Adjustment of profits ― overview

Produced by a Tolley Owner-Managed Businesses expert

Owner-Managed Businesses

Guidance

Why is the adjustment of profits relevant for tax?

Broadly speaking, profits generated by trading activities are subject to income tax in the hands of sole traders and partners, and corporation tax in the context of companies.

The tax legislation provides that the profits of a trade must be calculated in accordance with generally accepted accounting practice (GAAP), subject to any adjustments required or authorised by law. The starting point for calculating trading profits is usually the profit before tax figure as per the accounts, which is then subject to tax adjustments where applicable, which ultimately leads to the amount of total taxable profits.

See Simon’s Taxes B2.101.

What is GAAP?

GAAP is defined for this purpose by CTA 2010, s 1127. GAAP currently includes accounts prepared under:

•
UK GAAP (for most trades this will be either FRS 102 or FRS 105 for micro entities), see FRC: UK Accounting standards
•
International Financial Reporting Standards (IFRS) and any International Accounting Standards (IAS) that have not been superseded by IFRS

Since the above choices all

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