Deferred tax under FRS 105 is not recognized at all. Section 24 of the standard prohibits micro-entities from booking any deferred tax asset or deferred tax liability, no matter how large the timing differences between accounting profit and taxable profit happen to be.1Financial Reporting Council. FRS 105 The Financial Reporting Standard Applicable to the Micro-entities Regime Only current tax appears in the accounts. That is the whole rule, and everything else follows from it.
Why the Standard Bans It
Deferred tax captures the future tax consequences of transactions that have already happened. Claim capital allowances faster than you depreciate the same asset, and under FRS 102 you would sit a deferred tax liability on the balance sheet for the tax you will eventually owe when the allowances run out. FRS 105 skips that step.
The Financial Reporting Council’s basis for conclusions calls deferred tax “a complex area of accounting” that offers limited benefit given how little disclosure micro-entities are required to make. Tracking every temporary difference, applying enacted rates, and reassessing recoverability each year is disproportionate work for a company with fewer than ten employees and turnover under a million pounds. So the standard removes it.
The Capital Allowances Example
Capital allowances are the most common source of timing differences for a small company. Buy a van for £30,000 and you might claim the full annual investment allowance in year one, cutting taxable profit by £30,000 immediately. In the accounts, though, the van depreciates over five or six years. The gap between the tax deduction you have already taken and the book value still being written down is a textbook deferred tax liability under FRS 102.2GOV.UK. FRS 105 Overview Paper – Tax Implications Under FRS 105 that gap is ignored.
Practically, the balance sheet will never show a provision for the future tax bill that this timing difference will eventually create. For most businesses at this scale the amounts are small enough that nothing important is lost. But the obligation is real. Owners preparing for a sale, a refinancing, or a partnership discussion should know that the accounts do not show it.
What Actually Appears in the Accounts
With deferred tax removed, the only tax figure in a micro-entity’s accounts is current tax: the amount owed to HMRC (or refundable from HMRC) on the taxable profit for the period, calculated at the corporation tax rate enacted or substantively enacted by the balance sheet date.
Corporation tax rates have been unchanged since April 2023 and use a two-tier structure:
- Small profits rate of 19% on taxable profits up to £50,000
- Main rate of 25% on taxable profits above £250,000
- Marginal relief for profits between £50,000 and £250,000, using a fraction of 3/200, producing an effective rate somewhere between 19% and 25%3GOV.UK. Corporation Tax Rates and Allowances
Most micro-entities sit inside the small profits band. A company running close to the upper edge of the size regime could touch marginal relief.
Corporation tax unpaid at the balance sheet date is shown as a liability. An overpayment from a prior period is shown as a receivable. That is the full extent of tax accounting under FRS 105. No provisions for future years, no adjustments for timing differences, nothing except what is owed or refundable right now.
Disclosure is minimal. The total tax charge for the period must be visible, either on the face of the profit and loss account or in the notes. There is no requirement for a tax reconciliation between the expected charge (profit multiplied by the standard rate) and the actual charge. Under FRS 102 that reconciliation can run to a dozen lines covering capital allowances, disallowable expenses, and losses brought forward. Micro-entities skip it entirely.
Switching Into FRS 105 From FRS 102
A company moving from FRS 102 to FRS 105 has to strip out any deferred tax sitting on its balance sheet. The change applies retrospectively: the prior year’s comparative figures are restated as though FRS 105 had always been the framework. The accountant journals out the deferred tax asset or liability, and retained earnings absorb the difference. The comparative column is marked “as restated” so readers can see why the numbers moved.
If the company was carrying a deferred tax liability of £3,000, that liability disappears and retained earnings rise by £3,000. Any deferred tax charge or credit that ran through the prior year’s profit and loss also comes out. Miss this and the opening balances will not reconcile with the new framework, which pushes errors into every subsequent year.
Switching Out of FRS 105 to FRS 102
The harder direction is out. When a company outgrows the micro-entity size limits, it has to adopt FRS 102 and recognize deferred tax for the first time. Section 29 governs the calculation and Section 35 covers first-time adoption.
On the transition date, the company has to identify every temporary difference between the accounting carrying amount and the tax value of its assets and liabilities, and book the resulting deferred tax. For a business that has spent years under FRS 105 without tracking those differences, reconstructing them is real work. Capital allowances claimed years ago, losses carried forward, and any revaluation adjustments all have to be pulled back together.
This is where growing companies get caught. A business that has filed simplified accounts for five years suddenly needs a deferred tax calculation covering its entire history, and the fees for that reconstruction can be substantial. Anyone approaching the size thresholds should start tracking timing differences informally before the switch becomes mandatory. Retrofitting the data later costs far more than keeping it as you go.
When Staying on FRS 105 Works Against You
Qualifying as a micro-entity does not force you to use FRS 105. You can report under FRS 102 or its Section 1A small-company variant instead. Several situations make the simplified regime a poor fit.
Lenders are the most common friction point. Banks reviewing a loan application often want more financial detail than FRS 105 provides. A balance sheet with no deferred tax provision, no detailed policy notes, and no reconciliations can leave a credit team feeling under-informed. Some will ask for the accounts to be restated under FRS 102, so the work happens anyway.
FRS 105 also locks you into historical cost. You cannot revalue property, investments, or other assets upward to market. A company whose main asset is an appreciated commercial property will show a balance sheet that understates the business, which matters for financing, sales, and bringing in a partner.
And the deferred tax prohibition itself means the accounts do not show the full economic picture. Substantial capital allowances that will reverse in future years produce a real future tax bill. It just does not appear anywhere in the statements. Directors deciding on distributions, reinvestment, or an exit should factor that liability in even when the accounts do not require them to report it.