Corporation Tax Act 2009

Chapter 14 U.K. Adjustment on change of basis

Adjustment on change of basis U.K.

180 Application of Chapter U.K.

(1) This Chapter applies if—

(a) a company carrying on a trade changes, from one period of account to the next, the basis on which profits of the trade are calculated for corporation tax purposes,

(b) the old basis accorded with the law or practice applicable in relation to the period of account before the change, and

(c) the new basis accords with the law and practice applicable in relation to the period of account after the change.

(2) The practice applicable in any case means the accepted practice in cases of that description as to how profits of a trade should be calculated for corporation tax purposes.

(3) A company changes the basis on which profits of a trade are calculated for corporation tax purposes if the company makes—

(a) a relevant change of accounting approach (see subsection (4)), or

(b) a change in the tax adjustments applied (see subsections (5) and (6)).

(4) A “relevant change of accounting approach” means—

(a) a change of accounting principle or practice that, in accordance with generally accepted accounting practice, gives rise to a prior period adjustment, or

(b) a change from using UK generally accepted accounting practice to using generally accepted accounting practice with respect to accounts drawn up in accordance with international accounting standards.

(5) A “tax adjustment” means any adjustment required or authorised by law in calculating profits of a trade for corporation tax purposes.

(6) A “change in the tax adjustments applied”—

(a) does not include a change made in order to comply with amending legislation not applicable to the previous period of account, but

(b) includes a change resulting from a change of view as to what is required or authorised by law or as to whether any adjustment is so required or authorised.

181 Giving effect to positive and negative adjustments U.K.

(1) An amount by way of adjustment must be calculated in accordance with section 182.

(2) If the amount produced by the calculation is positive—

(a) the amount is brought into account as a receipt in calculating the profits of the trade, and

(b) the receipt is treated as arising on the first day of the first period of account for which the new basis is adopted.

(3) If the amount produced by the calculation is negative—

(a) a deduction is allowed for the amount as an expense of the trade in calculating the profits of the trade, and

(b) the expense is treated as arising on the first day of the first period of account for which the new basis is adopted.

(4) This section is subject to—

(a) section 183 (no adjustment for certain expenses previously brought into account),

(b) section 184 (cases where adjustment not required until assets realised or written off), and

(c) section 185 (change from realisation basis to mark to market).

182 Calculation of the adjustment U.K.

The amount of the adjustment is calculated as follows. Step 1

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

The amounts are—

	Amounts
1	Receipts which on the new basis would have been brought into account in calculating the profits of a period of account before the change, so far as they were not so brought into account.
2	Expenses which on the new basis fall to be brought into account in calculating the profits of a period of account after the change, so far as they were brought into account in calculating the profits of a period of account before the change.
3	Deductions in respect of opening trading stock or opening work in progress in the first period of account on the new basis, so far as 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, so far as they were not the subject of an adjustment for corporation tax purposes, where such an adjustment would be required on the new basis.

Step 2

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

The amounts are—

	Amounts
1	Receipts which were brought into account in a period of account before the change, so far as they would not have been so brought into account if the profits had been calculated on the new basis.
2	Expenses which were not brought into account in calculating the profits of a period of account before the change, so far as they— (a) would have been brought into account for a period of account before the change if the profits had been calculated 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 calculated 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, so far as 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 calculating the profits of a period of account.

Expenses previously brought into account U.K.

183 No adjustment for certain expenses previously brought into account U.K.

(1) This section applies if, as a result of a change of basis, expenses brought into account before the change on the old basis would on the new basis be brought into account over more than one period of account after the change.

(2) In such a case—

(a) no adjustment is made under this Chapter, and

(b) in calculating the profits of the trade no deduction is allowed for the expenses for any period of account after the change.

Realising or writing off assets U.K.

184 Cases where adjustment not required until assets realised or written off U.K.

(1) This section applies if there is a change of basis resulting from a tax adjustment affecting the calculation of any of the following amounts.

(2) The amounts are—

(a) any amount brought into account in respect of closing trading stock in the last period of account before the change of basis,

(b) any amount brought into account in respect of opening trading stock in the first period of account on the new basis, and

(c) any amount brought into account in respect of depreciation.

(3) The receipt of the trade or (as the case may be) the expense of the trade is treated as arising only when the asset to which it relates is realised or written off.

Mark to market U.K.

185 Change from realisation basis to mark to market U.K.

(1) This section applies if there is a change of basis from—

(a) not recognising a profit or loss on an asset until the asset is realised, to

(b) bringing assets into account in each period of account at a fair value.

(2) So far as—

(a) a receipt within item 1 of Step 1 in section 182 represents the fair value of an asset that is trading stock, or

(b) an expense within item 2 of that step relates to such an asset,

the receipt of the trade or (as the case may be) the expense of the trade is treated as not arising until the period of account in which the value of the asset is realised.

(3) In the case of a receipt of the trade, this is subject to any election under section 186 (election for spreading).

(4) In this section “trading stock” has the same meaning as in section 163.

186 Election for spreading if section 185 applies U.K.

(1) If section 185 applies, the company carrying on the trade may elect for any receipt treated as arising under this Chapter to be spread over 6 periods of account.

(2) The election must be made within 12 months of the end of the first accounting period to which the new basis applies.

(3) If an election is made, an amount equal to one-sixth of the amount of the receipt—

(a) is treated as arising, and

(b) is brought into account in calculating the profits of the trade,

in each of the 6 periods of account beginning with the first period to which the new basis applies.

(4) But if, before the whole of the receipt has been so brought into account, the company permanently ceases to carry on the trade, the whole of the amount so far as not previously brought into account—

(a) is treated as arising, and

(b) is brought into account in calculating the profits of the trade,

immediately before the cessation.

187 Transfer of insurance business U.K.

(1) This section applies if—

(a) an asset to which section 185 or 186 applies is transferred from one insurance company to another,

(b) the transfer is made under an insurance business transfer scheme, and

(c) immediately after the transfer, the transferee is UK resident or the asset is held for the purposes of a business carried on by the transferee in the United Kingdom through a permanent establishment.

(2) For the purposes of section 185, the asset is not to be treated as realised by the transferor merely because of its transfer under the scheme.

(3) If the transfer is of the transferor's whole business, the transferee is responsible under section 185 or 186 for bringing into account any amount required to be brought into account after the transfer.