MTT25300 - Calculating the effective tax rate: Covered tax balance: Post-filing adjustment of covered taxes
Source: gov.uk (2025-08-05)


Where a group determines that the covered taxes of a member in a prior period has increased or decreased, this will be dealt with in the return for the current year. Either the prior year will be recalculated, potentially resulting in an additional top-up tax amount in the current year, or the increase or decrease in liability will be reflected in the covered tax balance in the current year, even though it relates to a prior year.

Where the covered taxes have increased for the period, or there is an insignificant decrease, the adjustment to covered taxes will be made in the current period and no recalculation is required.

Where the covered taxes have decreased for the period, and no election is made to treat the decrease as insignificant, recalculations will be required for that period and subsequent periods. An election is possible if the aggregate decrease to covered taxes for the prior period is less than 1 million Euros.

Where recalculations are required as the result of a loss being set back to a prior period, a deferred tax asset is created.

This is set out in section 217 of Finance (No.2) Act 2023.

Increase or insignificant decrease

Where:
- the liability has increased, or
- the liability has decreased and the group has elected to treat it as insignificant,
that increase or decrease is to be reflected in the covered tax balance in the current period. An adjustment should be made if it is not already so reflected.

Election to treat decrease as insignificant

A decrease in liability for a prior period is to be treated as insignificant if:
- the aggregate covered tax balance of the members of the subgroup for that prior period is not reduced by 1 million euros or more, when taking into consideration all post-filing adjustments arising in the current period, and
- the filing member has made an election for decreases in that prior period to be treated as insignificant.
This election must be made annually and applies to a territory. See MTT52200 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt52200) for guidance on making elections.

Decrease not treated as insignificant

Where the liability has decreased, and the decrease is not to be treated as insignificant, the following are to be recalculated for the prior period to take account of the decrease:
- the effective tax rate for the member and the other members in the territory,
- the top-up amounts of those members, and
- if the liability to covered taxes has decreased because of a reduction of the member's profits, its adjusted profits (but only to the extent necessary to prevent the effective tax rate from decreasing).
The following further adjustments may also be required:
- the adjusted profits of those members in subsequent accounting periods are to be adjusted in consequence of the decrease to the covered tax balance, and the effective tax rates and top-up amounts must also be accordingly recalculated for the subsequent periods.
- if the amount of the decrease is reflected in the covered tax balance of the member for the current period, that balance is to be adjusted to exclude it.
A recalculation can result in an additional top-up tax amount arising in respect of the recalculated period. See MTT33200 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt33200) for guidance on the treatment of an additional top-up amount arising from a recalculation.

Deferred tax asset arising where a loss is set against a profit in an earlier year

Where the decrease in liability to covered taxes arises as a result of the member offsetting a loss in a later period against profits in a prior period, the member is treated:
- 15%, and
- the tax rate that applied to the profits against which the amount was offset, and
- as having used that asset in the prior accounting period.
No return submitted for prior period

Where an information return or self-assessment return has not yet been submitted for the prior period, the change in liability should be reflected in that return for the prior period.

Where no return was due for the prior period, it is possible that an intervening period for which a return has already been submitted is affected by the change. In this case, the rules apply in the same manner, as though a return had been submitted for the period in which the covered taxes have changed.

Amendment in Finance Act 2025

Section 217 was amended by FA25. This guidance page reflects the current version of the legislation. Consult FA25 for legislation applicable to prior periods if the retrospection election does not apply (see MTT09490 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt09490)).