accounting practice
The accounts of an enterprise display the profit (or loss) generated during the accounting period and, usually, a balance sheet showing assets less liabilities at the reporting date. The manner in which profits, assets, and liabilities are measured is the accounting practice of the enterprise. The UK Financial Reporting Council has issued six Financial Reporting Standards, which specify acceptable accounting practices. (The Standards currently applicable have effect from 2016.) These statements are commonly referred to as generally accepted accounting practice (GAAP).

Accounting practice has four fundamental principles for measuring profit: (1) the going concern concept, (2) consistency, (3) prudence, and (4) the matching (accruals) concept.

Income tax (for a company, corporation tax) is levied on the profit of a business. Tax law recognizes that the measure of profit on which tax is charged is computed by applying GAAP (Income Tax (Trade and Other Income) Act 2005 s 25; Corporation Tax Act 2009 s 46). Sometimes, there are two alternative acceptable accounting practices. Where that is the case, tax is levied on the basis of the profit computed by the accounting practice adopted by the enterprise in its accounts. Lord Millet in Comr of IR v Secan Ltd (2000) 74 TC 1 said: “There was no basis on which a taxpayer could challenge an assessment based on its own financial statements as long as these were prepared in accordance with ordinary accounting principles, showed a true and fair view of its affairs, and were not inconsistent with the statute”.

In the Finance Act 2000 (s 110) the concept of normal accounting practice is used to enact anti-avoidance legislation. A company is prohibited from obtaining a tax advantage by triggering a capital gain on the sale of its future rents. The prohibition is effected by requiring companies to draw up accounts for tax purposes in accordance with “normal accounting practice”, which is considered to outlaw such accounting treatment. Intriguingly, the way in which the statute is worded has the effect that future changes in Financial Reporting Standards are automatically given statutory effect, without any parliamentary oversight. Thus, a manner of measuring profit for tax purposes that is permitted in one year may be outlawed the following year, without there being any statutory change.

More recently, a number of provisions in the Taxes Acts (such as identifying research and development expenditure for which enhanced relief is given) have defined the scope of the provision by reference to “generally accepted accounting practice”, rather than by providing a statutory definition. The adoption of this approach within tax statute is not without difficulty. First, the accounting standards followed in the UK and Europe differ from those followed in the USA and other jurisdictions. Second, accountants regard all accounting standards as subject to the overriding requirement that the treatment in the accounts should give a “true and fair view” of the state of affairs of the business. This can mean that different accountants can apply accounting standards differently.

Exceptionally, a business with turnover of less than £150,000 in a year can compute tax liabilities from accounts prepared under the cash basis (cash received less expenses paid, without recognizing matching). The limit is raised to £300,000 for a recipient of universal tax credit.

https://www.frc.org.uk/

• Website of the Financial Reporting Council: includes a list of standards currently in issue

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