Finance Act 2002

Part 2U.K.General rules

Calculation of adjustmentU.K.

2The 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 of account 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 of account 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 that 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, to the extent that they were not the subject of an adjustment for tax purposes, where such an adjustment would be required on the new basis.

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 brought into account in a period of account before the change, to the extent that they would not have been so brought into account if the profits had been computed on the new basis.

2.Expenses which were not brought into account in computing the profits of a period of account before the change, to the extent that they—

(a)would have been brought into account for a period of account before the change if the profits had been computed 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 computed 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 of basis, to the extent that 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 computing the profits of a period of account.

Meaning of items being brought into accountU.K.

3(1)The references in paragraph 2 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 or practice then applicable.

(2)For the purposes of sub-paragraph (1)(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).

(3)For the purposes of sub-paragraph (1)(b) the practice applicable in any case means the accepted practice in cases of that description as to how profits should be computed for the purposes of Case I or II of Schedule D.

Giving effect to positive adjustmentU.K.

4(1)If the amount of the adjustment is positive, it is chargeable to tax.

(2)An amount so chargeable to income tax—

(a)is treated as income arising on the last day of the first period of account for which the new basis is adopted;

(b)is chargeable 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 tax year in which it is charged to tax; and

(d)is treated for the purposes of Chapters 1 and 2 of Part 10 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 so chargeable to corporation tax is treated as a receipt of the trade, profession or vocation arising on the last day of the first period of account for which the new basis is adopted.

Giving effect to negative adjustmentU.K.

5(1)If the amount of the adjustment is negative, it is allowed as a deduction in computing profits.

(2)An amount so allowed as a deduction in computing profits is treated as an expense of the trade, profession or vocation arising on the last day of the first period of account for which the new basis is adopted.