Corporate tax accounting is the work of reconciling two descriptions of the same year. The statutory accounts say what the company earned under accounting standards; the tax computation says what it earned under tax law. They differ permanently in some places and temporarily in others, and the accounts have to show both the tax payable and the effect of the temporary differences.
Permanent differences
Some items are in the accounts and never in the computation, or the reverse. Client entertaining is charged in the accounts and disallowed for tax forever. Most fines are the same. Certain grant income is taxable in one and not the other. These differences change the effective rate the company appears to pay and they never reverse, which is why a company's tax charge as a percentage of accounting profit is rarely exactly the statutory rate.
Timing differences and deferred tax
Depreciation and capital allowances relieve the same spending on different schedules, so in any one year the tax deduction and the accounting charge differ, and over the asset's life they agree. Accounting standards require the company to recognise that future effect now, as deferred tax: a liability where the tax relief has been taken early, an asset where it has not. Deferred tax is an accounts disclosure and never a payment; nothing is owed to HMRC because of it.
What ends up on the return
Only the computation reaches HMRC. The CT600 reports taxable profit and the tax on it; the deferred tax figure stays in the accounts. That is why a director looking at the accounts and the tax bill sees two numbers that do not reconcile without the computation in front of them, and why the computation, not the accounts, is the document to ask a firm for when checking their work.
Questions people ask about corporate tax accounting
Why does the tax charge not equal 25% of my profit?
Because taxable profit differs from accounting profit: depreciation is added back and capital allowances deducted, entertaining and most fines are disallowed permanently, and reliefs such as R&D change the base.
What is deferred tax?
An accounting recognition of the future tax effect of timing differences, mostly between depreciation and capital allowances. It is a disclosure in the accounts and is never payable to HMRC.
Which document shows what the company actually owes?
The corporation tax computation, which supports the CT600. The accounts show the charge and the deferred tax; only the computation shows the liability.