FRS 102 Deferred Tax: 2026 Rates and Records for UK SMEs and Startups
Under FRS 102 Section 29, deferred tax must be recognised on all timing differences using the “timing differences plus” approach, and measured at tax rates and laws enacted or substantively enacted at the reporting date. Deferred tax assets are recognised only when recovery is probable, offsetting requires strict cumulative conditions, and Pillar Two related balances carry a specific recognition and disclosure exception.
TL;DR:
Recognize loss based deferred tax assets only when board approved forecasts and signed contracts support probable recovery of legally usable losses from the same trade.
Measure deferred tax at rates enacted or substantively enacted at the reporting date; use blended rates across tax bands and schedule reversals.
Net deferred tax balances only when a legally enforceable current tax setoff right exists and the entity intends net settlement or simultaneous payment and recovery.
For 2026 reporting, exclude Pillar Two deferred tax recognition and disclosure, but explain group exposure and check whether a parent or fellow entity falls within scope.
Disclose deferred tax by timing difference, significant reversals expected within twelve months, unrecognized loss balances, and a reconciliation between accounting profit and tax charge.
Table of Contents
Recognition: timing differences plus and what triggers deferred tax under FRS 102
Measurement: enacted or substantively enacted rates and practical tax rate considerations
Recognition of deferred tax assets: probability, convincing evidence and common traps
Offsetting deferred tax: the narrow conditions for net presentation
Presentation and disclosure checklist for FRS 102 Section 29
Detailed explanation of temporary differences including examples
Treatment of revaluation gains and losses affecting deferred tax under FRS 102
Impact of business combinations and group relief on deferred tax under FRS 102
Differences between FRS 102 deferred tax treatment and IFRS for context
Disclosure requirements for deferred tax in the context of startups and growing businesses
Author perspective: why deferred tax matters for growing UK businesses
Recognition: timing differences plus and what triggers deferred tax under FRS 102
FRS 102 uses the “timing differences plus” approach to deferred tax: recognise tax on timing differences (gaps between when income or expenditure is recognised in accounts versus when it is taxed) plus a short list of additional items that Section 29 specifically brings into scope, such as fair value adjustments recognised on a business combination. This is narrower than full IFRS deferred tax but wider than a pure timing difference model, so it catches most of what preparers encounter day to day.
Common triggers you will meet in practice include:
Capital allowances running ahead of or behind depreciation charges on fixed assets.
Revaluation gains on property, plant or investment property that have not yet crystallised for tax.
Fair value adjustments on assets and liabilities acquired in a business combination.
Investment property fair value movements, which are typically taxable only on disposal.
There are limited initial recognition exceptions, so not every timing difference automatically creates a deferred tax balance at inception, particularly around certain asset acquisitions outside a business combination. One further carve out matters for 2026 reporting: amendments to FRS 102 introduced a temporary exception so that deferred tax related to Pillar Two income tax is neither recognised nor disclosed, under paragraphs 29.2B and 29.12A. This mainly affects larger groups within the scope of the Pillar Two global minimum tax rules, but preparers of any size should check whether a parent or fellow group entity falls within scope.
Measurement: enacted or substantively enacted rates and practical tax rate considerations
Deferred tax is measured using the tax rates and laws that are enacted or substantively enacted at the balance sheet date, not the rate you expect to apply when the timing difference actually reverses. Practically, this means you look at what Parliament has passed or effectively passed by your reporting date, not forecasts of future budgets.
Where a company’s profits span more than one marginal band, such as the UK’s main rate alongside a small profits rate, you should apply an average enacted rate expected to cover the periods in which timing differences are forecast to reverse rather than picking a single headline figure.
Build a simple reversal schedule showing which year each major timing difference is expected to unwind.
Apply the rate (or blended average rate) enacted for that future period, not today’s rate, if a change has already been substantively enacted.
Revisit the schedule at each reporting date, because rate changes enacted after the prior year end must be reflected even if the underlying timing difference itself has not moved.
Finance Act 2025 confirms the main UK corporation tax rate for financial year 2026 is set above previous years, alongside a small profits rate, which the Finance Act 2025 provisions set out as the enacted basis for measuring deferred tax at reporting dates falling within that year. Remeasurement from a rate change is recognised in the same place as the original balance: through profit or loss for most trading timing differences, or through other comprehensive income or equity where the deferred tax relates to an item that was itself recognised there, such as a revaluation reserve.
