The computation of annual trading profits or losses for tax purposes is based on the results shown by the financial statements as adjusted for tax purposes. These adjustments include the following:
- Any expenditure which is not wholly and exclusively incurred for the purposes of the trade. Capital expenditure is not deductible.
- Intra-group fees which are related to business referred to banks or branches can be allowed for tax purposes.
- Depreciation is not an allowable deduction but reliefs known as "capital allowances" may instead be claimed on most items of equipment and are the equivalent of depreciation.
- A general provision against bad debts, which cannot be shown to be required against specific advances, is not allowable.
- Discounts on financial instruments such as zero coupon bonds are generally accrued over the period to maturity for accounting purposes, whereas for tax purposes they can be recognised on a cash basis.
In addition to adjustments for non-deductible expenditure, various other matters may be considered in arriving at the taxable profits; these include a reasonable head office management charge. Any dealings with head office and other branches should be on an arm's length basis.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Jonathan G. Hooley on Tel (indirect line): + 44 (0) 1481 721000, Tel (direct line): +44 (0) 1481 719544, Fax: +44 (0) 1481 722373.