Tax implications of the new UK GAAP


As things stand, entities are faced with quite a choice when deciding which standard will be followed while preparing their accounts.

Since 1 January 2015, the mandatory implementation date for new UK GAAP, small entities have been able to choose to apply:

  • FRSSE 2015
  • FRS 101 (qualifying group companies)
  • FRS 102
  • full IFRS

Those entities that do not qualify as small have fewer options but can still choose to apply:

  • FRS 101 (qualifying group companies)
  • FRS 102
  • Full IFRS

Tax changes

The transition to UK GAAP will bring with it some tax changes, the most significant of which are considered below

First time adoption - accounting profits form the starting point for profits for tax purposes

Tax legislation stipulates that taxable profits are based on accounts prepared in accordance with GAAP.

The legislation then provides adjustments for specific items, such as:

  • depreciation
  • loan relationships
  • disallowable expenditure

As the changes to UK GAAP will have a direct effect on the reported profit, it will follow that this will impact on taxable profit. The differences to taxation will generally give rise to timing differences although the total taxable profits will be the same over the life of the business.

As the comparatives under new UK GAAP need to be on a like-for-like basis, first-time adoption will gives rise to a ‘prior period restatement’ in the accounts. This will mean that a tax adjustment is required and this adjustment is treated as a receipt/expense in the year of adoption.

Deferred tax

Deferred tax under 'old' UK GAAP is based on timing differences arising from the mismatch between the periods in which gains and losses are recognised in the financial statements and the period in which the tax effects arise.

Under new UK GAAP, the approach will be similar but also requires deferred tax to be recognised on items such as the revaluation of property.

Discounting of deferred tax balances is allowed in limited circumstances under old UK GAAP but is not permitted under new UK GAAP.

Investment property

Old UK GAAP requires investment properties to be revalued each year to open market value; FRS 102 requires revaluation each year to fair value with any changes in value to be taken to profit and loss.

The original cost less depreciation model may be used but only if fair value cannot be measured reliably without undue cost or effort. This is not permitted where the property is used by another group company.

Foreign currency exchange

Old UK GAAP allows transactions covered by a forward contract to be translated at the contract rate; this option is not permitted under FRS 102.
Instead, a foreign exchange forward contract will be recognised on the balance sheet as a financial instrument at fair value and the associated debtor or creditor will be retranslated at the year-end rate.

Intangible assets and goodwill

Old UK GAAP allows an asset to be amortised over its useful life and, in most cases, the amortising will be tax deductible.

The maximum useful life under old UK GAAP is 20 years, although this can be rebutted if a longer or indefinite life can be justified.
Under FRS 102, intangible assets and goodwill always have a finite life. If no reliable estimate can be made, the useful life will be presumed to be five years.

Lease accounting

Leases will continue to be classified into finance leases and operating leases based on whether the lessor holds the risks and rewards of ownership.

Under old UK GAAP, a lease is defined as a finance lease if the present value of the minimum lease payments is 90% or more of the fair value of the asset.

Under new UK GAAP, the 90% test disappears and is replaced with more qualitative tests, including where lease term covers major part (≥ 75%?) of asset life. There will be more chance of an asset qualifying as a finance lease.

A further change is where there are incentives for entering into a lease (eg a rent-free period), the value of the lease is spread over the period to the first rent review, being the point at which the rent is reset to market rates. Under new UK GAAP, lease incentives are spread over the full lease term, which may be a significantly longer time period.

Financial instruments

New UK GAAP classifies financial instruments into ‘basic’ and ‘other’. (Companies will also have the option of adopting the recognition and measurement criteria of full IFRS.):

  • Basic instruments – cash, bank accounts, commercial paper and bills, debtors and loans receivable, loan commitments, some non-convertible preference shares and non-puttable ordinary shares) will generally be measured at cost or amortised cost. Most receivables and payables that are classified as current assets or current liabilities will be measured at the undiscounted amount of cash expected to be paid or received.

Publically traded shares or where the share’s FV can be reliably measured are booked at FV with changes to P&L

Complex instruments – measured at fair value with changes generally taken to P&L (eg derivatives, investment in convertible debt).

Loan relationships and derivatives (eg bond holdings, loans and receivables, forwards, swaps and options) are taxable when an entry is made in P&L or ‘statement of comprehensive income’ (STRGL).

Shares are only taxed on disposal. Trading companies disposing of shares in other trading companies do not pay tax on such disposals if they owned ≥ 10% for (broadly) 12 months (substantial shareholder exemption). If the shares will be taxable on disposal, deferred tax must be recognised if they are fair valued via P&L.

Further support

Download our comprehensive factsheet on making the transition to new UK GAAP via the 'Related links' section on this page.

You can also request model account by email

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