BIM31004 - Tax and accountancy: computation of profits of trade, profession or vocation: FA98/S42

FA98/S42 apples to periods of account beginning after 6 April 1999, FA98/S42 (3)

Where there is a period of account which began on or before 6 April 1999 and does not end before 7 April 2000, it is treated as ending on 6 April 1999 and a new period as beginning on 7 April 1999. The rule in FA98/S42 will apply to the new period.

(1) For tax purposes the profits must be computed in accordance with generally accepted accounting practice/on an accounting basis which gives a true and fair view

The legislation applies to the computation of the profits of all trades, professions and vocations. It is not limited to companies or individuals.

The 1998 wording was ‘true and fair view’. This was changed in 2002 to generally accepted accounting practice. This is defined in ICTA88/S836A. It means generally accepted accounting practice with respect to accounts of UK companies that are intended to give a true and fair view. The changed wording does not change the sense or meaning.

What is true and fair

The Accounting Standard Board’s Foreword to Accounting Standards explains the relationship between accounting standards and ‘true and fair view’ as follows: ‘Accounting standards are authoritative statements of how particular types of transaction and other events should be reflected in financial statements and accordingly compliance with accounting standards will be necessary for financial statements to give a true and fair view’. Because the standards are formulated with the objective of ensuring that information resulting from their application faithfully represents the underlying commercial activity the Board envisages that only in exceptional circumstances will departure from the requirement of a standard be necessary in order to ensure a true and fair view. The true and fair view has the ultimate legal override, primarily because of the Fourth EC Directives.

(2) The profits are then subject to any adjustment required or authorised by law in computing profits for the purposes of Case I or II of Schedule D ( a tax adjustment), FA98/S42 (1)

So the first step is to ensure that the accounts give a true and fair view. The second step is to ensure that adjustments are made in a tax computation to comply with tax rules.

Exceptions from FA98/S42

An important point to note is that the section only applies to the computation of profits for tax purposes. So, for example, a non-resident trading in the UK would not have to prepare UK GAAP accounts but would have to prepare a computation which complied with UK GAAP for tax purposes. It doesn’t impose any audit requirements. FA98/S42 (2).

Barristers and advocates in the early years of practice do not have to comply with FA98/S42, see BIM74020.

Lloyd’s underwriters and life insurance companies have special rules. FA98/S42 (5)