BIM14100 - Schedule D: What is chargeable?

Both Case I and Case II charge 'annual profits or gains' and in ICTA88/S60 this is amplified by the direction to charge 'the full amount of the profits or gains'. The equivalent charge for Corporation Tax is in ICTA88/S70. There is no comprehensive guidance in the Taxes Acts on the way these profits or gains should be calculated and the methodology has emerged and been refined over many years through Court decisions.

The approach, in summary, is a two stage process as follows-

1) ascertain the profits of the trade etc computed in accordance with the correct principles of commercial accountancy.

2) adjust the accountancy profits in accordance with any tax rules or principles which differ from the accountancy principles.

In essence, therefore, if there are no relevant tax rules or principles which affect a particular case, correct accountancy principles will determine the amount of the taxable profit.

The tax adjustments in (2) above can be made in two ways;

1. under specific statutory rules such as that which forbids the deduction of expenditure which is not incurred wholly and exclusively for business purposes; or
2. under more general principles which are not specifically stated in the Acts but which are fundamental to the scheme of the tax. Thus, expenditure which is capital in nature is excluded in calculating the profits although accountancy principles may require it to be deducted in whole or in part.

You will find further guidance as follows-

Statute law BIM14105 onwards.

Accountancy principles BIM31000 onwards.