Income Tax (Trading and Other Income) Act 2005 (c. 5)

Part 2 U.K. Trading income

Chapter 3 U.K. Trade profits: basic rules

[F1 Basis of accounting U.K.

Textual Amendments

F1 S. 24A and cross-heading inserted (6.4.2024 for the tax year 2024-25 and subsequent tax years) by Finance Act 2024 (c. 3), Sch. 10 paras. 2, 47 (with Sch. 10 paras. 48-50)

24A Cash basis to apply by default U.K.

(1) The profits of a trade for a tax year must be calculated on the cash basis, unless—

(a) the trade is an excluded trade in relation to the tax year (see section 25B), or

(b) an election under section 25C(1) has effect in relation to the trade for the tax year.

(2) In this Part—

(a) references to calculating the profits of a trade on the cash basis are references to doing so in accordance with this section, and

(b) references to a trade in relation to which the cash basis applies are to a trade the profits of which are required by virtue of subsection (1) to be calculated on the cash basis.

(3) Chapter 3A contains provision about the calculation of profits on the cash basis and the application of the rest of this Part in relation to the cash basis.

(4) Where the cash basis applies in relation to a trade, sections 27, 28 and 30 do not apply in relation to the calculation of the profits of the trade.

(5) This section does not affect provisions of the Income Tax Acts relating to the calculation of the profits of Lloyd's underwriters.]

25 Generally accepted accounting practice U.K.

(1) The profits of a trade [F2 to which the cash basis does not apply] must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for income tax purposes.

(2) This does not—

(a) require a person to comply with the requirements of [F3 the Companies Act 2006 or subordinate legislation made under that Act] except as to the basis of calculation, or

(b) impose any requirements as to audit or disclosure.

F4 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) This section does not affect provisions of the Income Tax Acts relating to the calculation of the profits of Lloyd's underwriters.

Textual Amendments

F2 Words in s. 25(1) inserted (6.4.2024 for the tax year 2024-25 and subsequent tax years) by Finance Act 2024 (c. 3), Sch. 10 paras. 3(a), 47 (with Sch. 10 paras. 48-50)

F3 Words in s. 25(2)(a) substituted (6.4.2008) by The Companies Act 2006 (Consequential Amendments) (Taxes and National Insurance) Order 2008 (S.I. 2008/954), arts. 1(1), 36 (with art. 4)

F4 S. 25(3) omitted (6.4.2024 for the tax year 2024-25 and subsequent tax years) by virtue of Finance Act 2024 (c. 3), Sch. 10 paras. 3(b), 47 (with Sch. 10 paras. 48-50)

F5 25A Cash basis for small businesses U.K.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F5 S. 25A omitted (6.4.2024 for the tax year 2024-25 and subsequent tax years) by virtue of Finance Act 2024 (c. 3), Sch. 10 paras. 4, 47 (with Sch. 10 paras. 48-50)

[F6 25B Excluded trades U.K.

(1) A trade is an excluded trade in relation to a tax year if the trade meets any of conditions A to G.

(2) Condition A is that—

(a) the person who is or has been carrying on the trade is a firm, and

(b) one or more of the persons who have been partners in the firm at any time during the tax year was not an individual at that time.

(3) Condition B is that the person who is or has been carrying on the trade was a limited liability partnership at any time during the tax year.

(4) Condition C is that an election under Chapter 8 (trade profits: herd basis rules) has effect in relation to the trade for the tax year.

(5) Condition D is that a claim under Chapter 16 (claim for averaging of fluctuating profits) has been made in relation to the trade for the tax year.

(6) Condition E is that, at any time within the period of 7 years ending immediately before the tax year, the person who is or has been carrying on the trade obtained an allowance under Part 3A of CAA 2001 (business premises renovation allowances) in relation to the trade.

(7) Condition F is that the trade is or was at any time during the tax year a mineral extraction trade within the meaning of Part 5 of CAA 2001 (see section 394(2) of that Act).

(8) Condition G is that—

(a) at any time before the beginning of the tax year the person who is or has been carrying on the trade obtained an allowance under Part 6 of CAA 2001 (research and development allowances) in respect of qualifying expenditure incurred by the person in relation to the trade, and

(b) the person owns an asset representing the expenditure.

In this subsection “qualifying expenditure” has the same meaning as in Part 6 of CAA 2001.

(9) The Treasury may by regulations amend this section.

(10) A statutory instrument containing regulations under subsection (9) that restricts the circumstances in which an election may be made under section 25C may not be made unless a draft of the instrument containing the regulations has been laid before, and approved by a resolution of, the House of Commons.]

Textual Amendments

F6 S. 25B inserted (6.4.2024 for the tax year 2024-25 and subsequent tax years) by Finance Act 2024 (c. 3), Sch. 10 paras. 11, 47 (with Sch. 10 paras. 48-50)

[F7 25C Election for profits to be calculated in accordance with GAAP U.K.

(1) A person who is or has been carrying on a trade, other than an excluded trade, may elect for the profits of the trade to be calculated in accordance with generally accepted accounting practice (instead of on the cash basis).

(2) An election made in relation to a trade under subsection (1) has effect—

(a) for the tax year for which it is made, and

(b) for every subsequent tax year (subject to subsection (3)).

(3) An election made in relation to a trade under subsection (1) ceases to have effect if—

(a) the trade is an excluded trade in relation to a tax year, or

(b) the person who is or has been carrying on the trade, other than an excluded trade, elects to calculate its profits for a subsequent tax year on the cash basis.

(4) Subsection (3) does not prevent an election being made under subsection (1) for any subsequent tax year.

(5) For the meaning of “excluded trade”, see section 25B.]

Textual Amendments

F7 S. 25C inserted (6.4.2024 for the tax year 2024-25 and subsequent tax years) by Finance Act 2024 (c. 3), Sch. 10 paras. 5, 47 (with Sch. 10 paras. 48-50)

26 Losses calculated on same basis as profits U.K.

(1) The same rules apply for income tax purposes in calculating losses of a trade as apply in calculating profits.

(2) This is subject to any express provision to the contrary.