(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 relevant change of accounting approach (see subsection (4)), or
(b)a change in the tax adjustments applied (see subsections (5) and (6)).
(4)A “relevant change of accounting approach” means a change of accounting principle or practice that, in accordance with generally accepted accounting practice, gives rise to a prior period adjustment.
(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.
(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).
(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)sections 237 to 239 (which provide for spreading of adjustment income), and
(b)Part 8 (foreign income: special rules).
The person liable for any tax charged under this Chapter is the person receiving or entitled to the adjustment income.
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.