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6.2. Main Differences between Commercial and Tax Accounting

The starting point for the computation of the chargable income is the company’s accounting profit, which should be prepared according to the generally accepted accounting principles (section 465, Corporation Tax Act 2009).  The International Financial Reporting Standards (“IFRS”) is a mandatory requirement for UK listed companies.  All other companies have the choice of adopting the IFRS or continuing with the Generally Accepted Accounting Principles (“GAAP”) for the non-consolidated accounts.

The Financial Reporting Countil (“FRC”) has confirmed that the GAAP, in its current form, will be abolished from periods beginning 1 January 2015.  Following which, UK companies will have the choice of using the full IFRS or the new UK GAAP standard for accounting purposes.  Additionally, subsidiary companies will also have the option to prepare their accounts under IFRS of FRS102 with reduced disclosures.  The Financial Reporting Standard for Smaller Entities (“FRSSE”) will also be an option for small companies or groups, as defined by the Companies Act 2006. The options available, however, are subject to the requirements of the UK Company Law framework for consistency of GAAP within a group.

Although profits computed in accordance with GAAP form the starting point for the computation of taxable profits, adjustments to those profits may, however, need to be made to conform to tax law. In general, the differences wich need to be accounted for are from the profit on ordinary activities before taxation from the profit and loss account are:

  • expenses which are not deductible against the trading profits, such as depreciation and other capital expenditure written-off, and items which are not wholly and exclusively incurred for trading purposes;
  • revenue receipts which have not been included in the net profit but which should be properly included in the company's trading profits, e.g., income credited directly to reserves, prior year adjustments, etc.
  • revenue and capital receipts which do not form part of the company's taxable trading profit. This would include income dealt with under a different taxable activity or “category” (such as rental income, bank interest and other investment income), capital gains and exempt income (e.g., franked investment income);
  • expenditure which has not been charged against the net profit but which is properly deductible as a bona fide trading expense or is allowed specifically by statute; and
  • deductions available for capital allowances which are claimed in respect of the company's capital expenditure.