Deferred tax is where provision errors cluster. It is conceptually harder than current tax, it is where auditors focus their scrutiny, and it is where the mistakes that damage a finance function's credibility live. This guide walks through the deferred tax errors that come up most often in mid-market groups — with a worked figure for each, how the auditor catches it, and how it should have been done. It is written from the perspective of someone who has prepared these schedules in-house and defended them across the audit table.
If you want the wider context first — how deferred tax fits into the whole year-end provision — start with our guide to getting the tax provision right. This piece goes deep on the single area that causes the most trouble.
What deferred tax is, briefly
Deferred tax reflects the future tax effect of differences between the accounting and tax treatment of an item — differences that will reverse over time. Accelerated capital allowances create a deferred tax liability (tax relief now, accounting cost later); a provision not yet deductible creates a deferred tax asset (accounting cost now, tax relief later). It is measured at the rate expected to apply when the difference reverses, currently the 25% UK main rate. Get the concept right and the errors below mostly disappear; the trouble is that the concept is applied under deadline pressure, at year-end, by people without specialist tax knowledge.
Error 1 — Recognising a deferred tax asset on losses that shouldn't be recognised
This is the single most common and most damaging deferred tax error. A deferred tax asset on carried-forward losses can only be recognised to the extent it is probable that future taxable profits will be available to use them. Optimism is not evidence.
The error: A group with £800,000 of carried-forward losses recognises the full £200,000 deferred tax asset (£800,000 × 25%), on the basis that "the business is turning around."
How the auditor catches it: The auditor asks for the profit forecast supporting recovery. It shows modest, uncertain profits over three years — nowhere near enough to support the full asset as probable. The auditor requires a write-down.
The impact: A visible prior-period-style adjustment, a lower reported asset, and a dent in the auditor's confidence in every other judgement in the file.
How it should have been done: Recognise only the portion supported by a reliable forecast — say £300,000 of losses against near-term probable profits, a £75,000 asset — and document the basis. Prudent, defensible, and no write-down.
Auditor query. "You've recognised the full £200,000 deferred tax asset on the carried-forward losses. What forecast supports recovery, and over what period?"
Weak response (loses): "The business is turning around, so we expect to use them." No evidence, no period, no probability assessment — the auditor writes the asset down.
Strong response (holds): "We recognised only the £75,000 asset supported by the board-approved forecast showing £300,000 of probable profits over two years. The remaining losses are unrecognised until recovery becomes probable, and disclosed as an unrecognised asset." Tied to an approved forecast, quantified, and prudent — the judgement stands.
Error 2 — Missing timing differences entirely
Every timing difference feeds deferred tax. Miss one and the provision is wrong — and because the error sits in the balance sheet, it usually persists year after year until someone unpicks it.
The error: A £90,000 share-based payment charge is expensed in the accounts, but no deferred tax asset is recognised for the future tax relief on exercise. The £22,500 asset is simply missed.
How the auditor catches it: The auditor reconciles the deferred tax schedule to the share scheme records and asks why there is no deferred tax on the share-based payment. There is no answer — it was overlooked.
How it should have been done: Build the deferred tax schedule by reconciling to each source ledger — fixed asset register, provisions listing, share scheme records — so no difference can be silently dropped. Completeness is a process, not a memory test.
Error 3 — Applying the wrong rate
Deferred tax is measured at the rate expected when the difference reverses. Applying an outdated rate, or blending rates without basis, misstates the whole balance.
The error: A group still measures deferred tax at 19% out of habit, or blends 19% and 25% with no rationale. On a £400,000 net timing difference, the difference between 19% and 25% is £24,000 — material.
How the auditor catches it: The auditor confirms the enacted rate expected on reversal (25%) and tests the rate applied. The mismatch surfaces immediately.
How it should have been done: Apply 25% throughout unless a specific difference is genuinely expected to reverse in a period attracting a different rate — and if so, document why. One rate, one rationale.
Error 4 — The deferred tax movement doesn't reconcile
The movement in the deferred tax balance sheet account should reconcile to the deferred tax charge in the income statement. When it doesn't, and nobody can explain the difference, the auditor's confidence in the entire provision drops.
