Post by Admin on Oct 31, 2014 16:44:31 GMT
ASSESSABLE TRADING INCOME
Basis period are used to link periods of accounts to tax years. Broadly, the profits of a period of account ending in a tax year are taxed in that tax year. i.e. for an existing business, the end (i.e. last date) of the period of account is the major factor to determine the tax year in which the profit or loss of that period will be taxed for example, Mr. A a sole trader, who makes up his accounts to 31 December, every year would have his
Profits or loss for the year ended Tax year Reason
31 December, 2000 2000/01 31 December
(6/4/00-5/11/01) 2000 can be found within 2000/01
31 December, 2006 2006/01 31 December 2006
(6/4/06-5/4/07) can be found
within 2006/07
Question:
Determine the tax years when the profit or loss of the following accounting periods will be assessed to U.K. tax:
- (a) Year ended 31 March 2008
- (b) Year ended 30 September, 2009
- (c) Year ended 30 April, 2007
- (d) Year ended 30 November, 2006
- (e) Year ended 30 June, 2010
ESSENCE OF BASIS PERIOD
Sole traders (or individuals) have the privilege to choose any period as their periods of account. Most of these business do not have periods of account ending on 5 April. Therefore, a link between the period of account of a business and a tax year must be established i.e. there must be a way by which the profit or loss of a period of account can be related to a tax year for assessment. In order to achieve this, a general rule is now being established for existing businesses that, the last date of a period of account should be used as the basis for establishing the tax year. This period of account is simply the basis period.
Simply put the general rule is that, the basis period is the year of account ending in the tax year. This is known as the current year basis of assessment. It should be noted that, that above rule does not apply in the opening (commencement) and closing (cessation) years of a business. Also, special rules apply when the trader changes his accounting date.
SPECIAL RULES
The basis periods in the opening (commencement) and closing (cessation) years of a business as well as changes in accounting date are determined after applying the following rules:
COMMENCEMENT OF BUSINESS
When a trader commences business the following rules are applicable to link its basis periods with tax years.
FIRST TAX YEAR
The basis period for the 1st tax year commences from the date of commencement to the NEXT 5 April (Immediately following the date of commencement).
N.B: If a trade starts and ends before the end of the 1st tax year, the basis period will be from the date of commencement to the date of cessation.
THE SECOND TAX YEAR
The basis period for the second tax year is determined as follows:-
(a) Where the first period of accounts: is less than 12 months and does not end in the second tax year:u- The basis period for the second tax year, will be the accounting period that ended in the second tax year i.e. the date of the accounting period that ended in the second tax year; count twelve months backward.
(b) Where the first period of account: is less than 12 months and ends in the second tax year:- The basis period for second tax year will be 12 months, starting from the date of commencement of the business to the next successive 12 months.
(c) Where the first period of account: is a 12 months period and ends in the 2nd tax year:- the basis peri\od is equal to that 12 months period .i.e. date of commencement to the next 12 months.
(d) Where the first period of account: is longer than 12 months and ends in the third tax year:- The basis period for the second tax year will be equal to the tax year i.e. the basis period for the second tax year will commence from 6 April immediately following the end of the basis period for the first tax year to the Next 5 April.
(e) Where the first period of account: exceeds 12 months and ends in the 2nd tax year. The basis period for the second tax year will be 12 months to the ends of that period of account or the end of that period of account and count 12 months backward.
THIRD TAX YEAR
The basis period for the third tax year is equal to 12 months to the end of the period of account that ends in the third tax year or the basis period is the accounting/period that ends in the third tax year.
LATER TAX YEARS
For later tax year except the year in which the business ceases, the normal basis of assessment applies i.e. the basis period is the period of account ending in the tax year (i.e. General Rule).
THE FINAL YEAR
(a) If a trade starts and ceases in the same tax year, the basis period for that year is the whole life upon of the trade (already discussed).
(b) If the final year is the second year (i.e. if the trade ceases in 2nd tax year) the basis period runs from 6 April at the start of the 2nd tax year to the date of cessation.
(c) If the final year is the third or later year (i.e if the trade ceases in the third tax year or later tax year) the basis period runs from the end of the basis period for the previous tax year to the date of cessation.
OVERLAP PROFITS
Profits which have been taxed more than once are called overlap profits i.e. profits of a single period of account taxed within two or more tax years.
RELIEF AVAILABLE
(a) Overlap profit may be deducted from profit arising on a change of accounting date (where the change results in a period of more than 12 months) and
(b) Any unrelieved profit remaining when the trade ceases are deducted from the final years taxable profit. Any deduction of overlap profit may create or increase the loss which will be available for loss relief.
