A–Z of common adjustments to trading profits

Produced by Tolley

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

  • A–Z of common adjustments to trading profits
  • Why are adjustments to profit important?

A–Z of common adjustments to trading profits

Why are adjustments to profit important?

When calculating the profits of a trade, it is necessary to consider whether the expenses posted to the income statement are deductible for tax purposes. If not, the expenses must be added back to the profit in order to calculate the income tax or corporation tax liability (as appropriate).

As there are many different trades which each incur a wide variety of expenditure that may require adjustment, a huge body of case law has evolved to supplement the fundamental principles set out in statute. The relevant concepts are explained in the Adjustment of profits ― overview guidance note.

The table below lists some of the more common adjustments, together with links to additional sources of information including other guidance notes, Simon’s Taxes and HMRC’s manuals. Whether costs are allowable or not in practice often depends upon the specific trade in question and the surrounding facts. The table below should be used as a guide only.

Navigation tip: press ‘Ctrl + F’ to search for a particular term within the table.

Item of expenditureUsual tax treatmentFurther details
AAdvertising hoardingsMore permanent structures used for advertising treated as capital, therefore disallowableSales, advertising and marketing;
Simon’s Taxes B2.462;
Archives and record of business historyUsually deductible, akin to advertisingBIM42501
BBad and doubtful debtsAllowable for traders.
Dealt with under the loan relationships regime for companies
Simon’s Taxes B2.410;
Bank errors ― funds lostCurrent account deposits lost through bank failures are allowed up to the amount usually held within the account to meet the ordinary requirements of the business.
Not a loan relationship for companies
Break charge (payment to lender on early repayment of a loan)Treatment is fact-specific. Expressly disallowed if payments amount to a premium rather than merely interest or compensation to the lenderBIM45820
CCar hireFlat rate disallowance where CO2 emissions exceed prescribed limits (does not include motorcycles, electric cars or low emissions cars)Hire

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