Trading income ― general principles

By Tolley

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Trading income ― general principles
  • Generally accepted accounting practice (GAAP)
  • Allowable expenditure ― summary
  • Capital expenditure
  • Wholly and exclusively
  • Items not taxed as trading income
  • Trade profits ― payment in money’s worth
  • Pre-trading expenditure
  • Post-cessation receipts and expenses
  • Contributions to flood defence schemes
  • Other guidance

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, but are supplemented by a substantial body of case law.

In practice, this is an area where the correct treatment is often not obvious. In instances of doubt when preparing tax computations, it is essential to fully document the reasons for treating items as allowable or disallowable. This will assist in explaining the approach taken to clients or to the inspector in the event of an HMRC enquiry.

For information on whether the activity is trading in nature, see the Badges of trade guidance note.

Generally accepted accounting practice (GAAP)

Profits of a trade must be computed in accordance with GAAP, subject to any adjustment required or authorised by law in calculating profits for corporation tax purposes.

CTA 2009, s 46

Interpreting CTA 2010, s 1127, GAAP currently includes accounts prepared under:

  • EU-adopted International Accounting Standards (IAS)

UK GAAP means essentially either FRS 101, FRS 102 (for accounting periods beginning on or after 1 January 2015) or FRS 105 (for accounting periods beginning on or after 1 January 2016). Companies had the ability to adopt FRS 102 early for periods of account ending on or after 31 December 2012. Many chose to do so where this resulted in lower taxable profits than any other acceptable accounting basis.

Since the above choices all fall within the GAAP umbrella for UK tax purposes, as long as the basis of choice is applied in full when preparing the accounts of a company, HMRC must accept that as a valid basis. HMRC cannot insist on another basis

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