Accounting profit vs taxable profit: why the figures differ

1. The difference

Your accounts record the company's income and expenses under accounting rules. The profit left after those costs is the accounting profit. A Company Tax Return starts with that result, then applies the Corporation Tax rules to arrive at taxable profit.

A difference does not by itself mean either figure is wrong. HMRC's own guidance explains that a company's profit or loss for Corporation Tax can differ from the profit or loss in its annual accounts.

2. Common adjustments

For a straightforward micro-entity, the common reasons are:

• Disallowable expenses: some costs remain in the accounts but are added back for tax, such as client entertaining and fines.
• Depreciation and capital allowances: accounting depreciation is normally added back, while qualifying capital allowances are claimed under the tax rules instead.
• Income with a special treatment: for example, many dividends received by a company are exempt from Corporation Tax.
• Losses and reliefs: an eligible loss brought forward or other relief can reduce the taxable figure without changing this year's accounting profit.

3. A simple example

Suppose the accounts show a £20,000 profit after a £1,000 client-entertaining cost and £2,000 of depreciation. The entertaining and depreciation are added back for tax, then a £3,000 capital-allowances claim is deducted. The taxable profit is £20,000, even though the path to that figure differs from the accounts calculation.

The exact adjustments depend on the company's facts. Do not copy an example into a return without checking that it applies to the expense or asset you have.

4. Where to enter other Corporation Tax adjustments

Enter the real income and expenses once in the financial figures so the accounts are complete. On Financial data, open Tax adjustments for figures that need a separate Corporation Tax treatment. The most commonly used options appear first.

1. Use Show all adjustment options above or below the table to find another option, including associated companies, special rate allowances and investment management expenses.
2. Enter your prepared figures. Related controls appear automatically when needed. Options with figures or an error stay visible when you select Show fewer adjustment options.
3. For a long accounting period, allocate amounts between the two returns in the controls shown beside the relevant figures. Check both returns and confirm any allocation requested.
4. Check the resulting tax computation before you authorise filing.

You do not need to complete every adjustment option. Leave optional fields blank when they do not apply. Follow the instruction beside a claim if entering 0 has a specific meaning, such as claiming none.

Read disallowable expenses for costs that are added back, and capital allowances for qualifying equipment and cars. If you cannot identify the tax treatment, use an accountant before filing.