BIM31002 - Tax and accountancy: general charging provisions

The general charging provisions are in ICTA88/S18 and ICTA88/S60 (Income Tax) and ICTA88/S70 (Corporation Tax).

ICTA88/S18 (1) supplies the basic Schedule D charge. That part which is relevant to Cases I and II provides that:

Tax under this Schedule shall be charged in respect of the annual profits or gains arising or accruing:

1. to any person residing in the United Kingdom from any kind of property whatever, whether situated in the United Kingdom or elsewhere, and
2. to any person residing in the United Kingdom from any trade, profession or vocation, whether carried on in the United Kingdom or elsewhere.

ICTA88/S18 (2) directs that tax under Schedule D shall be charged under the six Cases provided in ICTA88/S18 (3) which include:

• Case I: tax in respect of any trade carried on in the United Kingdom or elsewhere but not contained in Schedule A.
• Case II: tax in respect of any profession or vocation not contained in any other Schedule.'

ICTA88/S60 directs that subject to the provisions of this Section and Sections 61 to 63 Income Tax under Cases I and II shall be charged on the full amount of the profits of the year of assessment. The equivalent provision for Corporation Tax is ICTA88/S70.

The important words in Section 18 are ` the annual profits or gains arising or accruing'. These words, with the reference in Section 60 to ` the full amount of the profits', have been interpreted by the Courts as requiring the consideration of `profits' as that word would be understood in its ordinary sense in commercial life. This involves setting against the receipts of a trade etc in any given period the expenses incurred to earn those receipts. More specifically, those profits are to be those calculated in accordance with the correct principles of commercial accountancy. That result is not, however, conclusive of the quantum of the profits for tax purposes; the Taxes Acts may still require specific adjustments.

Until FA98/S42 the Taxes Acts did not provide any comprehensive guidance on the way in which these profits should be calculated and the methodology has emerged and refined over the years through court decisions. With effect for periods of account beginning after 6 April 1999 FA98/S42 requires that for the purposes of Case I or II of Schedule D the profits of a trade, profession or vocation are to be computed on an accounting basis which gives a true and fair view, subject to any adjustment required or authorised by law. The true and fair view concept is imported from the Companies Act 1985 Sections 226 - 227 and Schedule 4-4A. The concept is therefore a legal one. One adjustment required by law is that tax is charged on the full amount of the profits so a tax adjustment would be made if the accounting method did not compute this figure.