Accelerated payment notices

In this edition of a series of views and commentary on FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, Financial Reporting Faculty staff answer some of your questions regarding APNs for corporation tax. It does not apply to APNs for other taxes eg, PAYE or NICs. It is not intended to be a definitive or comprehensive analysis of the many issues and scenarios regarding APNs that have come to our attention. This update was originally published in May 2015 as a Technical Enquiry Helpsheet. This version has been updated to reflect the requirements of FRS 102. Updated October 2017.

This FRS 102 Update examines whether receipt of an Accelerated Payment Notice (APN) affects the amount to be provided for corporation tax payable in a company’s accounts under UK GAAP.

FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland ¹ requires that current tax be measured at the amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the reporting date (FRS 102.29.5).

When there is a degree of uncertainty surrounding the existence and amount of a tax liability, for example when the company has entered into an arrangement which is or may be subject to challenge by HMRC, directors need to exercise judgement in determining the amount of tax to be provided, if any. This should take account of all the relevant facts and circumstances, and the directors may wish to take expert advice. 

The receipt, or expected receipt, of an APN will be taken into account when forming a judgement about the amount of corporation tax expected to be paid, but does not of itself mean an increase in the amount expected to be paid. The APN simply forms part of the evidence taken into account by the directors. 

If the directors consider that the weight of evidence is such that a higher amount of corporation tax than estimated previously will be payable to HMRC and the cash paid under the APN will not be recovered, the company’s best estimate of the tax payable should be increased to that higher amount. This will give rise to an additional tax charge for the year in the financial statements. 

If the weight of evidence is such that the directors consider that there is no reason to increase their best estimate of the tax payable, then no increase to the tax liability and charge will be necessary.

However, the receipt of an APN will advance the time at which in contentious circumstances a tax-related payment is required. When the company pays accelerated tax to HMRC, assuming the directors consider that the corporation tax liability has been calculated correctly already, there will be no additional tax charge. The amount paid will reduce the corporation tax liability or create a corporation tax asset.

FRS 102 includes a general requirement to disclose information that enables users to evaluate the nature and financial effect of the current and deferred tax consequences of recognised transactions and other events (FRS 102.29.25). FRS 102 also requires disclosure of judgements made by management in applying accounting policies, key assumptions and other key sources of estimation uncertainty at the reporting date (FRS 102.8.6-7)² . Directors may wish to consider the need for additional disclosures in the financial statements when the payment of an APN will have a significant impact on the company’s cash flows, and should bear in mind the requirement to disclose material uncertainties related to events or conditions that cast significant doubt upon the entity’s ability to continue as a going concern (FRS 102; 3.9).

The disclosure requirements are not considered further in the illustrative examples below.

Illustrative examples

Example 1

DOTAS scheme – corporation tax APN not yet issued

The company has entered into a corporation tax arrangement which is notifiable under the disclosure of tax avoidance scheme (DOTAS) rules and the DOTAS reference number has been included on the HMRC list of tax avoidance schemes on which users may be charged an upfront tax payment (APN).

Similar schemes have been successfully contested by HMRC and the corporation tax payable in the accounts reflects the opinion of the company’s tax advisors and the directors that HMRC are likely to be successful in this case.

As the corporation tax liability already reflects the expected outcome, no change to the amounts recognised in the accounts is necessary as a result of the identification of the tax arrangement as a scheme for which HMRC may issue an APN.

Alternatively, if the directors had been of the opinion, given all the available evidence, that the company would be successful in any challenge from HMRC, there would be no requirement to provide for a higher tax liability by virtue solely of the identification of the tax arrangement as a scheme for which HMRC may issue an APN. 

Example 2

DOTAS scheme – corporation tax APN issued but not yet paid

The facts and circumstances are as in Example 1, except that the company is now in receipt of the APN. It has not yet made the upfront tax payment to HMRC.

As noted above, the receipt of the APN does not of itself mean that a higher tax payment is probable. Therefore there is no need to change the accounting treatment solely as a result of the receipt of the APN. 

Example 3

DOTAS scheme – corporation tax APN paid

When an APN has been settled the company will need to account for the cash transferred. The accounting for tax payable will reflect the extent to which the amount of the APN had already been accrued.  If the directors are of the opinion that the cash paid will not be recovered, and if the full amount now paid had not previously been accrued, the company’s best estimate of the tax payable should be increased, giving rise to an additional tax charge for the year. 

If the best estimate of the total corporation tax payable has not altered as a result of the payment, the amount paid will reduce the corporation tax liability in the accounts or create a corporation tax asset.  

¹ Similar requirements exist in IAS 12 Income Taxes. In addition, IFRIC 23 Uncertainty over Income Tax Treatments clarifies for IFRS reporters how to reflect uncertainty in accounting for income taxes, particularly uncertainty over whether the relevant taxation authority will accept the tax treatment under tax law.

² There are Similar disclosure requirements in IAS 1 Presentation of Financial Statements.