The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:
This guidance note looks at how trading profits of sole traders and partnerships are calculated for income tax purposes. Additional special rules apply for very small businesses, as detailed below.
The basic rules determining the calculation of trade profits and losses for income tax purposes are found in ITTOIA 2005.
The rules are derived from ICTA 1988, which also provided the basis of the rules now found in CTA 2009 for companies. Consequently, many of the general principles share a common basis in law. Where there is a common statutory basis, case law is equally applicable between income tax and corporation tax. For example, the principles established in Law Shipping v IRC are applicable to unincorporated businesses even though the case concerned a limited company.
The most general rule applicable to calculating profits in relation to income 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).
This means that the profit before tax (PBT) is the starting point of the tax calculation. This is then subject to adjustments required by tax law.
GAAP is defined for this purpose by CTA 2010, s 1127. GAAP currently includes accounts prepared under:
HMRC guidance on
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