BIM37030 - Wholly & exclusively: statutory background: tax is charged on the full amount of profits
The interaction with the accountancy concept of ‘materiality’
ICTA88/S60 (1) provides:
…income tax shall be charged under Cases I and II of Schedule D on the full amount of the profits for the year of assessment.
As explained in BIM37020, ‘profits’ is not synonymous with income. Lord Shaw of Dunfermline commented on the meaning of the then (close) equivalent of these words in CIR v Hagart and Burn-Murdoch [1929] 14TC433 (see BIM37770), towards the top of page 446:
It must be remembered that the duty chargeable is computed ‘on the full amount of the balance of the profits, gains and ‘emoluments’ of the profession, employment or vocation, and as Lord Parker in an observation with which I most respectfully concur observed [6TC at p. 429]:
‘The expression 'balance of profits and gains' implies, as has been often pointed out, something in the nature of ‘a credit and debit account, in which the receipts appear on the one side and the costs and expenditure necessary for earning these receipts appear on the other side.’
You see that accountancy will have an important part to play in
determining the starting figure in the tax computation.
As explained at
BIM35101, the legislation offers no
definition of ‘profits’ and the courts have taken the
word to mean the profits as ascertained by a set of accounts drawn
up in accordance with the ordinary rules of commercial accountancy.
As explained in
BIM37040 following FA98/S42 profits must
now be computed in accordance with the rules of generally accepted
accounting practice unless there is a specific statutory override.
There is guidance on the relationship between accountancy and tax
at
BIM31000 onwards.
The CT equivalent of ICTA88/S60 (1) is ICTA88/S70 (1), which
provides:
…for the purposes of corporation tax for any accounting period income shall be computed under Cases I to VI of Schedule D on the full amount of the profits or gains or income arising in the period (whether or not received in or transmitted to the UK), without any deduction than is authorised by the Corporation Tax Acts.
The use of the words ‘ full amount’ to qualify ‘profits’ means that the accountancy concept of ‘materiality’ (see BIM31045) is not imported into the computation of taxable profits. In practice, on de minimis grounds, you should not seek to identify trivial disallowable items.