CHANGE OF ACCOUNTING DATE
A trader may change the date which he prepares his annual accounts for a variety of reasons e.g. He may wish to move to a calendar year end or to fit in with seasonal variations of his trade. Special rules normally apply for fixing basis periods when a trader change his accounting date.
On a change of accounting date, there may be:
- (a) One set of accounts covering a period of less than twelve months
- (b) One set of account covering a period of more than twelve months
- (c) Two set of accounts
- (d) No sets of account
(A) One set of accounts covering a period of less than 12 months. When a change of accounting date results in one short period of account ending in a tax year, the basis period for that tax year (of change) is always the 12 month, to the new accounting dates. As a result of this change, there is going to be over lap profit, because, the 12 months to the new date will overlap into the preceding basis period (i.e. period of account). In summary, a change in accounting date resulting one short period may lead to overlap profit.
(B) One set of account covering a period of more than 12 months:- When a change of accounting date result in one long period of account end in a tax year, the basis period for that year ends on the new accounting date. It begins immediately after the basis period for the previous year ends. This means the basis period will exceed 12 months. Here, no overlap profits will arise but the unrelieved overlap profit can be brought forward for relief (or to set off) against the “profit of the “Excess months”. The excess months represent the total number of months by which the new period exceeds 12 months.
Be warned!
Overlap profits are relieved or deducted based on the number of excess months
Relief is given as follows:
Excess months X Overlap profit
Total overlap (Total months of overlap period)
(C) Two sets of account ending in a tax year:-
;When a change of accounting date and a short power to new account date, result in two sets of account, (one 12 month period to the old accounting date) ending in a tax year the basis period for that year is the period to the new accounting date. It begins immediately after the basis period for the previous tax year ends. This means that the basis period will exceed 12 months to the new accounting date.
(D) No set of account ending in tax year: When a change of accounting date results in one long period of account such that there is one tax year where there is no set of accounts ending in that year, there will be a notional accounting date in that tax year. The Notional accounting date is the date which would have been the new accounting date had accounts been made up ending in that tax year. The basis period for the ta year is the 12 months to the new accounting date.
This may lead to the creation of overlap periods which may eventually results into overlap profits.
Basis period are used to link periods of accounts to tax years. Broadly, the profits of a period of account ending in a tax year are taxed in that tax year. i.e. for an existing business, the end (i.e. last date) of the period of account is the major factor to determine the tax year in which the profit or loss of that period will be taxed for example, Mr. A a sole trader, who makes up his accounts to 31 December, every year would have his
Profits or loss for the year ended Tax year Reason
31 December, 2000 2000/01 31 December
(6/4/00-5/11/01) 2000 can be found within 2000/01
31 December, 2006 2006/01 31 December 2006
(6/4/06-5/4/07) can be found
within 2006/07
Question:
Determine the tax years when the profit or loss of the following accounting periods will be assessed to U.K. tax:
- (a) Year ended 31 March 2008
- (b) Year ended 30 September, 2009
- (c) Year ended 30 April, 2007
- (d) Year ended 30 November, 2006
- (e) Year ended 30 June, 2010
ESSENCE OF BASIS PERIOD
Sole traders (or individuals) have the privilege to choose any period as their periods of account. Most of these business do not have periods of account ending on 5 April. Therefore, a link between the period of account of a business and a tax year must be established i.e. there must be a way by which the profit or loss of a period of account can be related to a tax year for assessment. In order to achieve this, a general rule is now being established for existing businesses that, the last date of a period of account should be used as the basis for establishing the tax year. This period of account is simply the basis period.
Simply put the general rule is that, the basis period is the year of account ending in the tax year. This is known as the current year basis of assessment. It should be noted that, that above rule does not apply in the opening (commencement) and closing (cessation) years of a business. Also, special rules apply when the trader changes his accounting date.
SPECIAL RULES
The basis periods in the opening (commencement) and closing (cessation) years of a business as well as changes in accounting date are determined after applying the following rules:
COMMENCEMENT OF BUSINESS
When a trader commences business the following rules are applicable to link its basis periods with tax years.
FIRST TAX YEAR
The basis period for the 1st tax year commences from the date of commencement to the NEXT 5 April (Immediately following the date of commencement).
N.B: If a trade starts and ends before the end of the 1st tax year, the basis period will be from the date of commencement to the date of cessation.
