Finance Act 1998

Section 44.

SCHEDULE 6U.K. Adjustment on change of accounting basis

IntroductionU.K.

1The provisions of this Schedule apply in the circumstances specified in section 44(1) and (2).

Adjustment on change of accounting basisU.K.

2(1)The amount required by way of adjustment must be calculated (in accordance with paragraph 3) and—

(a)if the amount is positive, it is chargeable to tax, and

(b)if it is negative, it is allowable as a deduction in computing profits.

(2)An amount chargeable to tax under this paragraph—

(a)is treated as income arising on the first day of the first period of account for which the new basis is adopted, subject to paragraphs 4 and 5 (spreading of adjustment charge in certain cases and election to accelerate payment);

(b)is chargeable to tax under Case VI of Schedule D;

(c)in the case of an individual whose income from the trade, profession or vocation in question is—

(i)relevant earnings within section 623(2)(c) or 644(2)(c) of the Taxes Act 1988, or

(ii)earned income within section 833(4)(c) of that Act,

is similarly relevant earnings or earned income for the year of assessment in which it is charged to tax; and

(d)is treated for the purposes of Chapters I and II of Part X of the Taxes Act 1988 (loss relief) as profits of the trade, profession or vocation for the chargeable period for which it is charged to tax.

(3)An amount allowable under this paragraph as a deduction in computing profits is treated as an expense of the trade, profession or vocation in the first period for which the new basis is adopted.

Calculation of adjustmentU.K.

3(1)The amount of the adjustment is calculated as follows.

First step

Add together any amounts representing the extent to which, comparing the two bases, profits were understated (or losses overstated) on the old basis:

1.Receipts which on the new basis would have been brought into account in computing the profits of a period before the change of basis, to the extent that they were not so brought into account.

2.Expenses which on the new basis fall to be brought into account in computing the profits of a period after the change, to the extent that they were brought into account in computing the profits of a period of account before the change of basis.

3.Deductions in respect of opening trading stock or opening work in progress in the first period of account on the new basis to the extent to which they 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.

• Second step

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

  1.

  Receipts which were taken into account in a period before the change, to the extent that they would not have been taken into account for such a period if the profits had been computed on the new basis.

  2.

  Expenses which were not taken into account in computing the profits of a period before the change, to the extent that they would have been taken into account for such a period if the profits had been computed on the new basis.

  3.

  Credits in respect of closing trading stock or closing work in progress in the last period of account before the change of accounting basis to the extent to which they 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.

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

• Third step

  In the case of a profession or vocation adopting a new accounting basis to comply with section 42 (true and fair view), a further deduction may be made by way of adjustment in respect of any change of accounting basis before 6th April 1999.

  The amount deductible is calculated as follows—

  A.

  Add together the amounts by which profits were overstated (or losses understated) by reason of the previous change of accounting basis:

  1.

  Receipts to the extent that by reason of the change of accounting basis they were brought into account in more than one period of account.

  2.

  Expenses to the extent that by reason of the change of accounting basis they were not deducted in any period of account.

  3.

  Credits in respect of closing trading stock or closing work in progress in the last period of account before the change of accounting basis to the extent that they were not matched by deductions in respect of opening trading stock or opening work in progress in the first period of account following the change.

  B.

  Then deduct the amounts by which profits were understated (or losses overstated) by reason of that change:

  1.

  Receipts to the extent that by reason of the change of accounting basis they were not brought into account in any period of account.

  2.

  Expenses to the extent that by reason of the change of accounting basis they were deducted in more than one period of account.

  3.

  Deductions in respect of opening trading stock or opening work in progress in the first period of account following the change of accounting basis to the extent that they were not matched by credits in respect of closing trading stock or closing work in progress in the last period of account before the change.

  An amount may not be so deducted if it has previously been brought into account; and it may not be deducted again on a subsequent change of accounting basis.

(2)The references in this paragraph to items being brought into account in a period of account before the change of basis are to their being brought into account—

(a)in computing the profits of the same trade, profession or vocation, and

(b)in accordance with the law and practice then applicable.

For the purposes of paragraph (a) a trade, profession or vocation is not regarded as the same if section 113(1) or 337(1) of the Taxes Act 1988 applies (deemed discontinuance on change of persons carrying on trade, profession or vocation).

Spreading of adjustment charge in certain casesU.K.

4(1)This paragraph provides for the spreading of the adjustment charge in certain cases where an individual—

(a)has been entitled to compute the profits of a profession or vocation on a basis that does not comply with section 42 of this Act (true and fair view), or would not have complied with that section if it had been in force, and

(b)changes to an accounting basis that does comply with that section.

(2)The cases in which this paragraph applies are where a change of basis is made to comply with that section—

(a)on that section coming into effect in relation to periods of account beginning after 6th April 1999, or

(b)on the exemption given by section 43 of this Act (barristers and advocates in early years of practice) coming to an end or ceasing to apply.

