Tax law and accounting practice

By Tolley

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Tax law and accounting practice
  • Accounting standards
  • Importance of GAAP
  • Provisions ― Herbert Smith v Honour (1999)
  • Capital and revenue

In general, the tax treatment of a particular item will follow the accounting treatment, ie income shown in the P&L account is taxable and expenses are deductible. This principle applies unless tax legislation or case law dictates otherwise. However, recent legislative changes have actually made the accounting rules apply for tax purposes in many cases.

In FA 1993, the foreign exchange gains and loss rules for tax purposes were aligned with the accounting treatment. FA 1994 required the recognition of gains and losses under the financial instruments rules to follow the accounting treatment. This was followed by FA 1996 which applied the accounting treatment to all loan relationships.

More recently, there have been many changes in the rules to deal with the adoption of International Accounting Standards (IAS). The terminology used in statute has been amended to follow that used in IAS, eg references to bad debt relief have been replaced with references to impairment losses.

The Government has gone virtually the whole way towards aligning tax and accounting in CTA 2009, s 46 which requires all accounts to be prepared using the true and fair basis.

CTA 2009, s 46 removes many of the prescriptive rules relating to debits and credits for loan relationships and derivatives, replacing them with a general rule that the amounts to be taxed are those recognised in calculating the accounting profit and loss for the period.

Accounting standards

As the tax treatment, in many cases, is dictated by the accounting treatment, it is important to ensure the proper adoption of accounting standards. It should be noted that UK generally accepted accounting principles (GAAP) was replaced by the introduction of ‘new UK GAAP’ (FRS 101 and FRS 102), which has mandatory effect for accounting periods starting on or after 1 January 2015. Early adoption of FRS 102 was permitted for accounting periods ending on

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