The basis must not be correctly computed in accordance with either the law or the practice applicable to that accounting period, BIM34020. The method of computing taxable profits will not:
and/or
and/or
Where a method of computing profits for tax purposes is an
invalid basis then it should be changed to a valid basis for that
accounting period. Where the tax profits for previous accounting
periods were computed on the old, invalid basis there is a change
from an invalid basis to a valid basis, see
BIM34030 and
BIM34035.
A policy, which is apparently consistent, may on examination
be found to pay insufficient regard to the changing facts. For
example a fixed percentage addition for overheads in a stock
valuation may lead to inconsistency if the underlying facts show
this to be inappropriate. However time should not be spent in
trying to agree minor annual variations if, in practice, the
estimation technique adopted yields a reasonable result, taking one
year with another.
There may be more than one acceptable accounting policy. If that is the case HMRC do not have the right to substitute one policy which is valid for tax purposes for another such policy. In Pearce v Woodall - Duckham Ltd [1978] 51TC271 for example Templeman J said:
'The company was entitled to produce accounts based on its on-cost method prior to 1969. The company was entitled, but not bound, to produce accounts for 1969 and subsequent years by the accrued profit method outlined by the chairman of the group. The change was made for sound commercial reasons.'
FRS18 says ‘an entity should select whichever of those accounting policies is judged by the entity to be most appropriate to its particular circumstances for the purpose of giving a true and fair view’. It imposes a more rigorous rule on the choice of accounting policies. An entity can no longer simply use any acceptable accounting policy, they have to use the most appropriate policy. FRS18 applies for accounting periods ending on or after 22 June 2001.
