Calculation of business profits for income tax purposes - L9 Flashcards
L9
What does s. 5 ITTOIA 2005 cover?
Charges income tax on the profits of a trade, profession, or vocation.
How is “profit” interpreted in Gresham Life Assurance v Styles (1892)?
As a commercial man would understand it – business meaning of profit.
What does Re Spanish Prospecting Co (1911) say about profits?
Profit means increase in the value of assets (excluding fixed capital).
Is profit taxable if left in the business?
Yes – per Mersey Docks v Lucas (1883), withdrawal is not necessary.
What does s. 25 ITTOIA 2005 require for trade profits?
Use of generally accepted accounting practice (GAAP), unless law says otherwise.
What case confirms choice among accountancy approaches?
BSC Footwear Ltd v Ridgway (1972) – taxpayer can choose any GAAP-consistent method.
What is the meaning of GAAP under s. 997 ITA 2007?
A method that gives a “true and fair view”.
What is the main takeaway from Gallagher v Jones (1994)?
Courts follow accounting practices, but tax law can override it.
What is the “cash basis” of accounting?
Records income/expenses only when cash is received or paid.
What is the default accounting method from 2024 per s. 24A ITTOIA 2005?
Cash basis is default unless businesses opt out.
What is the “earnings basis” of accounting?
Includes money, debts, stock, and work in progress – more comprehensive.
What does s. 27 ITTOIA 2005 say about debts?
Debts owed to or by the business are included when legally due.
What case sets the general rule for receipts?
Hall (JP) & Co v IRC (1921) – include when legally due.
What exception was made in Gardner v IRC (1947)?
If services completed, income must be added even if payment is later.
What does HMRC say about long-term contracts (BIM33020)?
Income should be spread yearly as work is completed.
When can income entry be delayed?
Symons v Llewelyn-Davies (1982) – if it gives a truer profit reflection.
What is the rule for expenditure deductions?
Deduct when legally due – Spencer & Co v IRC (1950).
When can deductions be brought forward?
Southern Railway of Peru v Owen (1957) – if accurate and reflects yearly cost.
What did Herbert Smith v Honour (1999) establish?
Deductions can happen before payment is due if GAAP allows it.
What is a “provision” in accounting terms?
A set-aside for a future unavoidable cost that brings no profit.
What’s HMRC’s view on early deductions (BIM46550)?
Allowed, but must be discounted for time delay.
How is stock in trade valued?
At cost or market value, whichever is lower (IRC v Cock, Russell & Co Ltd).
How is work in progress treated?
Added to accounts; partly manufactured goods included at year-end.
What does “cost” include in stock valuation?
Direct cost or cost plus share of overheads (Ostime v Duple Motor Bodies).
How is “market value” defined?
Price in the market the business uses, minus disposal costs (BSC Footwear Ltd v Ridgway).
