The introduction of UK GAAP this year means that corporation tax computations for 2015 are likely to be a lot less straightforward than normal and transitional adjustments associated with the introduction of FRS 101 or 102 could also have cash flow implications for companies as early as next month. In a timely note to clients, leading national accountants and tax advisors, Baker Tilly, have recently flagged the various options available to clients in order to avoid any potential pitfalls that could result from these changes.

The change in reporting standards involves a transition from one valid basis of accounting to an altogether different one for the calculation of taxable profits for corporation tax purposes.

Where differences arise between the two, it will be necessary to make transitional adjustments which in some instances will either be relieved in full or be subject to corporation tax in the first accounting period in which the new UK GAAP is applied. For those companies that pay their corporation tax on a quarterly basis, there could well be a noticeable effect on some companies’ corporation tax liabilities and cash flow from July 2015.

There are cases where some companies, when considering their likely corporation tax liability under the new regime, have the option of restating earlier transactions following the adoption of the new GAAP. Such restatement will decide whether or not transitional tax adjustments arise and how significant they are.

An example of this could be the restatement, from an appropriate prior date, of earlier acquisitions of trades and assets categorised as business combinations. Such a restatement could affect the makeup of intangible fixed assets which might well have a knock-on effect on the timescale over which corporation tax deductible amortisation can be debited from the profit and loss account. It is accounting policy choices like this that can have a significant bearing on the incidence of corporation tax payments and cash flow.

Another category which is at risk of adverse corporation tax implications comprises those companies holding financial instruments such as foreign currency hedges. Under the new UK GAAP, certain derivatives which have previously featured in the balance sheet at cost, will now have to be accounted for at fair value. This will inevitably mean some transitional adjustments as well as on going taxable or relievable movements.

Fortunately there are opportunities for some companies to apply the disregard regulations in order to either defer or possibly even exempt fair value movements and transitional adjustments from corporation tax where instruments are being employed to either manage interest rate risk or to hedge against adverse currency fluctuations. However, time is of the essence here with large companies that fall within the “senior accounting officer” regime having only 6 months from the opening of the first period under the new UK GAAP in which they can make the necessary elections.

It is also clear that the new UK GAAP could very well impact on the value of individual balance sheets affecting the position of some companies in relation to items such as transfer pricing, R&D claims and other aspects of corporation tax that are affected by a company’s size.

Time is ticking away and those companies that have yet to fully consider the implications of the new UK GAAP and to ascertain which elections or options they are able to make need to act with some urgency. Anyone needing clarification on this or on any other subject that may affect their corporation tax position can contact Baker Tilly’s corporation tax team here. They will be only too delighted to help.