THE SECOND TAX YEAR
The basis period for the second tax year is determined as follows:-
(a) Where the first period of accounts: is less than 12 months and does not end in the second tax year:u- The basis period for the second tax year, will be the accounting period that ended in the second tax year i.e. the date of the accounting period that ended in the second tax year; count twelve months backward.
(b) Where the first period of account: is less than 12 months and ends in the second tax year:- The basis period for second tax year will be 12 months, starting from the date of commencement of the business to the next successive 12 months.
(c) Where the first period of account: is a 12 months period and ends in the 2nd tax year:- the basis peri\od is equal to that 12 months period .i.e. date of commencement to the next 12 months.
(d) Where the first period of account: is longer than 12 months and ends in the third tax year:- The basis period for the second tax year will be equal to the tax year i.e. the basis period for the second tax year will commence from 6 April immediately following the end of the basis period for the first tax year to the Next 5 April.
(e) Where the first period of account: exceeds 12 months and ends in the 2nd tax year. The basis period for the second tax year will be 12 months to the ends of that period of account or the end of that period of account and count 12 months backward.
THIRD TAX YEAR
The basis period for the third tax year is equal to 12 months to the end of the period of account that ends in the third tax year or the basis period is the accounting/period that ends in the third tax year.
LATER TAX YEARS
For later tax year except the year in which the business ceases, the normal basis of assessment applies i.e. the basis period is the period of account ending in the tax year (i.e. General Rule).
THE FINAL YEAR
(a) If a trade starts and ceases in the same tax year, the basis period for that year is the whole life upon of the trade (already discussed).
(b) If the final year is the second year (i.e. if the trade ceases in 2nd tax year) the basis period runs from 6 April at the start of the 2nd tax year to the date of cessation.
(c) If the final year is the third or later year (i.e if the trade ceases in the third tax year or later tax year) the basis period runs from the end of the basis period for the previous tax year to the date of cessation.
OVERLAP PROFITS
Profits which have been taxed more than once are called overlap profits i.e. profits of a single period of account taxed within two or more tax years.
RELIEF AVAILABLE
(a) Overlap profit may be deducted from profit arising on a change of accounting date (where the change results in a period of more than 12 months) and
(b) Any unrelieved profit remaining when the trade ceases are deducted from the final years taxable profit. Any deduction of overlap profit may create or increase the loss which will be available for loss relief.
CHANGE OF ACCOUNTING DATE
A trader may change the date which he prepares his annual accounts for a variety of reasons e.g. He may wish to move to a calendar year end or to fit in with seasonal variations of his trade. Special rules normally apply for fixing basis periods when a trader change his accounting date.
On a change of accounting date, there may be:
- (a) One set of accounts covering a period of less than twelve months
- (b) One set of account covering a period of more than twelve months
- (c) Two set of accounts
- (d) No sets of account
(A) One set of accounts covering a period of less than 12 months. When a change of accounting date results in one short period of account ending in a tax year, the basis period for that tax year (of change) is always the 12 month, to the new accounting dates. As a result of this change, there is going to be over lap profit, because, the 12 months to the new date will overlap into the preceding basis period (i.e. period of account). In summary, a change in accounting date resulting one short period may lead to overlap profit.
(B) One set of account covering a period of more than 12 months:- When a change of accounting date result in one long period of account end in a tax year, the basis period for that year ends on the new accounting date. It begins immediately after the basis period for the previous year ends. This means the basis period will exceed 12 months. Here, no overlap profits will arise but the unrelieved overlap profit can be brought forward for relief (or to set off) against the “profit of the “Excess months”. The excess months represent the total number of months by which the new period exceeds 12 months.
Be warned!
Overlap profits are relieved or deducted based on the number of excess months
Relief is given as follows:
Excess months X Overlap profit
Total overlap (Total months of overlap period)
(C) Two sets of account ending in a tax year:-
;When a change of accounting date and a short power to new account date, result in two sets of account, (one 12 month period to the old accounting date) ending in a tax year the basis period for that year is the period to the new accounting date. It begins immediately after the basis period for the previous tax year ends. This means that the basis period will exceed 12 months to the new accounting date.
(D) No set of account ending in tax year: When a change of accounting date results in one long period of account such that there is one tax year where there is no set of accounts ending in that year, there will be a notional accounting date in that tax year. The Notional accounting date is the date which would have been the new accounting date had accounts been made up ending in that tax year. The basis period for the ta year is the 12 months to the new accounting date.
This may lead to the creation of overlap periods which may eventually results into overlap profits.