BIM37020 | Wholly and exclusively: statutory background: what the guidance covers: legislative starting point

S25 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), S46 Corporation Tax Act 2009 (CTA 2009)

Starting point for determining tax adjusted profits

The legislation charges tax on the profits of a trade, profession or vocation under S5 Income Tax (Trading and Other Income) Act 2005 for unincorporated businesses and under S35 Corporation Tax Act 2009 for companies. Profits are not synonymous with income and are calculated after the deduction of expenses. So you should recognise at the outset that profits are not the same as income.

The starting point for determining the profits from a trade, profession or vocation is the accounts which have been prepared using generally accepted accounting practice (GAAP) (see S25 ITTOIA 2005 for unincorporated businesses and S46 CTA 2009 for companies). For the definition of GAAP, see S997 Income Tax Act 2007 in relation to unincorporated businesses and S1127 Corporation Tax Act 2010 in relation to companies. See also BIM31029.

The figure of profits from such accounts is then subject to any applicable statutory or case law adjustments for tax purposes. See BIM31005.

Generally, in order to be deductible for tax purposes, the expenses must be revenue in nature (ie not capital) and be incurred wholly and exclusively for the purposes of the trade. However, there are also a few provisions that provide for specific deductions which would otherwise be denied under these general rules. One example is the costs of incidental loan finance for unincorporated businesses under S58 ITTOIA 2005 (for companies such costs are dealt with under the loan relationship rules).