Legislation – Finance Act 2026

“Part 4Pre-entry deferred tax assets and liabilities

Straddle periods

14

(1)

This paragraph applies in relation to an accounting period of a member of a multinational group if—

(a)

21 July 2025 falls during the period (but is not the first day of the period),

(b)

the member has a relevant pre-entry deferred tax asset or a relevant pre-entry deferred tax liability, and

(c)

the asset or liability is reversed (to any extent) in the period.

(2)

Despite section 185(7D) and paragraphs 2(3)(c) and 5(1)(c) of this Schedule, an amount in respect of the reversal may be reflected in—

(a)

the member’s deferred tax expense for the purposes of this Part of this Act, or

(b)

the member’s qualifying income tax expense for the purposes of Part 2 of this Schedule.

(3)

The amount that may be reflected in respect of the reversal is the pre-commencement proportion of the amount that could be so reflected if section 185(7D) or paragraph 2(3)(c) or 5(1)(c) of this Schedule (as the case may be) did not apply to the asset or liability.

(4)

In this paragraph “the pre-commencement proportion” means—

(a)

the number of days in the accounting period before 21 July 2025, divided by

(b)

the total number of days in the accounting period.

Grace period

15

(1)

This paragraph applies for an accounting period in relation to a relevant pre-entry deferred tax asset of a member of a multinational group if—

(a)

the accounting period falls within the applicable grace period,

(b)

the relevant pre-entry deferred tax asset is a deferred tax asset that arises as described in section 185(7A) or (7B), and

(c)

the action that results in the asset arising (that is to say, the action referred to in section 185(7A)(a) or (b) or (7B)) takes place on or before 18 November 2024.

(2)

If any relevant pre-entry deferred tax asset falling within a particular category is reversed, an amount in respect of that reversal may, despite section 185(7D) and paragraphs 2(3)(c) and 5(1)(c) of this Schedule, be reflected in—

(a)

the member’s deferred tax expense for the purposes of this Part of this Act, or

(b)

the member’s qualifying income tax expense for the purposes of Part 2 of this Schedule,

so far as it does not exceed the available grace period amount in relation to the category.

(3)

But an amount may not be reflected in respect of the reversal of a deferred tax asset so far as the reversal takes place as a result of (and would not have taken place but for) a change after 18 November 2024 to—

(a)

any law or election in effect in relation to the deferred tax asset,

(b)

the accounting methodology applicable to the deferred tax asset, or

(c)

the way in which a discretion of the kind mentioned in section 185(7A)(a) (government discretions) is exercised.

(4)

Take the following steps to find the “available grace period amount” (if any) in relation to a category of deferred tax asset for an accounting period.

• Step 1

  Determine, in relation to each deferred tax asset of the member falling within the category, the carrying value of the asset as at the time when it was first reflected in the underlying profits of the member.

  For that purpose, determine the carrying value of the asset on the basis of the lower of—

  1. (a)

     the nominal tax rate that applied in relation to it at that time, and

  2. (b)

     a tax rate of 15%.

• Step 2

  Find the sum of the values determined at Step 1.

• Step 3

  Multiply the result of Step 2 by 20%.

• Step 4

  Deduct any amount—

  1. (a)

     that has been taken into account in determining the deferred tax expense of the member—

     1. (i)

        in relation to assets falling within the category, and

     2. (ii)

        in an accounting period that falls within the applicable grace period, or

  2. (b)

     that would have been so taken into account in such a period had the Pillar Two rules applied to the member in question for that period.

(5)

For the purposes of this paragraph each of following is a “category” of relevant pre-entry deferred tax asset—

(a)

assets falling within section 185(7A)(a);

(b)

assets falling within section 185(7A)(b);

(c)

assets falling within section 185(7B).

(6)

For the purposes of this paragraph an accounting period “falls within the applicable grace period”—

(a)

in relation to the categories of asset mentioned in sub-paragraph (5)(a) and (b), if—

(i)

it begins on or after 1 January 2024 and before 1 January 2026, and

(ii)

it ends before 1 July 2027;

(b)

in relation to the category of asset mentioned in sub-paragraph (5)(c), if—

(i)

it begins on or after 1 January 2025 and before 1 January 2027, and

(ii)

it ends before 1 July 2028.

(7)

This paragraph is subject to paragraph 14 (and accordingly, that paragraph is to be applied in precedence to this in determining for the purposes of Step 4 in sub-paragraph (4) whether an amount has been taken into account in an accounting period in relation to a deferred tax asset).

General

16

(1)

In this Schedule, in relation to a member of a multinational group—

“relevant pre-entry deferred tax asset” means a deferred tax asset that arises as described in section 185(7A), (7B) or (7C);

“relevant pre-entry deferred tax liability” means a deferred tax liability that arises as described in section 185(7B).

(2)

For the purposes of those definitions the references in section 185(7A) to (7C) to an accounting period for which Pillar Two rules apply to a member include an accounting period for which the Pillar Two rules would have applied to the member but for a transitional safe harbour election.”