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BIM31001 - Tax and accountancy: overview

In computing the profits taxable under Schedule D Cases I and II the general principle is that:

  • the starting point is accounts prepared in accordance with ordinary principles of commercial accountancy, and
  • the commercial profits are then adjusted in accordance with the provisions of the Taxes Acts.

This long held principle of general case law was incorporated into legislation in FA98, see BIM31004, but was also restricted. Instead of ordinary principles of commercial accountancy the legislation said that the profits had to be computed on an accounting basis which gives a true and fair view, thus tying in the tax legislation to the Companies Act requirements. This has “true and fair view” as the over-riding objective for accounts, which will be met by following the accounting standards issued by the Accounting Standards Board, in most cases. Where there are exceptional reasons for departing from the accounting standards they have to be explained.

The interaction between tax and accountancy is not always straightforward. The case of Tapemaze Ltd v Melluish [2000] 73TC167, concerned whether advance payments which were retained on the sale of a business were taxable as profits of the trade. The last sentences of the report placed before the Special Commissioners by the Board of Inland Revenue’s Advisory Accountant at page 174E were:

“The accounting treatment, accordingly, answers the question when the £5,189,609 should be brought into account: it was proper in accounting terms to bring that income into account for the year ended 31 July 1994. It is not for an accountant, however, to answer the question of law as to whether or not it is trading income, that is, whether that income of £5,189,609 arose to Tapemaze for that year from any trade.’’

And Hart, J stated “In that final sentence Mr. Carne identifies the question which I have to resolve.”

It is not possible to ‘simply follow the accounts’ without considering the basic principles of Schedule D Cases I and II. Nonetheless accounts prepared in accordance with ordinary principles of commercial accountancy ( BIM31020) form the starting point for the computation.