MTT27400 - Calculating the effective tax rate: Covered tax balance: Deferred tax: Recapture of deferred tax liabilities

Where a member has included a deferred tax liability (other than an excluded liability) within its total deferred tax adjustment amount for an accounting period (the ‘initial period’), the liability will be recaptured if it has not reversed by the end of the fifth accounting period following the initial period.

A deferred tax liability is the amount of income tax payable in future periods in respect of temporary differences between accounting and taxable profits. The deferred tax liability will reverse in a future period when the carrying amount of the asset or liability is recovered or settled.

Where a deferred tax liability has not fully reversed within the five-year period, the element that has not reversed is the ‘recaptured deferred tax liability’.

The covered tax balance for the initial period must be recalculated to exclude the recaptured deferred tax liability. Additionally, the effective tax rate of the relevant territory and the top-up amount of the members located in that territory must be recalculated for the initial period.

This is set out in sections 182(6) and 184 of Finance (No.2) Act 2023.

Where a recalculation results in an additional top-up amount, see MTT33200 for guidance on the treatment of the additional top-up amount.

Recaptured deferred tax liability reverses after the fifth accounting period

Where a recaptured deferred tax liability reverses in an accounting period after the fifth accounting period, the deferred tax liability shall be included within the total deferred tax adjustment amount for the member in the period in which the reversal occurs.

When a deferred tax liability reverses, there is a credit to deferred tax expense reducing tax expense in the accounts. For deferred tax liabilities that reverse after the fifth accounting period, an adjustment is made to the deferred tax adjustment amount to remove this credit and therefore increase the tax expense. This effectively offsets the decrease, so the overall impact is nil. The reason for this is because the deferred tax liability that was recaptured has been excluded from the deferred tax adjustment amount and so any subsequent reversals should also be excluded.

See MTT27100 for guidance on the total deferred tax adjustment amount.

Example

Deferred tax liabilities (other than excluded liabilities) that do not reverse out within 5 years are recaptured.

A deferred tax liability (DTL) on an intangible fixed asset of 100 is recognised within the accounts of a member in Year 0. In year 3, 60 of the deferred tax liability unwinds in the member’s statutory accounts. The remaining 40 only reverses in the member’s statutory accounts in Y7 and therefore 40 of the deferred tax liability has not been reversed within 5 years and must be recaptured. In the Y5 Globe return, the covered taxes balance for Y0 is recalculated to exclude the 40 deferred tax liability which is recaptured. 

The table below shows how the deferred tax liability is reflected in the accounts and the effect of S184/182(6) on the deferred tax adjustment amount.

Year Deferred tax liability per accounts (Balance Sheet)
 Deferred tax liability per accounts (Income Statement)
 Total deferred tax adjustment amount pre- s184/s182(6) adjustments

 		s184/s182(6) adjustment
 Final total deferred tax adjustment amount (TDTAA)

 Explanation
Year 0 - initial period 100 100 100 (40) 60

Globe Return Y0: Member includes a DTL of 100 within its total deferred tax adjustment amount in year 0. 

Globe Return Y5: In year 5, 40 is recaptured and the year 0 TDTAA is recalculated as 100-40=60.
Year 1 100 0 - - 0 No reversal
Year 2 100 0 - - 0 No reversal
Year 3 40 (60) (60) 0 (60) Globe Return Y3: 60% of the DTL reverses in the member’s accounts and there is a credit to TDTAA of (60).
Year 4 40 0 - - 0 No reversal
Year 5 40 0 - - 0 Globe Return Y5: In year 5 the 40 of DTL not yet reversed in the accounts is recaptured for MTT purposes and the TDTAA is recalculated for year 0.  The TDTAA for year 5 is unaffected.
Year 6 40 0 - - 0 No reversal
Year 7 0 (40) (40) 40 0 Globe Return Y7: The reversal of 40 in the accounts is ignored for MTT purposes as it has already been recaptured in year 5 (and year 0’s TDTAA recalculated).

Excluded deferred tax liabilities

An excluded liability is a tax expense attributable to changes in deferred tax liabilities relating to any of the following:

  • cost recovery allowances on tangible assets
  • the cost of a licence or similar arrangement from the government for the use of immovable property or exploitation of natural resources that entails significant investment in tangible assets
  • research and development expenses
  • de-commissioning and remediation expenses
  • fair value accounting on unrealised net gains
  • foreign currency exchange net gains
  • insurance reserves and insurance policy deferred acquisition costs
  • gains from the sale of tangible property located in the same territory as the member that are reinvested in tangible property in the same territory
  • additional amounts accrued as a result of accounting principle changes with respect to things falling within any of the above categories

Such liabilities will not become recaptured deferred tax liabilities, even if they do not reverse after the five-year period.

Deferred tax liability recapture methodology

Recapture of deferred tax liabilities should be done using the methodology set out in Chapter 1 of the June 2024 Administrative Guidance document published by the OECD.

When using this guidance, the OECD defined terms should be read as if they were substituted by their equivalents in UK legislation. For example, a reference to a Five-Year Election is to be read as an election to which paragraph 1 of Schedule 15 (long term elections) applies.

The methodology may be enacted into UK legislation by regulations at a later time.

Amendment in Finance Act 2025

Section 184 was amended by FA25. This guidance page reflects the current version of the legislation. Consult FA25 for legislation applicable to prior periods if the retrospection election does not apply (see MTT01010).