You must first ascertain the annual profits of the trade, as
required by ICTA88/S18 (1)(a)(ii). To do that you set against
receipts of the trade the expenditure necessary to earn them
according to what the courts have described as the ordinary
principles of commercial accounting. It is clear that the courts
have in mind that the exercise should exclude the deduction of
expenses relating to capital transactions because such expenses
would not be incurred in earning profits and would not be
deductible in accordance with the courts’ interpretation of
the ordinary principles of commercial accounting. The disallowance
extends to expenditure that is incidental to the capital
expenditure.
Not every expense that is properly charged in the profit and
loss account according to the ordinary rules of commercial
accountancy and UK GAAP is deductible for income tax. For example
under UK GAAP a deduction is required for the cost (capital
expenditure) of depreciation. For income tax purposes depreciation
is not an allowable deduction in computing profits.
When you have computed the annual profits as described above
you then have to exclude the matters referred to in specific
statutory provisions, for example ICTA88/S74 (1).
