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HMRC internal manual

Business Income Manual

Tax and accountancy: need to conform to tax law

Profits computed in accordance with generally accepted accounting practice form the starting point for the computation of taxable profits. Adjustments to those profits may, however, need to be made to conform to tax law. As well as those required by specific statutory principles adjustments may also be needed to give effect to more general tax principles, best seen as being derived from the requirement in S7(1) Income Tax (Trading and Other Income) Act 2005 and s8(3) Corporation Tax Act 2009 to tax the `full amount’ of the profits of the trade, laid down by the courts. See BIM35000 onwards.

In recent years the courts have been increasingly reluctant to override generally accepted accounting practice. See the judgments in Threlfall v Jones [1993] 66TC77, Johnston v Britannia Airways [1994] 67TC99 and, specifically on the timing of receipts, Symons v Lord Llewelyn-Davies’ Personal Representative and Others [1982] 56TC630. In particular they have been especially unready to override accounting treatment, which in commercial terms is the only acceptable treatment (see the observations of the Master of the Rolls in Threlfall v Jones - 66TC at page 23).

There may be cases where it may appear that the commercial accounts take an unrealistically conservative view. In worthwhile cases of this nature you should seek accountancy advice at an early stage on the following points:

  • whether the accounting treatment is in accordance with GAAP (if not, the starting point for the tax computation should be accounts drawn up under GAAP, see BIM30510);
  • whether there is an alternative treatment which is acceptable under GAAP and if so what it is;
  • whether, and how, the treatment actually adopted can be justified in terms of `earning’ and `matching’ or whether, rather, it is only justified by overriding considerations of prudence (see BIM31030);
  • how any alternative treatment is to be analysed in terms of these concepts.

If in the light of the accountancy advice you consider that there is a case for arguing that profits should be recognised on a less conservative basis for tax you should put the point to the taxpayer or his agent and debate it accordingly.