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The relevant tax legislation sets out a step-by-step method of calculation of the adjustment, and there is slightly different treatment of the adjustment depending on whether the income tax or corporation tax rules apply¹. For income tax purposes, if the adjustment so calculated is positive, it is treated as income (adjustment income) and charged to income tax² as trading income, but taxed separately from the profits of the trade³ on the person entitled to the income⁴. Tax is charged on the full amount of adjustment income arising in the tax year⁵ unless the income is spread over a number of years in specific cases (see B2.116).

For corporation tax purposes a positive amount of adjustment is brought into account as a receipt in calculating the profits of the trade⁶.

For both income tax and corporation tax purposes, if the adjustment is negative, a deduction (adjustment expense) is made for it in calculating the profits of the trade⁷.