The error: Opening deferred tax liability £50,000, closing £77,500 — a £27,500 movement. But the P&L deferred tax charge is posted as £35,000. The £7,500 gap is unexplained.
How the auditor catches it: This is a standard audit test — closing less opening should equal the charge (adjusted for any amounts taken to equity/OCI). The gap is found in minutes.
How it should have been done: Reconcile the movement every time, splitting out anything posted to equity or other comprehensive income (a share-based payment excess or a revaluation) so the P&L charge and the balance sheet movement tie exactly.
Error 5 — Netting assets and liabilities incorrectly
Deferred tax assets and liabilities can only be offset in specific circumstances — broadly, where they relate to the same tax authority and there is a legal right to offset. Groups sometimes net across entities or authorities that shouldn't be netted, misstating both the presentation and, where different rates or recoverability apply, the number.
The error: A UK company's deferred tax liability is netted against an overseas subsidiary's deferred tax asset in the consolidated accounts, as if they were one balance.
How the auditor catches it: The auditor tests whether the offset criteria are met. Different tax authorities, no right of offset — so the net presentation is wrong, and the overseas asset's recoverability needs testing on its own terms.
How it should have been done: Assess each entity's deferred tax position separately, apply the offset rules strictly, and — for groups with overseas subsidiaries — recognise that consolidation adds its own layer of complexity (covered in our guide to provisions for groups with an overseas parent).
What these errors cost
Deferred tax errors are rarely just a corrected figure. Because they sit in the balance sheet, they compound — and because auditors scrutinise this area hardest, they surface at the worst moment:
- Write-downs and adjustments. An over-recognised loss asset written down by the auditor is a visible, late adjustment that dents confidence in the whole file.
- They carry forward. A missed timing difference or misstated balance becomes next year's wrong opening position — so the error repeats, and grows, until someone unpicks it.
- A slower, fraught audit. Deferred tax queries that can't be answered cleanly stall the tax section of the audit, holding up sign-off for the whole set of accounts.
- Lost credibility with investors and lenders. A deferred tax balance that doesn't reconcile, or an effective tax rate no one can explain, generates exactly the questions a business least wants during a funding round or due diligence. For the full downstream picture, see our guide to getting the provision right.
The pattern behind every one of these
Read the five together and the common thread is obvious: deferred tax rewards discipline and punishes guesswork. Every error above comes from the same root cause — the schedule was built at year-end, under time pressure, without reconciling to source records or documenting the judgements. None of them are exotic. They are the same mistakes, in the same order, in most mid-market groups that have grown faster than their finance function.
That predictability is the good news. A deferred tax schedule that is maintained through the year, reconciled to source ledgers, measured at the right rate, and reconciled movement-to-charge simply doesn't produce these errors. It is exactly the routine an experienced in-house tax function applies — and exactly what an Outsourced Head of Tax provides to a group without one.
Frequently asked questions
What is the most common deferred tax error?
Recognising a deferred tax asset on carried-forward losses that fails the "probable future profits" test, which the auditor then writes down. Missed timing differences are a close second.
What do deferred tax errors cost if not caught?
Because they sit in the balance sheet they compound into the next year, and because auditors scrutinise this area hardest they cause write-downs, a slower audit, and difficult questions from investors and lenders during due diligence or a funding round.
Why do deferred tax errors persist year after year?
Because they sit in the balance sheet. A missed timing difference or a misstated balance carries into the opening position of the next year, so the error compounds until someone unpicks it.
What rate should deferred tax be measured at?
The rate expected to apply when the difference reverses — currently the 25% UK main rate — unless a specific difference will reverse in a period attracting a different rate, in which case that rate applies and the basis should be documented.
Can deferred tax assets and liabilities be netted?
Only where they relate to the same tax authority and there is a legal right of offset. Netting across different entities or tax authorities is a common presentation error, particularly in groups with overseas subsidiaries.
Do we need an in-house tax specialist to get deferred tax right?
Not necessarily. The discipline can be provided on a retained basis by an Outsourced Head of Tax, who maintains the schedule, documents the judgements and handles the auditors — without the cost of a full-time hire.