Commentary on Sections Overview Chapter 3: Trade profits: basic rules Section 25: Generally accepted accounting practice
131.This section sets out the starting point for the calculation of trade profits. It is based on section 42 of FA 1998, as amended by section 103(5) of FA 2002.
132.Subsection (1) is the general rule that requires profits to be calculated “in accordance with generally accepted accounting practice”, an expression defined in section 50 of FA 2004. In particular, such practice generally requires account to be taken of debtors and creditors and of the value of stock and work in progress. The general rule is subject to any special rule of law whether expressed in statute or explained by the courts.
133.The relevant statutory laws are mainly those that are rewritten in this Part. But there are also provisions not included in Part 2 of this Act which may affect the calculation of profits: for example, the pension contributions deductions provisions in FA 2004 and certain anti-avoidance provisions in ICTA that apply to all income types.
134.Subsection (2) makes it clear that subsection (1) does not bring with it any of the other accounting requirements, such as a formal audit.
135.Subsections (3) and (4) set out two exceptions to the general rule in subsection (1). Some barristers may use the “cash basis” of accounting (see section 160). And Lloyd’s underwriters have their own special rules (mostly in Chapter 3 of Part 2 of FA 1993).
136.The Inland Revenue does not believe that there are currently any non-resident companies liable to income tax in respect of insurance business or that there will be any in the future as the law stands at present. So this section does not reproduce the reference to companies carrying on life assurance mentioned in section 42(5) of FA 1998.
137.There are no other exceptions to the general rule. So this section does not reproduce the reference to “particular description of business” in section 42(5) of FA 1998.