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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Tax and accountancy: interaction between UK GAAP and IAS

The accounting standards issued by the Financial Reporting Council do not give detailed accounting guidance for every possible transaction. Where there is no specific standard a relevant International Accounting Standard which gives detailed guidance for a particular transaction may throw some light onto accepted best practice. In particular, if an entity has correctly followed an IAS standard, which does not conflict with UK GAAP and this accurately reflects the facts, the accountancy treatment will comply with the requirement to compute profits of a trade in accordance with GAAP.

However where there is a currently existing UK standard which applies to the transaction the UK standard should be followed rather than any international standard to bring the accounts and tax computation within the requirement.

Anti-avoidance

S996 Corporation Tax 2010

Section 996 is anti-avoidance legislation. Because individual companies within a Companies Act group are able to prepare accounts using either UK GAAP or IAS, this section ensures that the element of choice of accounting standard does not allow a company to obtain a tax advantage.

It deals with the situation where a company is permitted to use IAS and has a transaction with another group company which uses UK GAAP. If the transaction has as a main benefit the conferring of a tax advantage as a result of different accounting treatments, the IAS company will have to use UK GAAP for the transaction for tax purposes. The disparity in treatment of the transaction has to be as a result of the use of two different accounting frameworks. An example often quoted is where one company uses mark to market or fair value accounting for its end of a transaction, such as a loan, and the other uses cost accounting. But this difference exists already under current UK GAAP, and it exists within IAS and therefore it does not fall into the Section 996 category. Application of Section 996 is likely to be infrequent in practice, since there are few instances where IAS provides a clear difference in accounting treatment of the same transaction from the UK GAAP.