Recognition of deferred tax assets: probability, convincing evidence and common traps
A deferred tax asset is recognised only when recovery is probable, meaning more likely than not, and that test needs real evidence behind it rather than optimism. ICAEW guidance on deferred tax is clear that the existence of tax losses is itself evidence that future taxable profits may not materialise, so recognising an asset against brought forward losses needs convincing evidence that sufficient taxable profit will arise, from the same trade or qualifying source, within a reasonable timeframe.
In practice, work through these steps before recognising a loss-based deferred tax asset:
Confirm the losses are available against future profits of the right type and source under current tax law.
Build a profit forecast that is consistent with board-approved budgets, not a stretch target.
Identify contracted or highly probable revenue that supports the forecast, rather than aspirational pipeline.
Check that any tax planning assumed in the forecast is lawful, feasible and within management’s control.
Document the judgement, including sensitivities, so the conclusion survives audit challenge a year later.
The most common error we see is treating “we expect to be profitable eventually” as sufficient evidence on its own. ACCA’s technical guidance on FRS 102 deferred tax stresses that management should document the assumptions behind recognition, including revenue pipelines, signed contracts and realistic cost-linked projections, because that paper trail is what persuades an auditor or HMRC reviewer that the asset is sound.
Pro Tip: Keep a one-page deferred tax asset memo alongside your working papers each year end, even when the balance is small, because the evidence required to defend it only gets harder to reconstruct later.
Offsetting deferred tax: the narrow conditions for net presentation
Offsetting deferred tax assets against deferred tax liabilities is permitted only when two cumulative conditions are both met, as set out in FRS 102 Section 29 guidance. You need a legally enforceable right to set off current tax assets against current tax liabilities, and an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
A single company offsetting deferred tax balances that relate to the same taxable entity and the same taxation authority will usually meet both tests.
Group companies filing separately with the same tax authority rarely qualify, because the legal right of set off typically does not extend across separate taxable entities.
Entities taxed in different jurisdictions can never offset against each other, regardless of intention, because the same taxation authority condition fails outright.
Where offsetting is not permitted, present deferred tax assets within debtors and deferred tax liabilities within provisions for liabilities, shown gross rather than netted on the face of the balance sheet.
Presentation and disclosure checklist for FRS 102 Section 29
Deferred tax assets normally sit within debtors, and deferred tax liabilities within provisions for liabilities, unless the strict offsetting conditions above are met. Getting the classification right matters for ratio analysis and for consistency year-on-year.
For the notes, work through this checklist drawn from disclosure requirements in Section 29:
Break down the deferred tax balance by type of timing difference, such as fixed assets, revaluations and losses.
Disclose the amount expected to reverse within the next twelve months where that is significant.
State the amount of unused tax losses or other deductible timing differences for which no deferred tax asset has been recognised.
Explain any Pillar Two related exposure, where the entity or group falls within scope, even though the related deferred tax itself is not recognised.
Provide a reconciliation, often called a tax proof, explaining the relationship between the accounting profit and the tax charge, with narrative for any unusual or one-off movements.
A clear note here does more for audit efficiency than almost any other disclosure in the accounts, because it lets the reviewer trace each number back to its source without raising a query.
Practical application: how Keystone Financial Advisory helps preparers meet FRS 102 deferred tax requirements
We approach deferred tax at year end by scoping every timing difference first, then building a reversal schedule before touching the tax rate assumptions. For founders and growing businesses, that usually means:
Reviewing capital allowance pools against depreciation schedules to isolate fixed asset timing differences.
Testing loss-based deferred tax assets against realistic, board-approved forecasts before recognising anything.
Drafting disclosure notes that anticipate the questions an auditor or HMRC reviewer is likely to ask.
Advising on business combinations, revaluations and loss utilisation where the judgement calls are hardest.
Detailed explanation of temporary differences including examples
A temporary difference is any gap between the carrying amount of an asset or liability in the accounts and the amount attributed to it for tax purposes, which will reverse over time. FRS 102 does not use the full “temporary difference” concept found in IFRS, but its “timing differences plus” model captures most of the same ground through specific categories.
