Sole traders: Basis of assessment

Question 1

What is the basis of period for the tax year?

Answer 1

• the profit earning or loss making period of account that is attributed to a particular tax year

Question 2

What is the ongoing basic rule?

Answer 2

The profits for a tax year are the tax adjusted trading profits for 12 month period of account ending in that tax year

Question 3

For the first tax year what is the basis of assessment?

Answer 3

from date of commencement to following 5 April
(Actual basis)

Question 4

For the second tax year the period of account ending in the tax year is: 12 months what is the basis of assessment?

Answer 4

• that period of account CYB - current year basis

Question 5

For the second tax year the period of account ending in the tax year is: less than 12 months, what is the basis of assessment?

Answer 5

• the first 12 months of trade

Question 6

For the second tax year the period of account ending in the tax year is: more than 12 months, what is the basis of assessment?

Answer 6

• 12 months to the accounting date ending in the second tax year (i.e. the last 12 months of the long period of account)

Question 7

If there is no period of account ending in the second tax year, what is the basis of assessment?

Answer 7

• actual profits in the second tax year:
  From: 6 April
  To: 5 April

Question 8

For the third tax year what is the basis of assessment?

Answer 8

• 12 months to the accounting date ending in the third tax year
• normally CYB
• if a long period of account
  = last 12 months of the long period

Question 9

For the fourth tax year onwards what is is basis of assessment?

Answer 9

• normal current year basis (CYB)

Question 10

What are overlap profits?

Answer 10

• profits that are assessed in more than one tax year are known

Question 11

When overlap profits arise?

Answer 11

• in every scenario at commencement of trade other than when the trader has a 31 March or 5 April year end
• overlap profits are carried forward and are normally deducted from the assessment for the tax year in which the business ceases
• whilst the trader will get relief for overlap profits, relief may not be obtained for many years if the business continues for a long while.

Question 12

What are the closing year rules?

Answer 12

• the objective in the final tax year is to ensure that any profits not previously assessed are assessed in that year
• any overlap profits from commencement are deducted from the assessment for the final tax year

Question 13

To identify the basis period for the final tax year:

Answer 13

• identify the tax year in which the trade ceases. This is the last tax year that profits are assessed
• for the immediately preceding tax year, identify the assessment under normal CYB rules
• all profits after this period of account will not have been assessed and so fall into the assessment for the final tax year of trade
• remember to deduct overlap profits in this final tax year

Question 14

An accounting date of just after, rather than just before, 5 April such as 30 April will:

Answer 14

• ensure the maximum interval between earning profits and having to pay the related tax liability
• however, will result in increased overlap profits upon the commencement of trading. Although there is relief for overlap profits, there may be a long delay before relief is obtained
• makes it easier to implement tax planning measures as there is a longer period over which to plan

Question 15

Alternatively an accounting date of just before 5April, such as 31 March will: