Income Tax (Trading and Other Income) Act 2005 section 231

Calculation of the adjustment

Section 231 sets out the method for calculating the adjustment income or adjustment expense that arises when a business changes its basis of calculating profits for tax purposes.

• Step 1 adds together amounts by which profits were understated (or losses overstated) under the old basis, covering missed receipts, prematurely recognised expenses, unmatched opening stock deductions, and unadjusted depreciation.
• Step 2 deducts amounts by which profits were overstated (or losses understated) under the old basis, covering receipts recognised too early, expenses that should have been recognised earlier, and unmatched closing stock credits.
• The stock and work-in-progress items in both steps also catch situations where the valuation basis itself changes, even if the figures appear to match, by comparing what the figures would have been under the alternative basis.
• Any amount deducted under Step 2 cannot be deducted again when calculating profits of any other accounting period.