A straightforward example: a company buys equipment for £100,000. Capital allowances let it deduct £100,000 for tax in year one, but the accounts depreciate it over five years at £20,000 a year. In year one, the tax deduction exceeds the accounting depreciation by £80,000, creating a timing difference that will reverse as the asset continues to depreciate in later years without further capital allowances. That reversal pattern is exactly what the reversal schedule mentioned earlier is designed to track.
Permanent differences are different in kind, not degree: items such as client entertaining that are never deductible for tax, in any period, create no deferred tax at all because there is nothing to reverse.
Other common examples include:
Accrued expenses deductible for tax only when paid, rather than when accrued in the accounts.
Provisions for bad debts or warranty claims recognised for accounting purposes ahead of their tax deduction.
Research and development costs capitalised in the accounts but relieved for tax as incurred.
Each of these creates a deferred tax balance that should sit on your reversal schedule alongside capital allowance and revaluation timing differences, measured at the rate expected to apply when each one actually unwinds.
Treatment of revaluation gains and losses affecting deferred tax under FRS 102
Revaluing property, plant and equipment or investment property creates a timing difference because the uplift is recognised in the accounts immediately but is not taxed until the asset is sold. Tolley’s guidance on FRS 102 current and deferred tax confirms that revaluations and business combinations are among the main sources of deferred tax under the standard, and sets out worked measurement examples where tax rates differ from the rate in force at acquisition.
For property, plant and equipment revalued through other comprehensive income, the related deferred tax movement is also recognised in other comprehensive income, keeping the tax effect aligned with where the gain itself sits, rather than distorting the profit and loss account.
Investment property under FRS 102 is measured at fair value through profit or loss where that is reliably measurable, and any resulting fair value gain is taxable only on eventual disposal in most cases. That creates a deferred tax liability calculated using the rate expected to apply on disposal, which for many UK companies means considering the rate that would apply to a capital gain rather than simply the trading rate, since the two can differ.
A fall in value works the same way in reverse: a revaluation loss that reduces the carrying amount below its tax base can create a deferred tax asset, subject to the same recoverability test applied to any other deferred tax asset. Preparers sometimes forget this and only think about revaluation gains, leaving a deferred tax asset unrecognised on an impaired property.
Practical examples illustrating deferred tax calculations
Say a company has unrelieved capital allowances that have created a net timing difference of £150,000 at the year end, meaning the tax written down value of its fixed assets is £150,000 below their accounting carrying amount. Applying the enacted main rate of 25% gives a deferred tax liability of £37,500, assuming the difference is expected to reverse within the period the 25% rate applies.
Now say the same company also has brought forward trading losses of £80,000, and a board-approved forecast shows it will return to taxable profit within two years, supported by signed contracts covering most of that forecast. If that evidence meets the “probable” and convincing evidence tests, a deferred tax asset of £20,000 (25% of £80,000) can be recognised, reducing the net deferred tax position to a liability of £17,500.
If a revaluation of the company’s premises has also added £60,000 to the carrying value, with no corresponding change in tax base, that creates a further deferred tax liability. Because gains on disposal of this kind of asset are often taxed at a different rate from trading profits, the calculation should use whatever rate is enacted for that category of gain rather than defaulting to the trading rate.
These three elements, fixed assets, losses and revaluation, are typically presented together as one net deferred tax balance in the notes, with the breakdown shown separately so a reader can see where each part of the movement came from.
Impact of business combinations and group relief on deferred tax under FRS 102
Business combinations are one of the specific “plus” items that FRS 102 brings into deferred tax scope beyond pure timing differences. When one company acquires another, the acquirer typically restates the acquired assets and liabilities to fair value, and any resulting difference between that fair value and the tax base of those assets creates a deferred tax balance on acquisition, which in turn affects the goodwill calculation.
For example, if an acquired property is restated upward on consolidation but its tax base stays at historic cost, the difference creates a deferred tax liability that increases goodwill, because goodwill is a balancing figure after all identifiable assets and liabilities, including deferred tax, are recognised at fair value.
