Income Tax (Trading and Other Income) Act 2005

Adjustment on change of basis U.K.

227 Application of Chapter U.K.

(1) This Chapter applies if—

(a) a person carrying on a trade changes, from one period of account to the next, the basis on which profits of the trade are calculated for income tax purposes,

(b) the old basis accorded with the law or practice applicable in relation to the period of account before the change, and

(c) the new basis accords with the law and practice applicable in relation to the period of account after the change,

but does not apply to income which is charged in accordance with section 832 (relevant foreign income charged on the remittance basis).

(2) The practice applicable in any case means the accepted practice in cases of that description as to how profits of a trade should be calculated for income tax purposes.

(3) A person changes the basis on which profits of a trade are calculated for income tax purposes if the person makes—

(a) a [F1 change of accounting policy ] (see subsection (4)), or

(b) a change in the tax adjustments applied (see subsections (5) and (6)).

[F2 (4) A “change of accounting policy” includes, in particular—

(a) a change from using UK generally accepted accounting practice to using generally accepted accounting practice with respect to accounts prepared in accordance with international accounting standards, and

(b) a change from using generally accepted accounting practice with respect to accounts prepared in accordance with international accounting standards to using UK generally accepted accounting practice.]

(5) A “tax adjustment” means any adjustment required or authorised by law in calculating profits of a trade for income tax purposes.

(6) A “change in the tax adjustments applied”—

(a) does not include a change made in order to comply with amending legislation not applicable to the previous period of account, but

(b) includes a change resulting from a change of view as to what is required or authorised by law or as to whether any adjustment is so required or authorised.

Textual Amendments

F1 Words in s. 227(3)(a) substituted (with effect in accordance with s. 54(5)(6) of the amending Act) by Finance Act 2012 (c. 14), s. 54(1)(a)

F2 S. 227(4) substituted (with effect in accordance with s. 54(5)(6) of the amending Act) by Finance Act 2012 (c. 14), s. 54(1)(b)

[F3 227A Application of Chapter where cash basis used U.K.

(1) This Chapter applies if—

(a) an election under section 25A (cash basis for small businesses) has effect in relation to a trade for a tax year but no such election has effect in relation to the trade for the following tax year, or

(b) no such election has effect in relation to a trade for a tax year but such an election has effect in relation to the trade for the following tax year.

(2) But this Chapter does not apply to income which is charged in accordance with section 832.

[F4 (3) This section is subject to section 227C (application of Chapter where section 227B applies).]]

Textual Amendments

F3 S. 227A inserted (with effect in accordance with Sch. 4 paras. 56, 57 of the amending Act) by Finance Act 2013 (c. 29), Sch. 4 para. 36

F4 S. 227A(3) inserted (16.11.2017) (with effect in accordance with Sch. 3 para. 13 of the amending Act) by Finance (No. 2) Act 2017 (c. 32), Sch. 3 para. 6

[F5 227B Cash basis treatment: full relief under Chapter 1 of Part 6A (trading allowance) U.K.

(1) Subsection (2) applies if—

(a) an individual carries on a trade in a tax year, and

(b) the profits or losses of the trade for the tax year are treated as nil under section 783AF (trade profits: full relief under Chapter 1 of Part 6A) by virtue of the fact that the conditions in section 783AE(2) are met.

(2) For the purposes of determining if this Chapter applies, an election under section 25A is to be treated as having effect in relation to the trade for the tax year.

Textual Amendments

F5 Ss. 227B, 227C inserted (16.11.2017) (with effect in accordance with Sch. 3 para. 13 of the amending Act) by Finance (No. 2) Act 2017 (c. 32), Sch. 3 para. 7

227C Application of Chapter where section 227B applies U.K.

(1) This section applies if, as a result of the operation of section 227B, the basis on which profits of a trade are calculated is treated as changed as mentioned in section 227A(1).

(2) This Chapter applies as if—

(a) in sections 232(1) and 233(1), for “the first period of account for which the new basis is adopted” there were substituted “ the first tax year for which the profits or losses of the trade are not treated as nil under section 783AF ”, and

(b) sections 235, 236, 237, 239A and 239B were omitted.

(3) If there is no tax year after the change of basis for which the profits or losses of the trade are not treated as nil under section 783AF, this Chapter does not apply.]

Textual Amendments

F5 Ss. 227B, 227C inserted (16.11.2017) (with effect in accordance with Sch. 3 para. 13 of the amending Act) by Finance (No. 2) Act 2017 (c. 32), Sch. 3 para. 7

228 Adjustment income and adjustment expense U.K.

(1) An amount by way of adjustment must be calculated in accordance with section 231.

(2) If the amount produced by the calculation is positive, it is treated as income and charged to income tax under this Chapter.

It is referred to in this Chapter as “adjustment income”.

(3) If the amount produced by the calculation is negative, a deduction is allowed for it in calculating the profits of the trade.

It is referred to in this Chapter as an “adjustment expense”.

(4) This section is subject to section 234 (no adjustment for certain expenses previously brought into account).

229 Income charged U.K.

(1) Tax is charged under this Chapter on the full amount of any adjustment income arising in the tax year.

(2) This is subject to—

(a) [F6 sections 237 to 239B] (which provide for spreading of adjustment income), and

(b) Part 8 (foreign income: special rules).

Textual Amendments

F6 Words in s. 229(2)(a) substituted (with effect in accordance with Sch. 4 paras. 56, 57 of the amending Act) by Finance Act 2013 (c. 29), Sch. 4 para. 52(2)

230 Person liable U.K.

The person liable for any tax charged under this Chapter is the person receiving or entitled to the adjustment income.

231 Calculation of the adjustment U.K.

The amount of the adjustment is calculated as follows. 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—

	Amounts
1	Receipts which on the new basis would have been brought into account in calculating the profits of a period of account before the change, so far as they were not so brought into account.
2	Expenses which on the new basis fall to be brought into account in calculating the profits of a period of account after the change, so far as they were brought into account in calculating the profits of a period of account before the change.
3	Deductions in respect of opening trading stock or opening work in progress in the first period of account on the new basis, so far as they— (a)  are not matched by credits in respect of closing trading stock or closing work in progress in the last period of account before the change, or (b)  are calculated on a different basis that if used to calculate those credits would have given a higher figure.
4	Amounts recognised for accounting purposes in respect of depreciation in the last period of account before the change, so far as they were not the subject of an adjustment for income tax purposes, where such an adjustment would be required on the new basis.

Step 2

Then deduct any amounts representing the extent to which, comparing the two bases, profits were overstated (or losses understated) on the old basis.

The amounts are—

	Amounts
1	Receipts which were brought into account in a period of account before the change, so far as they would not have been so brought into account if the profits had been calculated on the new basis.
2	Expenses which were not brought into account in calculating the profits of a period of account before the change, so far as they— (a)  would have been brought into account for a period of account before the change if the profits had been calculated on the new basis, and (b)  would have been brought into account for a period of account after the change if the profits had continued to be calculated on the old basis.
3	Credits in respect of closing trading stock or closing work in progress in the last period of account before the change, so far as they— (a)  are not matched by deductions in respect of opening trading stock or opening work in progress in the first period of account on the new basis, or (b)  are calculated on a different basis that if used to calculate those deductions would have given a lower figure.

An amount so deducted may not be deducted again in calculating the profits of a period of account.