Corporation Tax Act 2009

Adjustment on change of basis

180 Application of Chapter

(1) This Chapter applies if—

(a) a company carrying on a trade changes, from one period of account to the next, the basis on which profits of the trade are calculated for corporation 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.

(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 corporation tax purposes.

(3) A company changes the basis on which profits of a trade are calculated for corporation tax purposes if the company 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) a change of accounting principle or practice that, in accordance with generally accepted accounting practice, gives rise to a prior period adjustment, or

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

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

181 Giving effect to positive and negative adjustments

(1) An amount by way of adjustment must be calculated in accordance with section 182.

(2) If the amount produced by the calculation is positive—

(a) the amount is brought into account as a receipt in calculating the profits of the trade, and

(b) the receipt is treated as arising on the first day of the first period of account for which the new basis is adopted.

(3) If the amount produced by the calculation is negative—

(a) a deduction is allowed for the amount as an expense of the trade in calculating the profits of the trade, and

(b) the expense is treated as arising on the first day of the first period of account for which the new basis is adopted.

(4) This section is subject to—

(a) section 183 (no adjustment for certain expenses previously brought into account),

(b) section 184 (cases where adjustment not required until assets realised or written off), and

(c) section 185 (change from realisation basis to mark to market).

182 Calculation of the adjustment

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 corporation 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.