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Why is the Adjusted Profit for tax purposes different from the Profit in the Accounts?
Tax legislation prescribes the treatment of certain transactions for tax purposes. There may be good reasons why a set of Accounts drawn up for a business presents the transaction in a different way. An adjustment has to be made in the Tax Computation to arrive at a Profit calculated in accordance with the tax legislation.
A Partnership is entitled to share profits between the Partners in any way it chooses. The Partnership agreement (whether in writing or not) can charge the whole of the home telephone bills, and all the motor expenses of the Partners to the Profit and Loss Account in arriving at the Profit to be divided between the Partners.
The Inland Revenue will not allow tax relief on such part of those expenses as relates to private use. An appropriate amount is therefore adjusted. This is known as an "add back".
Many businesses will calculate depreciation for the number of months for which a new asset has been owned in the accounting year. Tax legislation substitutes Capital Allowances for depreciation. No tax relief is allowed for depreciation at whatever rate the business has decided. Instead Capital Allowances are granted at rates defined by the Chancellor. A full years allowance is normally given for an asset purchased at any time during the accounting year.
A business might consider entertaining expenses to be a perfectly legitimate expense against Profits. Tax legislation does not permit tax relief on entertaining expenses, except limited entertaining of staff.
A typical Adjusted Profit will be calculated as follows -
| Profit as Accounts | X | |
| Add back - | X | |
| Private proportion of Motor Expenses | X | |
| Private proportion of Motor Hire Purchase Interest | X | |
| Private proportion of (Home) Telephone | X | |
| Private accommodation (typically for a Guest House owner) | X | |
| Private keep (typically for a Guest House owner) | X | |
| Other non allowable expenses (e.g. entertaining) | X | |
| Depreciation | X | |
| X | ||
| X | ||
| Deduct Capital Allowances | X | |
| Adjusted Profit for Tax Purposes | X |
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