Beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Business Income Manual

Change of basis of computing taxable profits: has there been a change of basis?

There has been a change of basis of computing taxable profits when:

  • an invalid basis has been used and the profits must be recomputed on a valid basis,


  • a tax adjustment either ceases to be made or begins to be made as a result of a change of understanding of the law,


  • there is a change in accounting policy.

There has not been a change of basis if the accounting policy is merely refined by a change in estimation technique, see BIM34050.

This guidance does not apply when the change of basis is a result of specific legislation that contains its own transitional rules.


  1. Company A manufactured machine tools and supplied them on sale or return to Company B in the Netherlands, Company C in France and Company D in Germany. Initially it did not know what the level of returns would be and it had not been recognising any profit until the companies confirmed onward sales. On reviewing its sales records it realised that it had never had any returns from the Netherlands or France and only a 3% return rate from Germany. It decided to recognise the profits on sale when it despatched the goods abroad. This was a change from a valid basis of computing profits to another valid basis.
  2. Mr A ran a tent and marquee hire business. About half his customers were individuals hiring once for a special event and the other half were firms that provided entertainment and hired from him repeatedly. When he drew up his year end accounts he included as debtors the individual customers who had not yet paid their bills, but did not include any amounts outstanding from his customers who had rolling accounts with him. He got a new bookkeeper who sorted out his books, and kept up-to-date records of hirings and amounts owed. His next year’s accounts did include all outstanding amounts in closing debtors. This was a change from an invalid basis to a valid basis.
  3. Mr B had a boat repairing business. He needed to move to bigger premises but had signed the lease on his present workshop for ten years and still had five to run. He found someone to rent it from him and moved into new premises. The person who was sub-letting defaulted on the rent and then left. Mr B put a provision in his accounts for the future rent on his old workshop. Before the decision in Herbert Smith (see BIM31100) this would not have been allowed for tax purposes and his tax computation had an add-back for the provision. The next year he paid rent on the old premises and this was allowed for tax purposes, by way of a tax computation deduction. When Herbert Smith was decided the provision became allowable for tax purposes. This was a change in a tax adjustment and a valid to valid change.
  4. Mrs C had been in business for a number of years, selling electrical goods on instalment plans. She had been calculating her bad debt reserve by including all of the debt outstanding if someone missed two instalments. Looking back at her records she realised that many people eventually did pay up if they missed two instalments, but if they missed three in a row she was unlikely to get all her money back. She started calculating her bad debt reserve by calculating a proportion of the debt for those who missed two instalments and all of the debt for those who missed three. This was a change in estimation technique, but not a change in accounting policy. It was not a change of basis.