BIM34125 - Change of basis of computing taxable profits: calculation of adjustment (FA98)

Paraphrase of the statutory formula, FA98/SCH6/PARA3

In what follows, the accounts for the period before the change are referred to as the 'old accounts' and the accounts for the period following the date of change are referred to as the 'new accounts'.

The amount of the catching up charge is calculated as follows:

First step

Add together any amounts by which the old basis understated profits (or overstated losses) by comparison with accounts on a true and fair view basis. That is to say, add together:

1. Receipts which have not been included in the old accounts but which would have been included in the true and fair view account, for example debtors at the date of change.
   
   
2. Expenses that were included in the old accounts but which on a true and fair view relate to the period after the change, for example an expense, such as rent, paid in advance.
   
   
3. The opening values for stock and work in progress for the new accounts to the extent that they were not included in the old accounts.

Second step

Then deduct the aggregate of the amounts by which profits were overstated (or losses understated) on the old basis in the period before the change. That is to say, deduct the sum of:

Receipts included in the old accounts, which would not have been included on a true and fair view.
Expenses not included in the old accounts but which would have been included on a true and fair basis, for example creditors at the date of change.
The closing values of stock and work in progress for the old accounts to the extent that they have not been included in the opening values in the new accounts.
(Any amount deducted in the second step may not be deducted again in computing the profits for a period of account.)

The result is the adjustment to be made in the tax computation.

Further steps are necessary if a profession or vocation has already had a change of accounting basis before 6 April 1999, see BIM74030.