Changes to UK GAAP Results in Mismatch

The changes made to UK GAAP by Financial Reporting Standard 102 (FRS 102) which is effective for medium and large entities for periods commencing on or after 1 January 2015 and for small entities for periods commencing on or after 1 January 2016, has resulted in some mismatches for profits chargeable to corporation tax.

The taxable profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for tax purposes CTA 2009 (s46) and ITTOIA 2005 (s25).

Firstly, let us look at Investment properties under FRS 102 the accounts should show a fair value and changes in value go through the profit and loss account.  For tax purposes a there is no gain or loss until the asset is sold.  So, for corporation tax purposes any loss should be added back to the profits and any gain deducted.

Secondly let us look at pension contributions under FRS 102 there is a requirement to recognise any deficit on the balance sheet in relation to multi-employer schemes and this may reduce realised profits. For corporation tax pension contributions are only allowed when paid there is no tax relief on any additional pension provision so again the profits need to be adjusted for tax.

Finally let us look at loans. The fair value movements recognised in the profit & loss will be relevant for tax under the loan relationships.  A problem arises in cases where the loan is not entered into on market terms i.e. no interest charged between connected parties.

HMRC give the following example of how a is treated  at :

(At the time of writing this is not in HMRC’s Corporate Finance Manual, as yet, it hasn’t updated by HMRC)

CFM33177: GAAP: Interest-free loans and other non-market loans: loan from shareholder: loans made under New UK GAAP

Where the loan was made under New UK GAAP the accounting issue arises from inception. The corporation tax treatment will be based on the amounts recognised in the company’s accounts.

Example A shareholder lends £100,000 to B Ltd, a UK company, on 1 January 2015. The loan is interest free and is repayable on 1 January 2020. It is assessed the market rate at which B Ltd can borrow is 10% per annum (this is therefore the rate used to discount the cash flows of the loan). B Ltd has sufficient borrowing capacity to be able to borrow £100,000 on arm’s length basis (so is not thinly capitalised). No other consideration is paid or transaction entered between the two parties.

Accounting by B Ltd – year ended 31 December 2015 (New UK GAAP)

Dr Cash (balance sheet) £100,000
Cr Capital contribution (equity) £37,908
Cr Loan liability (balance sheet) £62,092
Dr Finance expense (P&L) £6,209
Cr Loan liability (balance sheet) £6,209

(The numbers in this example are used to illustrate the technical points. The precise accounting amounts would need to be calculated by the company.)

Tax analysis: The capital contribution of £37,908 will be recognised in B Ltd’s statement of changes in equity and the finance expense of £6,209 will be recognised in its income statement. Both amounts arise in respect of a loan relationship and should be brought into account under sections 307 and 308 CTA 2009.

Over the course of the loan term, B Ltd will bring into account the same amount of debits and credits, reflecting that it has no overall profit or loss from the loan relationship.


More information on the effects of the new accountancy rules with regard to corporation tax are at:

Note This is a tax article any accountancy queries should be referred to your professional accountancy body.

Linda Eales