What does section 227C of ITTOIA 2005 do?

Section 227C governs how the Chapter 17 adjustment income rules apply when a change in the basis of calculating trade profits is triggered by the interaction between cash basis accounting and trading allowance full relief under section 227B. It modifies the timing of recognising adjustment income or expenses and disapplies several spreading and deferral provisions.

When is adjustment income recognised under section 227C?

Under section 227C, adjustment income or expense is recognised in the first tax year in which the trader's profits or losses are no longer treated as nil under the trading allowance full relief provisions of section 783AF, rather than in the first period of account under the new basis as would normally apply under Chapter 17.

Which Chapter 17 provisions are disapplied by section 227C?

Section 227C disapplies sections 235, 236, 237, 239A and 239B of ITTOIA 2005. These cover deferred adjustments until assets are realised or written off, changes from realisation to mark-to-market basis, elections for spreading under section 236, and spreading and acceleration provisions for leaving the cash basis, simplifying the adjustment treatment.

What happens if trading profits are always treated as nil after the change of basis?

If there is never a subsequent tax year in which the trade's profits or losses cease to be treated as nil under section 783AF trading allowance full relief — for example because the trader continues claiming full relief indefinitely or ceases trading — then Chapter 17 does not apply at all and no adjustment income or expense is recognised.

Income Tax (Trading and Other Income) Act 2005 section 227C

Application of Chapter where section 227B applies

Section 227C deals with how the adjustment income rules in Chapter 17 apply when there has been a change in the basis of calculating trade profits triggered by the interaction between the cash basis and the trading allowance (full relief) under section 227B.

This section applies when the basis of calculating trade profits is treated as having changed because of the operation of section 227B (which concerns the interaction of cash basis accounting and the trading allowance full relief rules).
Adjustment income or expense arising from the change of basis is recognised in the first tax year in which the trade's profits or losses are no longer treated as nil under the trading allowance full relief provisions, rather than in the first period of account under the new basis.
The special rules in sections 235, 236, 237, 239A and 239B (which deal with deferred adjustments, mark-to-market changes, spreading on leaving the cash basis, and elections to accelerate charges) are all disapplied — they do not apply in this situation.
If there is no subsequent tax year in which the trade's profits or losses cease to be treated as nil under the trading allowance full relief, then the entire adjustment income chapter does not apply at all.

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