checklist in paragraph 36:

  • whether there are enough taxable temporary differences with the same authority and the same taxable entity;
  • whether it is probable the company will have taxable profits before the losses expire;
  • whether the losses result from identifiable causes which are unlikely to recur; and
  • whether tax planning opportunities are available.

Paragraph 35 of IAS 12 says that when an entity has a history of recent losses, it recognises an asset only to the extent of sufficient taxable temporary differences or convincing other evidence that sufficient taxable profit will be available. That is a useful benchmark for applying the strong evidence warning in paragraph 29.7.

Evidence that tends to persuade includes: a long record of profits interrupted by a loss with a clear one off cause, such as a single failed contract or a closed division; signed contracts or an order book that support the forecast; and cost reductions already made rather than planned. Evidence that rarely persuades on its own: a business plan for a start up that has never made a profit, or forecasts that show a sharp turnaround with no explanation of what has changed.

How much of the loss can be recognised?

Recognition is not all or nothing. The IFRS Interpretations Committee noted in 2005 that, in practice, the probability test is generally applied to portions of the total loss. A company may recognise an asset for the losses it expects to use in the next two or three years, where forecasts are reliable, and leave the rest unrecognised.

Schedule the expected use year by year. Take the forecast taxable profits, apply the loss restriction where relevant, and stop at the point where forecasts become too uncertain to support a more likely than not conclusion. Use forecasts consistent with those used for the going concern assessment and impairment reviews; inconsistent forecasts are an obvious question for an auditor or reader.

Measure the asset at the rate expected to apply when the losses are used. Paragraph 29.13 requires the average rate where rates vary with profit, which is relevant if forecast profits fall in the marginal relief band. See which tax rate to use for deferred tax.

What does this look like in practice?

Illustration only. Company A has been profitable for ten years. In the year to 31 March 2027 it makes a trading loss of £500,000 because a single large contract failed. It carries back £100,000 against the previous year’s profits, which is a current tax asset. That leaves £400,000 to carry forward. It also has accelerated capital allowances giving a deferred tax liability on a timing difference of £120,000. Board approved forecasts, backed by signed contracts, show taxable profits of about £300,000 a year from next year.

The cause is identifiable and is not expected to recur, and the forecasts are supported. The company could reasonably recognise a deferred tax asset for the whole £400,000, which at a 25% rate is £100,000, alongside the liability of £30,000.

Company B was set up three years ago and has £400,000 of losses, a deferred tax liability on a timing difference of £60,000, and a business plan showing profits from year five. It can support an asset for the losses that will be absorbed by the reversing liability, but recognising more would need convincing evidence it does not yet have. The unrecognised losses are disclosed.

What has to be disclosed?

Paragraph 29.27(e) requires the amount of deferred tax liabilities and assets at the end of the period for each type of timing difference and the amount of unused tax losses and tax credits. Paragraph 29.27(f) adds any expiry date of timing differences, unused losses and credits. Small companies must give the paragraph 29.27(e) analysis under paragraph 1AC.11A, and the tax reconciliation under paragraph 1AC.32C, for periods beginning on or after 1 January 2026. Unrecognised losses usually appear as a reconciling item in the tax reconciliation note.

FRS 102 has no direct equivalent of the IAS 12 requirement to describe the evidence supporting recognition, but paragraph 29.25 requires information that lets users evaluate the tax consequences of recognised transactions, and a short explanation of why an asset is recoverable after losses is good practice.

Paragraph 29.24A only allows deferred tax assets and liabilities to be offset where there is a legally enforceable right of set off and they relate to the same tax authority and taxable entity (or entities intending to settle net).

What mistakes come up most often?

  • Recognising the full loss because management “expects” profits, without evidence that addresses the warning in paragraph 29.7.
  • Ignoring the reversing liability, and so writing off an asset that is clearly recoverable.
  • Treating a carry back as deferred tax when paragraph 29.4 makes it a current tax asset.
  • Forgetting events that forfeit losses, such as a change in ownership combined with a major change in the trade, or ceasing the trade, since section 45A requires the trade to continue.
  • Not reassessing each year. A previously unrecognised loss should be recognised once recovery becomes probable, and a recognised asset reduced if forecasts deteriorate.

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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.