IFRS - Tax implications

While businesses have been concentrating on the accounting implications of the new standards, tax issues have taken a back seat. But with the publication of the 2005 Finance Act, the tax implications of IFRS have become much clearer.

Link: The budget implications of IFRS

Tax directors must consider how international accounting standards will affect their tax bills as experts warn that huge increases in deferred tax can be expected under the new regime.

‘One of the recurrent themes about tax is whether we can explain deferred tax, because there are some very large numbers coming up,’ says Gillian Wild, tax director at PricewaterhouseCoopers.

She says that huge increases in the deferred tax liabilities of businesses under IFRS have raised concerns among the analyst community.

‘Tax directors really have to think about the answers to those questions – how much of that additional deferred tax liability will, if at all, convert into cash liabilities,’ says Wild.

She believes that companies with large property portfolios would be particularly susceptible to the impact of IFRS on their tax liability. ‘Tax accounting means you have to provide all deferred tax liabilities, which includes revalued and investment property, regardless of whether they are up for disposal,’ she says.

July will provide the first opportunity for companies to assess the full impact of the new standards on the corporate tax bill, as the first installment of tax will be due for companies operating under IFRS on 14 July.

‘Why aren’t people as focused on the cash tax impact as we might anticipate they would be given that we’re already part way through the tax year and tax payments come up in July?’ questions Wild.

One of the biggest areas of tax complexity under IFRS is with financial instruments but the Finance Act has at least clarified the legislation, even if it hasn’t simplified it.

‘Financial instruments was a really complex area, and it still is, but now the legislation has been pretty much drafted. Everybody knows what the tax legislation ought to say, but it’s making sure that they’ve understood the accounting sufficiently,’ she says.

‘Working your way around it is a bit like navigating through a spaghetti junction, and it’s about holding your nerve through that.’

One of the biggest areas of confusion is in credits and debits, according to Wild. ‘What people are still scratching their heads over is what the actual debits and credits in the accounts are going to be,’ Wild says, before adding that loan relationships and fair values are notoriously complicated.

The complexity of tax and IFRS is so much of an issue that nobody is fully clear what the full cash impact will be. ‘I think we’ve looked at whether company results are more likely to go up or down and it came out pretty much evenly,’ she says. ‘But you can’t make decisions on general trends.’

Wild goes on to say that there was one aspect of this year’s Budget that appeared as if the ‘Revenue was stamping its feet’ when it clamped down on a potential loophole in the financial instruments legislation, where companies were bringing forward financial adjustments so that they would be liable to a tax deduction two years early.

‘What they picked up on was companies intentionally crystallising deductions in 2004 so that they could make sure that they could have a deduction in 2004 rather than wait until 2006,’ she says. ‘It wasn’t rampant, but the Revenue wanted to make certain that no companies would be taking advantage of the loophole,’ she says.

The fact that Wild claims nobody, least of all the Revenue, is entirely clear about the full implications that IFRS will have on the corporate tax take, means that July is set to be an extremely interesting month.

Link: The budget implications of IFRS