On 20 June 2023, Finance (No 2) Bill 2023 (the ‘Bill’) completed its third reading in the House of Commons. Many of the measures in the Bill reflect the Spring Budget of 15 March 2023 and include the introduction of ‘full expensing’ (replacing the super-deduction regime), both global and domestic top-up taxes to achieve a minimum 15% corporation tax rate for large groups and for financial years beginning on or after 31 December 2023, and the Electricity Generator Levy of 45% on ‘extraordinary returns’. Refer to UK In brief UK2023-08 for further details of the Spring Budget measures.

The important date for tax reporting purposes is the date of ‘substantive enactment’ (or 'enactment' for US GAAP). For financial reporting purposes under IFRS and UK GAAP, taxation balances are only adjusted for a change in tax law if the change has been substantively enacted by the balance sheet date. However, the effects of the change in tax law must be disclosed if the change is enacted or announced before the accounts are signed and the effects are significant.

For UK GAAP and IFRS, the measures within Finance (No 2) Bill 2023 are considered to be substantively enacted on completion of its third reading. For US GAAP, the measures will be considered enacted when the Bill receives Royal Assent.

As noted in UK In brief UK2023-08, the planned increase in the corporation tax rate has already been enacted. As such, the valuation of any deferred tax assets or liabilities on the balance sheet should already reflect the 25% rate from 1 April 2023, taking into account expectations around the timing in which they will unwind.

We expect entities to conclude that the Electricity Generator Levy is outside the scope of IAS 12 and section 29 of FRS 102, and this In brief does not deal with the accounting and disclosure considerations in relation to this new ‘above the line’ tax.

Under the ‘full expensing’ regime companies receive a 100% first year tax deduction for expenditure that they incur on qualifying plant or machinery from 1 April 2023 until 31 March 2026; this essentially reduces, the in-year cost of plant or machinery by 25%. Under both IFRS and FRS 102, accounting for the 100% first-year allowance is more straightforward. Depreciation for tax and accounting purposes is the same over the asset’s life, but it differs from year to year. This gives rise to temporary differences between the asset’s carrying amount and its tax base, and timing differences under FRS 102. In this case, the capital allowances depreciate the asset at a faster rate for tax purposes than the rate of depreciation charged in the financial statements; this results in carrying amounts in excess of the tax base/timing differences. The temporary differences/timing differences created are referred to as ‘accelerated capital allowances’.

In this In brief we draw your attention to the tax and disclosure considerations in relation to the domestic and multinational top-up taxes implemented by the Bill. These taxes are the result of the UK implementing the OECD’s ‘Pillar Two’ model rules, which are designed to ensure that large multinational enterprises pay a minimum level of tax (15%) on the income arising in each of the jurisdictions where they operate.

On 23 May 2023, the IASB issued a narrow-scope amendment to IAS 12, ‘Income Taxes’, that provides a temporary relief from accounting for deferred taxes arising from the implementation of the Pillar Two model rules. See GX In brief INT2023-12. However, these amendments have not yet been endorsed for use in the EU or the UK, and so entities that are impacted by these new rules in the Bill will initially need to consider the deferred tax implications of the Pillar Two legislation, since they are unable to use the IAS 12 amendment. This applies to reporters with balance sheet dates both before and after 20 June 2023, now that the Bill implementing domestic and multinational top-up taxes in the UK has been substantively enacted.

As noted in GX In brief INT2023-05, to address this issue, entities need to determine their accounting policy in respect of top-up / Pillar Two taxes which they will need to apply prior to the amendment being endorsed for use. As set out in the In brief, entities might conclude that the most appropriate policy choice in respect of top-up / Pillar Two taxes results in no adjustments or additions to existing deferred tax balances.

For annual reporters with balance sheet dates before 20 June 2023, substantive enactment of the Pillar Two legislation is a non-adjusting post balance sheet event and therefore the requirements of paragraph 22(h) of IAS 10 and paragraph 32.11(h) of FRS 102 apply for IFRS and UK GAAP purposes respectively. Entities are required to disclose the effects of changes in tax law if the effects are significant.

The following is an illustration of a 'subsequent event' disclosure that such reporters might give where they are still assessing the impact of the Pillar Two rules in the Bill and have concluded that they do not account for deferred tax on top-up taxes:

“On 20 June 2023, Finance (No.2) Act 2023 was substantively enacted in the UK, introducing a global minimum effective tax rate of 15%. The legislation implements a domestic top-up tax and a multinational top-up tax, effective for accounting periods starting on or after 31 December 2023. The Group is reviewing these rules to understand any potential impacts. The Group[/Company] does not account for deferred tax on top-up taxes and therefore, if these rules had been substantively enacted on the balance sheet date, there would have been no deferred tax accounting impact.”

For annual reporters with balance sheet dates after 20 June 2023, substantive enactment of the Pillar Two legislation is accounted for in the measurement of deferred tax balances. The following is an illustration of a disclosure that such reporters might give where they conclude that top-up taxes do not require adjustments or additions to existing deferred tax balances.

“On 20 June 2023, Finance (No.2) Act 2023 was substantively enacted in the UK, introducing a global minimum effective tax rate of 15%. The legislation implements a domestic top-up tax and a multinational top-up tax, effective for accounting periods starting on or after 31 December 2023. The Group[/Company] does not account for deferred tax on top-up taxes and therefore, there was no impact on the recognition and measurement of deferred tax balances as a result of the legislation being substantively enacted.”

Once the IAS 12 amendment is endorsed for use, the disclosure requirements as set out in the amendment apply. A group signing annual accounts after endorsement but for reporting periods beginning prior to 1 January 2023 might include disclosure such as:

“On 20 June 2023, Finance (No.2) Act 2023 was substantively enacted in the UK, introducing a global minimum effective tax rate of 15%. The legislation implements a domestic top-up tax and a multinational top-up tax, effective for accounting periods starting on or after 31 December 2023. The Group[/Company] has applied the exception allowed by an amendment to IAS 12 to recognising and disclosing information about deferred tax assets and liabilities related to top-up income taxes.”

As stated in UK In depth INT2023-10, for annual reporting periods beginning on or after 1 January 2023, entities are required to disclose the following:

As noted in UK In depth INT2023-10, the disclosures relating to the known or reasonably estimable exposure to Pillar Two income taxes are not required to be disclosed in interim financial reports for any interim period ending on or before 31 December 2023.

For more information, contact Dave Walters or Janet Milligan.

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