The net amount of deferred taxation credited to the Consolidated Statement of Comprehensive Income in the year was £101,000 (2021:£6,547,000 debit)
The majority of the Group's profits are earned in the UK with the standard rate of corporation tax being 19 per cent for the year to 31 December 2022. The UK corporation tax rate will increase to 25 per cent from 2023 and the deferred tax has been calculated at 25 per cent, which is the rate at which it is expected to unwind in the future using rates enacted at the balance sheet date.
Capital allowances are tax reliefs provided in law for the expenditure the Group makes on fixed assets. The rates are determined by Parliament annually, and spread the tax relief due over a number of years. This contrasts with the accounting treatment for such spending, where the expenditure on fixed assets is treated as an investment with the cost then being spread over the anticipated useful life of the asset, and/or impaired if the value of such assets is considered to have reduced materially.
The different accounting treatment of fixed assets and intangible assets for tax and accounting purposes is one reason why the taxable income of the company is not the same as its accounting profit. During the year to 31 December 2022 the depreciation charge for the year exceeded the capital allowances due to the Group.
Short term timing differences arise on items such as depreciation in stock and share-based payments because the treatment of such items is different for tax and accounting purposes. These differences usually reverse in the years following those in which they arise, as is reflected in the deferred tax charge in the Financial Statements.
Adjustments to tax charges arising in earlier years arise because the tax charge to be included in a set of accounts has to be estimated before those Financial Statements are finalised. Such charges therefore include some estimates that are checked and refined before the Group’s corporation tax returns for the year are submitted to HM Revenue & Customs, which may reflect a different liability as a result.
Some expenses incurred may be entirely appropriate charges for inclusion in the Financial Statements but are not allowed as a deduction against taxable income when calculating the group’s tax liability for the same accounting period. Examples of such disallowable expenditure include business entertainment costs and some legal expenses.
The prior year adjustment in corporation tax (includes the reversal of some tax provisions made on acqusitions of subsidiaries in prior years which are no longer required.
As can be seen from the tax reconciliation, the process of adjustment that can give rise to current year adjustments to tax charges arising in previous periods can also give rise to revisions in prior year deferred tax estimates. This is why the current year adjustments to the current year charge for capital allowances and short term timing differences are not exactly replicated in the deferred taxation charge for the year.
The Group's overseas operations comprise a manufacturing operation in Belgium and sales and administration offices in the USA and China. The sales of the units, in total, were under 4 percent of the Group's turnover in the year to 31 December 2022. In total, the trading profits were not material and a minimal amount of tax is due to be paid overseas.