The basic rules determining the calculation of trade profits and losses for corporation tax purposes are found in CTA 2009. Statutory provisions determining the required adjustments to trading profits are brief, but are supplemented by a substantial body of case law.
In practice, this is an area where the correct treatment is often not obvious. In instances of doubt when preparing tax computations, it is essential to fully document the reasons for treating items as allowable or disallowable. This will assist in explaining the approach taken to clients or to the inspector in the event of an HMRC enquiry.
For information on whether the activity is trading in nature, see the Badges of trade guidance note.
Generally accepted accounting practice (GAAP)
Profits of a trade must be computed in accordance with GAAP, subject to any adjustment required or authorised by law in calculating profits for corporation tax purposes. CTA 2009, s 46
Interpreting CTA 2010, s 1127, GAAP currently includes accounts prepared under: