Accounting profit vs taxable profit: a CT600 example

In short: Taxable profit starts from the profit in your company's accounts, then applies the tax rules: add back costs that are not deductible for Corporation Tax, such as depreciation on equipment and client entertaining, and deduct reliefs such as capital allowances instead. In the example below, £42,000 of accounting profit becomes £41,500 of taxable trading profit. Corporation Tax Act 2009, section 46 sets that starting point: trade profits follow generally accepted accounting practice, subject to adjustments required by law.

Your company can have one profit in its accounts and a different profit for tax. The tax computation explains the movement between them. It should be a traceable reconciliation, not a replacement profit figure that appears without explanation.

The difference does not necessarily mean the accounts are wrong. Accounting and tax rules answer different questions about some costs.

Why is taxable profit different from accounting profit?

Accounting and taxable profit differ because an expense in the accounts is not automatically deductible for Corporation Tax, and depreciation is generally added back, with any capital allowances claimed separately. HMRC distinguishes capital and revenue expenditure and specifically disallows some costs, such as client entertainment. HMRC's company-expenses guidance explains those tests.

Depreciation on ordinary tangible fixed assets is another familiar adjustment. It is generally added back when computing taxable profit; a separate capital-allowance claim may provide tax relief. Do not extend that shorthand to every intangible asset, because the corporate intangible-assets rules need separate consideration. HMRC's capital-versus-revenue toolkit explains the distinction.

How do you get from accounting profit to taxable profit?

Start with accounting profit before tax, add back depreciation and disallowable costs already deducted, then deduct confirmed capital allowances. In the illustration below, £42,000 of accounting profit becomes £41,500 of taxable trading profit. Each line should be a traceable adjustment with an amount and a reason, not a replacement figure.

Illustration, not a customer case: a UK trading company has accounting profit before tax of £42,000. That figure already includes £2,000 depreciation on tangible equipment and £500 of client entertainment. Assume the entertainment is disallowable and the company's adviser has confirmed a £3,000 capital-allowance claim. There is no other income, gain, loss relief or adjustment.

The arithmetic is 42,000 + 2,000 + 500 - 3,000 = 41,500. All figures are whole pounds, with no rounding adjustment.

This example assumes the allowance has already been established. It does not demonstrate that buying £3,000 of equipment always produces a £3,000 deduction. Capital allowances depend on the asset, expenditure and applicable rules. See GOV.UK: Claim capital allowances.

What does "add back" actually mean?

Adding back means reversing a deduction for the purpose of the tax calculation. It does not mean the supplier invoice disappears or the company gets the money back. In the example, the £2,000 of equipment depreciation remains part of the accounting result; the tax computation removes that deduction and applies the separately established tax treatment.

This is why deleting a legitimate expense from the bookkeeping just to make taxable profit look right is the wrong shortcut. Keep the accounting record and tax adjustment distinguishable.

How do you check your own reconciliation?

Check it line by line: start with the profit before Corporation Tax from the final accounts, and ask for a schedule where each adjustment has an amount, a reason and supporting evidence. In the example above, that schedule has three adjustments — two add-backs and one capital-allowance deduction — between £42,000 and £41,500.

For each line, check:

1. Was the amount actually included in the starting profit?
2. Is this an addition or a deduction?
3. Is the treatment confirmed, rather than inferred from the bank description?
4. Has the same item been adjusted anywhere else?

If the company has rental income, investment income, asset disposals or brought-forward losses, a single trading-profit bridge may not describe the whole return. Different sources and reliefs may need separate schedules. Work out that structure carefully before using a tax calculator. If your return really is a single ordinary trade with a bridge like the one above, take the 30-second check to see whether Taxley fits your company.

Next step: once the taxable-profit figure and relevant assumptions have been checked, use Taxley's Corporation Tax calculator for an estimate. A calculator cannot decide whether your underlying expenses or reliefs are allowable.

Frequently asked questions

Should I put my bank balance into a tax calculator?

No. Cash at the bank is not taxable profit. It can include loans, capital introduced and money needed to settle liabilities. Start instead from profit before tax in the final accounts, then apply the reconciliation adjustments.

Does a lower taxable profit prove the return is correct?

No. The explanation and evidence matter. An incorrect deduction can reduce the number just as easily as a valid one, so each adjustment in the reconciliation should have an amount, a reason and supporting evidence.

Is depreciation deductible for Corporation Tax?

Not directly. Depreciation on ordinary tangible fixed assets is generally added back when computing taxable profit, and tax relief may come instead from a separate capital-allowance claim. Intangible assets follow the corporate intangible-assets rules, so don't apply the same shorthand to them (HMRC's capital-versus-revenue toolkit).

Is client entertainment deductible for Corporation Tax?

Generally no. HMRC specifically disallows some costs, such as client entertainment, so the cost stays in the accounts but is added back in the tax computation. In the illustration above, £500 of client entertainment is added back (HMRC's company-expenses guidance).

Does buying £3,000 of equipment always give a £3,000 deduction?

Not necessarily. Capital allowances depend on the asset, the expenditure and the applicable rules, so the claim has to be established for the actual purchase. The illustration assumes an adviser has already confirmed a £3,000 claim (GOV.UK: Claim capital allowances).

General information, not personalised tax or accounting advice.