The profit and loss account is prepared using accounting standards and the relevant statements of recommended principles (SORP). This is not the case with taxable profits whose preparation is a function of the legal and fiscal rules that governments set as guidelines for tax computations.
The main reasons that explain why there are disparities between the profits reported in the financial statements filed at the Companies House and the profits shown in tax returns submitted to the Inland Revenue are as follows:
- Capital allowances
- Disallowable expenses
- Income not liable for tax
- Loss and tax reliefs
Capital Allowances
A business records depreciation expense in the profit and loss account. The depreciation expense is a nominal charge for both wear and tear of fixed assets and for usage of fixed assets in generating revenues with the business. For tax purposes depreciation expense is not an allowable expense therefore it must be added back to increase the size of the taxable profit.
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