(3)Where this paragraph applies the adjustment charge is spread over ten years of assessment, as follows.

(4)In each of the nine years of assessment beginning with that in which the whole amount would otherwise be chargeable to tax, an amount equal to whichever is the less of—

(a)one-tenth of the amount of the adjustment charge, and

(b)10 per cent. of the profits of the profession or vocation for that year of assessment,

is treated as arising and chargeable to tax.

For the purposes of paragraph (b) the profits of the profession or vocation means the profits as computed for the purposes of Case II of Schedule D, leaving out of account any allowances or charges under the M1Capital Allowances Act 1990.

(5)In the tenth year of assessment the balance of the adjustment charge is treated as arising and chargeable to tax.

(6)If before the whole of the adjustment charge has been charged to tax the profession or vocation—

(a)is permanently discontinued, or

(b)is treated as permanently discontinued under section 113(1) of the Taxes Act 1988 (change of persons carrying on profession or vocation),

the preceding provisions of this paragraph continue to apply, but with the omission of the alternative limit in sub-paragraph (4)(b) by reference to profits of the profession or vocation.

(7)This paragraph has effect subject to any election under paragraph 5.

Election to accelerate payment of adjustment chargeU.K.

5(1)A person who under paragraph 4 is chargeable to tax for a year of assessment on an amount representing part of an adjustment charge may elect that the amount treated as income arising in that year of assessment should be increased.

(2)The election must be made—

(a)by notice in writing,

(b)to an officer of the Board,

(c)before the 31st January following the year of assessment in question.

(3)The election must specify the amount to be treated as income arising in the year of assessment, which may be any amount up to the whole of the adjustment charge so far as not previously charged to tax.

(4)Where an election has been made, paragraph 4 applies in relation to any subsequent year of assessment as if the original amount of the adjustment charge were reduced by the additional amount treated as arising in the year for which the election was made.

Application of provisions to partnershipsU.K.

6(1)In the case of a trade, profession or vocation carried on in partnership, the amount of any adjustment under this Schedule shall be computed—

(a)for income tax purposes, as if the partnership were an individual resident in the United Kingdom, and

(b)for corporation tax purposes, as if the partnership were a company resident in the United Kingdom.

(2)Subject to the following provisions of this paragraph, each partner’s share of any amount chargeable to tax under paragraph 2 shall be determined according to the profit-sharing arrangements for the twelve months ending immediately before the date on which the new accounting basis was adopted.

(3)If paragraph 4 applies (spreading of adjustment charge in certain cases), then, subject to sub-paragraph (4) below—

(a)each partner’s share of the amount chargeable in any year of assessment shall be determined—

(i)for the first year of assessment, according to the profit-sharing arrangements for the twelve months ending immediately before the date on which the new accounting basis was adopted, and

(ii)for any subsequent year of assessment, according to the profit-sharing arrangements for the twelve months immediately preceding the anniversary in that year of that date; and

(b)any election under paragraph 5 (election for accelerated payment) in relation to a year of assessment must be made jointly by all the persons who have been members of the partnership in the relevant twelve month period.

(4)If paragraph 4(6) applies (effect of discontinuance of profession or vocation), then—

(a)each partner’s share of any amount chargeable on or after the discontinuance is determined as follows—

(i)if the discontinuance occurs on the date on which the new accounting basis was adopted, according to the profit-sharing arrangements for the twelve months ending immediately before that date;

(ii)if the discontinuance occurs after that date but before the first anniversary of that date, according to the profit-sharing arrangements for the period between that date and the date of discontinuance;

(iii)if the discontinuance occurs after the first anniversary of the date on which the new accounting basis was adopted, according to the profit-sharing arrangements for the period between the immediately preceding anniversary of that date and the date of discontinuance; and

(b)any election under paragraph 5 after the discontinuance must be made by each former partner separately.

(5)For the purposes of this paragraph—

(a)“profit-sharing arrangements” means the rights of the partners to share in the profits of the trade, profession or vocation for the period in question; and

(b)references to the date on which a new accounting basis was adopted are to the first day of the first period of account for which the new basis was adopted.

(6)The provisions of section 111 of the Taxes Act 1988 (general provisions as to taxation of partnerships), except subsection (1) (partnership not to be treated as separate entity), do not apply to the extent that the preceding provisions of this paragraph apply.

Liability of personal representatives in case of death of person chargeableU.K.

7In the case of the death of a person who, if he had not died, would have been chargeable to tax under paragraph 4 on an amount representing part of an adjustment charge—

(a)the tax which would have been so chargeable shall be assessed and charged on his personal representatives and shall be a debt due from and payable out of his estate, and

(b)his personal representatives may make any election under paragraph 5 which he might have made.

InterpretationU.K.

8In this Schedule—

• “adjustment charge” means a charge under paragraph 2 above; and

• “period of account” means any period for which accounts of the trade, profession or vocation are drawn up.