General principles ― companies

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

General principles ― companies
Statutory rules for tax adjustments to profits
Capital expenditure
Wholly and exclusively
Statutory adjustments to specific income / expenditure
Transfer pricing
Profit fragmentation
Approach to calculating taxable profits

The basic rules determining the calculation of trade profits and losses for corporation tax purposes are found in CTA 2009. Statutory provisions determining the required adjustments to trading profits are brief, supplemented by a substantial body of case law.

Statutory rules for tax adjustments to profits

The rules in CTA 2009 are derived from ICTA 1988, which also provided the basis of the rules now found in ITTOIA 2005 for individuals. Consequently, many of the general principles share a common basis in law. Where there is a common statutory basis, case law is equally applicable to both income tax and corporation tax. For example, the principles established in Herbert Smith v Honour are applicable to companies even though the case concerned an unincorporated partnership.

Herbert Smith v Honour [1999] STC 173 (subscription sensitive)

The most general rule applicable to calculating profits in relation to corporation tax is that in the absence of any amendment required for tax purposes, the trading profit or loss is calculated in accordance with generally accepted accounting procedures (GAAP).

CTA 2009, ss 46–48

This means that the taxable trading profit (TTP) is the starting point of the tax calculation. This is then subject to adjustments required by tax law.

What is GAAP?

GAAP is defined for this purpose by CTA 2010, s 1127. GAAP currently includes accounts prepared under:

•UK GAAP (for most businesses this will be either FRS 102 for non-micro entities or FRS 105 for micro entities), see FRC: UK Accounting standards
•International Financial Reporting Standards (IFRS) and any International Accounting Standards (IAS) that have not been superseded by IFRS

HMRC guidance on the accounting principles relevant to the computation of trading profits can