FA02/S64 applies when there is a change in the basis of
computing Case I or II profits and the old basis was valid, that
is, it accorded with the law or practice applicable at the time,
and the new basis accords with both the law and practice.
The old basis can be in accordance with either the law or the
practice applicable at the time. This caters for circumstances
where the law is clarified and we realise that the practice, which
was thought to comply with the law at the time, did not actually
comply with the law. The ‘practice applicable’ means
the accepted practice in cases of that description on how profits
should be computed for Case I and II Schedule D (FA02/SCH22/PARA3
(3)). So the legislation applies where that particular practice was
applied to all similar cases, and does not apply if it had just
been applied by one particular business.
In these types of cases the old basis is valid, as it
complied with the practice applicable at the time, even though our
view of the law subsequently changed. But the entity will have to
change its basis of computing profits to comply with the new view
of the law. The new basis will be in accordance with both law and
practice.
A change of basis is defined (FA02/S64 (2))as either a change of
accounting practice (or principle) which gives rise to a prior
period adjustment, or a change in the tax adjustment applied.
Section 64 does
not apply where the prior period adjustment is
made to correct a fundamental error in the earlier accounts or
where a change is made to comply with legislation which is not
applicable to the previous period of account.
So the section applies:
or
When the prior period adjustment is made to correct a fundamental error it is likely that the previous basis for computing taxable profits will not have been a valid basis, see BIM34020.
A tax adjustment is any adjustment required or authorised by law to accounts computed in accordance with generally accepted accounting practice to arrive at the profits of a trade, profession or vocation for the purposes of Schedule D Cases I and II, FA98/S42.
The period of account in which a change of basis takes effect is the first period of account of the new basis (FA02/SCH22/PARA18).
A relevant change of accounting approach means a change of accounting principle or practice which gives rise to a prior period adjustment, FA02/S64 (3).
Period of account is defined in ICTA88/S832 to mean any period for which a person or business draws up accounts.
An item is brought into account when it is taken into account in computing the profits of the trade, profession or vocation and this is in accordance with the law or practice applicable to that period of account, FA02/SCH22/PARA3 (1).
