Income Tax (Trading and Other Income) Act 2005

Chapter 3 U.K. Trade profits: basic rules

[F1 Professions and vocations] U.K.

Textual Amendments

F1 S. 24 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. 10, 47 (with Sch. 10 paras. 48-50)

24 Professions and vocations U.K.

Apart from section 30 (animals kept for trade purposes), the provisions of this Chapter apply to professions and vocations as they apply to trades.

[F2 Basis of accounting U.K.

Textual Amendments

F2 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 [F3 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 [F4 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.

F5 (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

F3 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)

F4 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)

F5 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)

F6 25A Cash basis for small businesses U.K.

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

Textual Amendments

F6 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)

[F7 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

F7 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)

[F8 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

F8 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.

[F9 Rules relating to calculation of profits] U.K.

Textual Amendments

F9 S. 27 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. 12, 47 (with Sch. 10 paras. 48-50)

27 Receipts and expenses U.K.

(1) In the Income Tax Acts, in the context of the calculation of the profits of a trade, references to receipts and expenses are to any items brought into account as credits or debits in calculating the profits.

(2) There is no implication that an amount has been actually received or paid.

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

28 Items treated under CAA 2001 as receipts and expenses U.K.

The rules for calculating the profits of a trade need to be read with—

(a) the provisions of CAA 2001 which treat charges as receipts of a trade, and

(b) the provisions of CAA 2001 which treat allowances as expenses of a trade.

[F10 28A Money's worth U.K.

(1) Subsection (2) applies—

(a) for the purpose of bringing into account an amount arising in respect of a transaction involving money's worth entered into in the course of a trade, and

(b) if an amount at least equal to the amount that would be brought into account under that subsection is not otherwise brought into account as a receipt in calculating the profits of a trade under a provision of this Part other than a provision mentioned in subsection (3).

(2) For the purpose of calculating the profits of the trade, an amount equal to the value of the money's worth is brought into account as a receipt if, had the transaction involved money, an amount would have been brought into account as a receipt in respect of it.

(3) But where another provision of this Part makes express provision for the bringing into account of an amount in respect of money's worth as a receipt in calculating the profits of a trade (however expressed), that other provision applies instead of subsection (2).]

Textual Amendments

F10 S. 28A inserted (with effect in accordance with s. 71(7) of the amending Act) by Finance Act 2016 (c. 24), s. 71(2)

29 Interest U.K.

For the purpose of calculating the profits of a trade, interest is an item of a revenue nature, whatever the nature of the loan.

[F11 Animals kept for trade purposes] U.K.

Textual Amendments

F11 S. 30 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. 13, 47 (with Sch. 10 paras. 48-50)

30 Animals kept for trade purposes U.K.

(1) Animals or other living creatures kept for the purposes of a trade are treated as trading stock if they are not kept wholly or mainly—

(a) for the work they do in connection with the carrying on of the trade,

(b) for public exhibition, or

(c) for racing or other competitive purposes.

(2) But they are not treated as trading stock if they are part of a herd in relation to which a herd basis election has effect (see Chapter 8).

(3) This section applies to shares in animals or other living creatures as it applies to the creatures themselves.

(4) This section does not apply to professions or vocations.

[F12 Rules relating to deductions] U.K.

Textual Amendments

F12 S. 31 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. 14, 47 (with Sch. 10 paras. 48-50)

31 Relationship between rules prohibiting and allowing deductions U.K.

(1) Any relevant permissive rule in this Part—

(a) has priority over any relevant prohibitive rule in this Part, but

(b) is subject to [F13 section 36 (unpaid remuneration), section 38 (employee benefit contributions), section 48 (car F14 ... hire) and section] 55 (crime-related payments).

[F15 (1A) But, if the relevant permissive rule would allow a deduction in calculating the profits of a trade in respect of an amount which arises directly or indirectly in consequence of, or otherwise in connection with, relevant tax avoidance arrangements, that rule—

(a) does not have priority under subsection (1)(a), and

(b) is subject to any relevant prohibitive rule in this Part (and to the provisions mentioned in subsection (1)(b)).]

(2) In this section “any relevant permissive rule in this Part” means any provision of—

(a) Chapter 5 (apart from sections 60 to 67),

[F16 (aa) Chapter 5A,]

(b) Chapter 11, F17 ...

(c) Chapter 13, [F18 or

(d) Chapter 17A,]

which allows a deduction in calculating the profits of a trade.

(3) In this section “any relevant prohibitive rule in this Part”, in relation to any deduction, means any provision of this Part (apart from sections [F19 36, 38,] 48 and 55) which might otherwise be read as—

(a) prohibiting the deduction, or

(b) restricting the amount of the deduction.

[F20 (4) In this section “relevant tax avoidance arrangements” means arrangements—

(a) to which the person carrying on the trade is a party, and

(b) the main purpose, or one of the main purposes, of which is the obtaining of a tax advantage (within the meaning of section 1139 of CTA 2010).

“Arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).]

Textual Amendments

F13 Words in s. 31(1)(b) substituted (with effect as stated in s. 67(7) of the amending Act) by Finance Act 2007 (c. 11), s. 67(2)

F14 Words in s. 31(1)(b) omitted (with effect in accordance with Sch. 11 paras. 65-67 of the amending Act) by virtue of Finance Act 2009 (c. 10), Sch. 11 para. 35

F15 S. 31(1A) inserted (with effect in accordance with s. 78(5)-(7) of the amending Act) by Finance Act 2013 (c. 29), s. 78(1)(a)

F16 S. 31(2)(aa) inserted (with effect in accordance with Sch. 5 para. 6 of the amending Act) by Finance Act 2013 (c. 29), Sch. 5 para. 3

F17 Word in s. 31(2)(b) omitted (with effect in accordance with Sch. 4 paras. 56, 57 of the amending Act) by virtue of Finance Act 2013 (c. 29), Sch. 4 para. 49

F18 S. 31(2)(d) and word inserted (with effect in accordance with Sch. 4 paras. 56, 57 of the amending Act) by Finance Act 2013 (c. 29), Sch. 4 para. 49

F19 Words in s. 31(3) inserted (with effect as stated in s. 67(7) of the amending Act) by Finance Act 2007 (c. 11), s. 67(3)

F20 S. 31(4) inserted (with effect in accordance with s. 78(5)-(7) of the amending Act) by Finance Act 2013 (c. 29), s. 78(1)(b)