Group relief adds a further layer. Where group companies can surrender losses to one another, a deferred tax asset recognised in one entity may depend on the group’s ability and intention to use group relief, not just that entity’s own forecast profits. This needs the same convincing evidence standard discussed earlier, applied at a group level where relevant, and documented clearly so it is obvious which entity’s forecast is supporting which asset.
Groups should also check Pillar Two scope at acquisition, since a newly consolidated subsidiary might bring the group within scope of the Pillar Two exception for the first time, changing what deferred tax is recognised and disclosed going forward.
Differences between FRS 102 deferred tax treatment and IFRS for context
FRS 102 and IFRS both require deferred tax, but they get there differently. IFRS (through IAS 12) uses a full “temporary difference” balance sheet approach, comparing the carrying amount of every asset and liability with its tax base and recognising deferred tax on essentially all resulting differences, subject to limited exceptions.
FRS 102’s “timing differences plus” model is narrower. It starts from income statement timing differences rather than balance sheet temporary differences, then adds back a specific list of items, including the business combination fair value adjustments already discussed, to bring the outcome closer to IFRS in the cases that matter most.
In practice, the two approaches produce similar answers for most SMEs, because capital allowances, revaluations and business combinations are the areas where the “plus” items close the gap. The differences tend to show up at the margins, such as certain asset revaluations outside the specific categories FRS 102 lists, where IFRS would recognise deferred tax and FRS 102 might not.
For a UK group that reports some entities under FRS 102 and consolidates into an IFRS parent, this means the deferred tax figures calculated at subsidiary level cannot simply be aggregated without adjustment, and preparers should flag this early rather than at consolidation deadline.
Disclosure requirements for deferred tax in the context of startups and growing businesses
Early stage and growing businesses often carry unrecognised deferred tax assets on losses, precisely because they cannot yet meet the convincing evidence test for recoverability. The disclosure obligation does not disappear just because the asset itself is not recognised: you still need to state the amount of unused losses or other deductible timing differences for which no deferred tax asset has been recognised, so readers can see the scale of the unrecognised position.
For a startup moving from losses toward profitability, the disclosure note becomes increasingly important to investors and lenders, because it signals how close the business is to being able to recognise a loss-based asset, which is itself a useful forward indicator of financial health.
Growing businesses should also disclose:
The expected reversal profile of their main timing differences, particularly where rapid capital expenditure is creating large, growing capital allowance timing differences.
Any deferred tax impact of a recent or planned business combination, even a small one such as an asset acquisition structured as a share purchase.
Whether Pillar Two scope has been considered, since rapid international expansion can bring a previously domestic group within scope sooner than expected.
Keeping these disclosures current each year, rather than rolling forward last year’s wording, is one of the simplest ways to keep audit queries short.
Author perspective: why deferred tax matters for growing UK businesses
Deferred tax rarely feels urgent until an audit or enquiry forces the question, by which point the evidence trail is harder to rebuild. Matching tax to the accounting period it relates to is what keeps profit figures believable, and businesses that document their judgement as they go, rather than retrospectively, tend to find year end far less stressful.
— Shoaib
How Keystone can help with FRS 102 deferred tax compliance
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FAQ
What is a deferred tax asset?
A deferred tax asset is a future tax saving recognised in the accounts, arising from timing differences such as carried forward losses or deductible expenses not yet relieved for tax. Under FRS 102, it is recognised only when recovery is probable, supported by convincing evidence from ICAEW’s guidance.
When was FRS 102 introduced?
FRS 102 is the core UK and Republic of Ireland financial reporting standard replacing most previous UK GAAP standards. Section 29 has since been updated, including the Pillar Two related amendments covered by FRC guidance.
What is ASC 740-10?
ASC 740 is the US accounting standard governing income taxes, including deferred tax, under US GAAP, and it is not the framework that applies to UK FRS 102 accounts. UK preparers should apply FRS 102 Section 29 or, where relevant, IFRS, rather than US guidance.
Do you have to revalue investment property under FRS 102?
FRS 102 requires investment property to be measured at fair value through profit or loss where fair value can be measured reliably without undue cost or effort, rather than carried at cost. Any resulting deferred tax is calculated on the difference between that fair value and the property’s tax base, using the rate expected to apply when the gain is eventually taxed.
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