Tax year

An individual in business will need to complete a tax return for a tax year.
A tax year runs from 6 April to the following 5 April Tax year 2010/11:

Current year basis

The basic rule is: Assessable trading income for any tax year will be based on the profit for the 12 month period of account ending in that year This is known as the current year basis.

Question 1
Vi prepares accounts to 30 April each year. Her trading profits after making all necessary adjustments, including capital allowances, were as follows: Year ended 30 April 2008 30,000 Year ended 30 April 2009 28,000 State in which tax years these profits will be taxed.

Opening year rules

To make sure that there is an assessment in every year the business trades, there are special opening year rules as follows: First tax year First year the business started assesses: Actual profits from commencement to 5 April This is known as the actual basis of assessment Assume profits accrue evenly over the accounting period and work to the nearest month

Second tax year

Third year
Basis of assessment in Year 3: 12 months ending on the accounting date in that year. Fourth year onwards Basis of assessment: Current Year Basis (CYB).

Question 2
Linda started in business on 1 November 2007, preparing accounts to 31 October each year. Her adjusted profits were as follows: Year ended 31.10.2008 15,000 Year ended 31.10.2009 36,500 Year ended 31.10.2010 49,000 Calculate the assessments for the first four tax years of trading.

Overlap profits
When an individual starts to trade, some profits are often taxed twice. Profits assessed in more than one year are called overlap profits. Overlap profits are relieved by being deducted from the final assessment when an individual ceases to trade.

Question 3
Ekram started in business on 1 July 2007. He prepared his first set of accounts for the six months ended 31 December 2007 and then for calendar years thereafter. His adjusted profits were as follows: 6 months ended 31.12.07 3,000 Year ended 31.12.08 8,600 Year ended 31.12.09 7,200 Year ended 31.12.10 6,900 Calculate the assessments for the first four tax years of trading.

Question 4
Harry started in business on 1 January 2008. He prepared his first set of accounts for the seven months ended 31 July 2008 and annually to 31 July thereafter. His adjusted profits were as follows 7months to 31.07.08 15,500 Year ended 31.07.09 30,200 Year ended 31.07.10 29,000 Calculate the assessable trading income for the tax years 2007/08 to 2010/11 inclusive, and calculate the amount of any overlap profits.

Question 5
Zachary started in business on 1 February 2008. He prepared his first set of accounts for the 18 months to 31 July 2009 and annually to 31 July thereafter His adjusted profits were as follows: 18 months ended 31.07.09 7,500 Year ended 31.07.10 3,400 Calculate the assessable trading income for the tax years 2007/08 to 2010/11 inclusive, and calculate the amount of any overlap profits.

Closing year rules

When an individual trader ceases to trade, any profits not yet assessed will be taxed in the tax year in which trading ceases. Overlap profits can be deducted.

Question 6
Henry has been in business for many years, preparing his accounts to 30 June each year. Owing to retirement, he stopped trading on 31 January 2010. His adjusted profits were as follows: Year ended 30.06.08 10,000 Year ended 30.06.09 14,000 Seven months ended 31.01.10 3,860 Show his assessable trading income for the relevant tax years, assuming that there were overlap profits of 8,000 from the commencement of trade.

CHANGE OF ACCOUNTING DATE

A trader will change his accounting date when he draws accounts for a period which is not 12 months long. The change of accounting date rules will not apply in the year the trader commences or the year in which the trade ceases in these instances, the opening and closing year rules will apply. When considering the change of accounts date rules, remember two basic principles: 1) The basis period will never be less than 12 months long; and 2) HMRC will always tax all profits there will never be a period when profits are earned but are not taxed.

 To calculate trading profits on a change of accounting date, we follow a 4-stage process as outlined below: 1) Identify the year of change. 2) Calculate taxable profits for all tax years either side of the year of change:
Before the change - tax 12 months of profits up to the old accounts date. After the change - tax 12 months of profits up to the new accounts date. 3) Identify the gap period the gap here is the period of profits which have not thus far been taxed.

The 4-stage process

 4) Tax the profits in the gap: If the gap exceeds 12 months, reduce the profits by using up an appropriate amount of overlap relief. If the gap is less than 12 months, tax an appropriate amount of profits from the previous period to make the gap up to the 12 months. This will create additional overlap relief. On a change of accounting date, you will either be using overlap relief or creating additional overlap relief.

1. The year of change

The year of change is the earlier of: (i) the first tax year in which accounts are not drawn to the old date; (ii) or the first tax year in which accounts are drawn to the new date.

 Assume a trader prepares accounts to 30 April 2009. In the next accounting period he changed his accounting date to 31 March 2010. We work out the year of change as follows: (i) Using the old date, the first time accounts are not drawn up to 30 April is the period to 30 April 2010. That falls into 2010/11. (ii) The first time accounts are drawn up to the new date is 31 March 2010. That falls into 2009/10. The earlier of the two years is 2009/10 and this year is therefore the year of change.

Example

Example 2
A trader prepares accounts to 31 December 2008. In the next accounting period, he changed his accounting date by drawing accounts for the 18 months to 30 June 2010. Determine the year of change.

Question 7

Question 8

Question 9

Question 10

Conditions for a valid change of accounting date

The above rules will only apply where: 1) the accounting period of change does not exceed 18 months; and
2) the taxpayer informs HMRC of the change by 31 January following the year of change; and 3) there has been no other change in the previous 5 years or the current change of date is for a bona fide commercial reason.

Question 11

Question 12