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HMRC internal manual

Business Income Manual

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

S227 Income Tax (Trading and Other Income) Act 2005, S180 Corporation Tax Act 2009

A change of accounting policy happens when a business changes the way that it draws up its accounts in some respect. This has also often been described as a change of accounting basis. Since such changes are matters of accountancy the advice of an HMRC compliance accountant should always be sought in cases of doubt or difficulty.

Entities will change accounting policies either to a more appropriate policy or in order to comply with a new accounting standard, see BIM34055.

Change between UK GAAP and IAS

A change of accounting policy includes in particular a change from using UK GAAP to using international accounting standards (IAS) and a change from IAS to UK GAAP. It will also include a change from UK GAAP or IAS to FRS101/102 (‘new UK GAAP’).

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Change in the way an existing policy is applied

A change of accounting policy must be distinguished from a change in the way in which an existing policy is applied. The latter is not a change in accounting policy.

Additionally, changes in accounting estimates arising from new information or developments are not corrections of errors and, hence, should not be given retrospective effect by a restatement of prior periods. Sometimes a change in estimate may have the appearance of a change of accounting policy and care is necessary to avoid confusing the two.

For example, a business has an accounting policy of valuing stock at the lower of cost and net realisable value. The business may decide that its method of estimating cost is not reliable enough, without it necessarily being wrong. It may decide to adopt a different method. This would be a change in accounting estimate and would not amount to a change of accounting policy (the accounting policy being to value stock at the lower of cost and net realisable value). The change would be accounted for prospectively unless it represents the correction of a material error or is required by another accounting standard. The closing stock figure will be calculated using the new method without comment and the opening stock figure will be calculated using the old method. The consequences of such changes in methods and estimates will pass through the profit and loss account and no special treatment is required.

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Modification of an accounting policy

There is a distinction between a change of accounting policy and a modification of a particular policy made because of a change in trading conditions. For example a modification to a method of computing a provision brought about by changes in the nature of the obligation in respect of which the provision was made, or in the probable future costs to be incurred, would not constitute a change of policy.

Where an existing policy is modified no tax computation adjustment is necessary as the opening figures for the accounting period will be the same as the closing figures for the previous accounting period.