Commentary

B2.115 Calculation of adjustment on a change of basis

Business tax
Business tax | Commentary

B2.115 Calculation of adjustment on a change of basis

Business tax | Commentary

B2.115 Calculation of adjustment on a change of basis

The relevant tax legislation sets out a step-by-step method of calculation of the adjustment, and there is slightly different treatment of the adjustment depending on whether the income tax or corporation tax rules apply1. For income tax purposes, if the adjustment so calculated is positive, it is treated as income (adjustment income) and charged to income tax2 as trading income, but taxed separately from the profits of the trade3 on the person entitled to the income4. Tax is charged on the full amount of adjustment income arising in the tax year5 unless the income is spread over a number of years in specific cases (see B2.116).

For corporation tax purposes a positive amount of adjustment is brought into account as a receipt in calculating the profits of the trade6.

For both income tax and corporation tax purposes, if the adjustment is negative, a deduction (adjustment expense) is made for it in calculating the profits of the trade7.

The adjustment income calculation steps

The adjustment calculation is set out below, where accounts for a period before the change (period X) have been prepared on the 'old basis' and the accounts for a period following the change (period Y) are prepared on the 'new basis':

Step 1 Add together any amounts representing the extent to which, comparing the two bases, profits were understated (or losses overstated) on the old basis. The amounts are:

  1.  

    •     receipts which have not been included in the accounts for period

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