Taxation of trading profits—basis, receipts and deductions

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Taxation of trading profits—basis, receipts and deductions
  • The basic principles for calculating trading profits
  • What is GAAP?
  • Case law principles on accounts and tax
  • Changes in accounting practice
  • Receipts
  • Capital v revenue
  • Deductions
  • Specifically allowed deductions
  • Specifically disallowed deductions
  • More...

Taxation of trading profits—basis, receipts and deductions

Once a company has established that it has a trade (for which see Practice Note: What is a trade for tax purposes?), it is required to calculate the profits of its trade or trades for corporation tax purposes in accordance with generally accepted accounting practice, but subject to:

  1. removing any receipt or deduction that is of a capital nature

  2. removing any deduction for an expense that was not incurred wholly and exclusively for the purposes of the trade (WEPT)—ie removing those expenses that are not WEPT expenses, and

  3. making adjustments for specific items that are identified by statute as being, or not being, a receipt or deduction of the trade for tax purposes

The basic principles for calculating trading profits

A company is required to calculate the profits of its trade or trades for corporation tax purposes in accordance with generally accepted accounting practice (GAAP), subject to any requirement to the contrary.

This means that a company's taxable trading profits will largely be the accounting profits of the company, unless:

  1. any of the statutory or case law rules which require an adjustment to accounting profits apply, and/or

  2. the company does not prepare its accounts in accordance with GAAP

The same principles apply to the calculation of losses, unless there are specific rules to the contrary.

What is GAAP?

GAAP means:

  1. if the company in

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