Tax law and accounting practice

By Tolley

The following Owner-Managed Businesses 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
  • Capital and revenue

In general, the tax treatment of a particular item will follow the accounting treatment, ie income shown in the profit and loss (P&L) account is taxable and expenses are deductible. This principle applies unless tax legislation or case law dictates otherwise.

For example, the simplified cash basis available to unincorporated businesses from 6 April 2013 provides a different basis of taxation altogether. The accounting treatment and the use of generally accepted accounting practice (GAAP) as the basis for determining taxable profits is disregarded by legislation. See the Simplified cash basis for small businesses guidance note.

However, in many cases, the legislation makes the accounting rules apply for tax purposes.

In FA 1993 (subscription sensitive), the foreign exchange gains and loss rules for tax purposes were aligned with the accounting treatment. Recognition of gains and losses were required under FA 1994 (subscription sensitive) 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. For example, references to bad debt relief have been replaced with references to impairment losses.

The Government went 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.

Many of the prescriptive rules relating to debits and credits for loan relationships and derivatives were removed by CTA 2009, s 46. It replaced them with a general rule that the amounts to be taxed are those recognised in calculating the accounting P&L for the period.

Accounting standards

As the tax treatment, in many cases, is dictated by the accounting treatment,

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