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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Tax and accountancy: Substance over form: taxation implications

It is unlikely that the Courts would reject the use of the concept of substance over form as a satisfactory means of recognising the time when income arises for tax purposes simply because it may disregard the legal form of the transaction. It would be for the Tribunal to decide as a question of fact, having regard to accountancy evidence, whether the treatment actually adopted in the accounts was in accordance with GAAP.

Furthermore it remains open for the courts to hold as a matter of law that the result arising out of the application to particular facts has sufficient regard to those facts (as in the Anaconda American Brass case cited by the Master of the Rolls in Threlfall v Jones and Gallagher v Jones [1993] 66TC77 at page 116). However, it is unlikely that the application of GAAP explicitly aimed at reflecting the substance of transactions would not adequately reflect the facts.

The application of substance over form may have a significant impact on financial reporting. You may find that in many instances the treatment for tax purposes may well follow the accounting treatment, but that is not inevitably so. In some cases the tax treatment of transactions following the legal form of those transactions is significantly different from the accounting treatment.

There is specific guidance on the taxation of private finance initiative contracts, PFI, at BIM64000. The tax treatment of many sale and leaseback transactions is dealt with in the Business Leasing Manual.