MTT27120 - Calculating the effective tax rate: Covered tax balance: Deferred tax: Disallowed accruals and unclaimed accruals

Disallowed accruals and unclaimed accruals are to be excluded when determining the total deferred tax adjustment amount.

These amounts can be speculative, and it is not always clear when or whether these amounts will be paid. This rule is intended to prevent accruals of tax with respect to uncertain tax positions and distributions from a member being included in the covered tax balance until they are actually paid (via current tax expense).

This is set out in section 182(2)(b), (3) and (8) of Finance (No.2) Act 2023.

Disallowed accruals

A disallowed accrual is a movement in the deferred tax expense reflected in the member’s underlying profits, which relates to either:

  • an uncertain tax position, or
  • a distribution from another member of the group.

The amounts relating to such movements are to be excluded when determining the total deferred tax adjustment amount.

When a current tax expense is subsequently recorded (for example, where the outcome of an uncertain tax position is that an amount of tax does become payable), the reversal of a deferred tax liability relating to that uncertain tax position will also be disregarded. The current tax expense will then be reflected in the covered tax balance (unless it is otherwise excluded).

Unclaimed accruals

An unclaimed accrual is an increase in a deferred tax liability that is reflected in the underlying profits which:

  • is not expected to reverse within the five following accounting periods, and
  • by election, is not to be included in the total deferred tax adjustment amount.

This election allows a group to avoid having to monitor the liability or retrospectively perform recalculations when the liability has not reversed within the five-year period (see MTT27400).

This election is made on an annual basis. See MTT52200 for guidance on making elections.

Reversal of deferred tax liability that had been treated as an unclaimed accrual

The relevant deferred tax expense is to be increased in an accounting period if:

  • a deferred tax liability is reversed in that period, and
  • that deferred tax liability was treated as an unclaimed accrual in a previous period.

The amount of the increase is the amount of the deferred tax liability that has reversed.

Consequently, unclaimed accruals are recognised in the covered tax balance when the tax is paid via current tax expense. The above adjustment ensures that any reversal of the deferred tax liability of the unclaimed accrual in the accounts does not offset the increase in covered tax balance recognised in current tax expense when the tax has been paid.