The cut in corporation tax may be more than a year away, but company earnings
could benefit from the 2% reduction to 28% much earlier than that because of the
way deferred tax is calculated in accounts.
Deferred tax is designed to deal with the mismatch between accounting profits
and profits used for tax purposes. A disconnect between the two occurs because
the cost of buying assets is recognised early for tax purposes but only later
for accounting purposes.
The deferred tax comes into force because it recognises this gap and makes a
provision to pay the tax at a later date. These provisions, based on what tax
will have to be set against company profits in the future, will now be revised
downwards in acknowledgement of the lower corporation tax rate that will come
into effect in April 2008
‘There are no figures for the exact amounts that will be released to company
profits, nor how much deferred tax UK companies have set aside, but the impact
will boost distributable reserves,’ said Bill Dodwell, head of tax policy at
But perhaps the more important question is how analysts and brokers will
react to the change and what the effect of the deferred tax will be on share
Investors have begun to pay more attention to the detailed tax affairs of
companies following tax issues that have cropped up at Vodafone and
Nevertheless, they remain sceptical of the impact of deferred tax as it is
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