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What is a deferred tax asset or liability?

Answered 17 March 2026

Based on the sources retrieved, the available materials address deferred tax assets and liabilities specifically in the context of the Multinational Top-up Tax (MTT) / Pillar Two regime. Here is what the sources say:

What the law says

The legislation does not provide a single standalone definition of "deferred tax asset" or "deferred tax liability," but their nature can be understood from how they are used in the statutory provisions:

  • A deferred tax asset can arise from, for example, a carried-forward tax loss — representing a future tax benefit. Such an asset may or may not be recognised in the accounts depending on whether accounting recognition criteria are met.
  • A deferred tax liability represents a future tax obligation. A deferred tax liability that is not reversed within five accounting periods after the period in which it was taken into account becomes a recaptured deferred tax liability, triggering a recalculation of the effective tax rate.
  • Both assets and liabilities are reflected in a member's underlying profits accounts and feed into the total deferred tax adjustment amount for the purposes of calculating covered taxes.

HMRC guidance / practice

  • A deferred tax asset or liability arises from a temporary difference — i.e., a difference between the tax treatment and accounting treatment of an amount that is eliminated over time. By contrast, a permanent difference is one that is not eliminated over time and therefore does not give rise to a deferred tax asset or liability.

  • A deferred tax asset commonly arises where a tax loss is carried forward: the loss may be recognised as a deferred tax asset in the accounts, representing the future tax saving when the loss is utilised. However, if there is no expectation of future profits against which to use the loss, the asset may not be recognised for accounting purposes.

  • A valuation allowance (liability) may be recorded against a recognised deferred tax asset to offset its value to the extent the loss is forecast not to be usable. If the financial forecast changes and taxable profit becomes probable, this offsetting liability is reversed.

  • For MTT purposes, deferred tax assets that are not recognised (or not fully recognised) in the accounts due to valuation or accounting recognition adjustments are nonetheless recognised in full.

⚠️ Important caveat: The sources retrieved relate exclusively to the Pillar Two / Multinational Top-up Tax context. The general concept of deferred tax (as used in financial accounting under IAS 12 or FRS 102, and as relevant to UK corporation tax more broadly) is not defined in the retrieved materials. For a broader definition, you may wish to consult IAS 12 (Income Taxes), FRS 102 Section 29, or HMRC's Corporate Finance Manual.

Citation sources

1 MANUAL
Calculating the effective tax rate: Covered tax balance: Deferred tax: Valuation adjustments and accounting recognition adjustments

In some cases, amounts which were not originally recognised as a deferred tax asset may be recognised in a subsequent period, as the result of an accounting recognition adjustment. For example, a tax loss may not be recognised as a deferred tax asset because there is no expectation of future profits against which to utilise that loss. In a subsequent period, there may be a new expectation of future profits. The deferred tax asset could then be recognised in the accounts through a recognition adj

HMRC guidance
2 MANUAL
Calculating the effective tax rate: Adjusted profits: Intra-group transactions – Permanent differences arising from transfer pricing adjustments

For this purpose, a difference is a ‘permanent difference’ if it is a difference between the treatment of an amount for the purposes of determining the member’s liability to covered taxes and for accounting purposes, and it is not eliminated over time (and so does not give rise to a deferred tax asset or liability).

HMRC guidance
3 LEGISLATION
Finance (No. 2) Act 2023

Part 3 Multinational top-up tax Chapter 5 Covered tax balance Dealing with deferred tax assets etc Total deferred tax adjustment amount 182 1 The total deferred tax adjustment amount for a member of a multinational group for an accounting period is the deferred tax expense relating to covered taxes reflected in the member’s underlying profits, adjusted as follows. 2 The deferred tax expense is to be adjusted to exclude the following— a any amount of that expense that reflects items not reflected

Primary legislation
4 MANUAL
Calculating the effective tax rate: Covered tax balance: Deferred tax: Valuation adjustments and accounting recognition adjustments

Where a deferred tax asset relating to the carry forward of unused tax losses is not recognised in the accounts because the accounting recognition criteria are not met, the deferred tax asset is to be reflected in the total deferred tax adjustment amount. For example, a tax loss that can be carried forward may not be recognised (in full in or in part) as a deferred tax asset for accounting purposes, due to uncertainty about whether there will be future profits against which to utilise the loss.

HMRC guidance
5 MANUAL
Calculating the effective tax rate: Covered tax balance: Deferred tax: Treatment of deferred tax assets and liabilities on entry into regime

An existing deferred tax asset or liability is to be taken into account in the calculation of the deferred tax expense or credit for MTT purposes either: at 15%, if the nominal tax rate to which it relates is 15% or above, or at the nominal tax rate, if that rate is below 15%. The impact of any valuation adjustment or accounting recognition adjustment in respect of a deferred tax asset is ignored. Deferred tax assets which are not recognised (or not fully recognised) in the accounts due to such

HMRC guidance