CHAP 7: TRADING PROFITS – BASIS OF ASSESSMENT

1/ CURRENT YEAR BASIS:

CYB: Basis period for the tax year is the 12-month POA ending in that tax year.

VD:

POA Taxable TP

y/e 31/12/20 £12,000

y/e 31/12/21 £15,000

Tax year 21/22:

➞ Basis period: 1/1/21 - 31/12/21

➞ Taxable TP for 21/22 = £15,000

2/ OPENING YEARS:
2.1. First tax year:
Actual basis: date of commence ➞ 5/4
2.2. Second tax year:

POA ending in 2nd tax year Basis period

< 12m First 12m of trading

= 12m That 12m POA

> 12m 12m to the end of the POA ending in 2nd tax year

No such POA Actual basis (6/4 - 5/4)

VD: POA ending in 2nd tax year = 12m

ST start trading on 1/6/21 & decide to make up accounts to 31/12:
● 1st POA: 1/6/21 - 31/12/21 ➞ 12000

● 2nd POA: 1/1/22 - 31/12/22 ➞ 24000

● 3rd POA: 1/1/23 - 31/12/23 ➞ 24000

• 1st tax year: 21/22

➞ Basis period: 1/6/21 - 5/4/22

➞ Taxable TP for 21/22 = 12000 + 24000 × 3/12

• 2nd tax year: 22/23

POA ended 31/12/22 = 12m

➞ Basis period: 1/1/22 - 31/12/22

➞ Taxable TP for 22/23 = 24000

VD: POA ending in 2nd tax year < 12m

Scott started trading on 1/11/20 & decided to make up accounts to 31/7. Taxable trading
profits:

9 months to 31/7/21 £18,000

y/e 31/7/22 £48,000

• 1st tax year: 20/21

➞ Basis period: 1/11/20 - 5/4/21

➞ Taxable TP for 20/21 = 18000 × 5/9

• 2nd tax year: 21/22

POA ended 31/7/21 = 9m < 12m

➞ Basis period: 1/11/20 - 31/10/21

➞ Taxable TP for 21/22 = 18000 + 48000 × 3/12

VD: No POA ending in 2nd tax year

Ben began trading on 1/1/21 & prepared his first account to 30/4/22. Tax-adjusted trading
profits for period ended 30/4/22 were £24,000

● 1st POA: 1/1/21 - 30/4/22 (16m) ➞ 24000

● 2nd POA: 1/5/22 - 30/4/23 (12m)

• 1st tax year: 20/21

➞ Basis period: 1/1/21 - 5/4/21

➞ Taxable TP for 20/21 = 24000 × 3/16

• 2nd tax year: 21/22

No POA ending in 2nd tax year

➞ Basis period: 6/4/21 - 5/4/22

➞ Taxable TP for 21/22 = 24000 × 12/16

• 3rd tax year: 22/23

POA ended 30/4/22 = 16m > 12m

➞ Basis period: 1/5/21 - 30/4/22

➞ Taxable TP for 22/23 = 24000 × 12/16

VD: POA ending in 2nd tax year > 12m

Ben began trading on 1/5/21 & prepared his first account to 30/6/22. Tax-adjusted trading
profits for period ended 30/6/22 were £24,000

● 1st POA: 1/5/21 - 30/6/22 (14m) ➞ 24000

● 2nd POA: 1/7/22 - 30/6/23 (12m)

• 1st tax year: 21/22

➞ Basis period: 1/5/21 - 5/4/22

➞ Taxable TP for 21/22 = 24000 × 11/14

• 2nd tax year: 22/23

POA ended 30/6/22 = 14m > 12m

➞ Basis period: 1/7/21 - 30/6/22

➞ Taxable TP for 22/23 = 24000 × 12/14

2.3. Third tax year:

POA ending in 3rd tax year Basis period

= 12m That 12m POA (CYB)

≠ 12m 12m to the end of the POA ending in 3rd tax year
3/ OVERLAP PROFITS:
Overlap profits: Opening year rules ➞ choose POA not ending on 5/4 ➞ some taxable TP
were taxed twice (overlap profits)

VD1: Maureen starts trading on 1/6/20 & decides to make up accounts to 31/7. Taxable TP:
14 months to 31/7/21 ➞ £20,160

• 1st tax year: 20/21

➞ Basis period: 1/6/20 - 5/4/21

• 2nd tax year: 21/22

POA ended 31/7/21 = 14m > 12m

➞ Basis period: 1/8/20 - 31/7/21

• Overlap profit:

➞ Overlap period: 1/8/20 - 5/4/21

➞ Overlap profit = 20160 × 8/14

VD2: Connie starts trading on 1/1/20. Taxable TP:

6 months to 30/6/20 £28,500
12 months to 30/6/21 £48,000

• 1st tax year: 19/20

➞ Basis period: 1/1/20 - 5/4/20

• 2nd tax year: 20/21

POA ended 30/6/20 = 6m < 12m

➞ Basis period: 1/1/20 - 31/12/20

• 3rd tax year: 21/22

POA ended 30/6/21 = 12m

➞ Basis period: 1/7/20 - 30/6/21

• Overlap profit:

➞ Overlap period: 1/1/20 - 5/4/20 & 1/7/20 - 31/12/20

➞ Overlap profit = 28500 × 3/6 + 48000 × 6/12

4/ CLOSING YEARS:
4.1. Final tax year:
Basis period (Final tax year): End of basis period for penultimate tax year ➞ Date of
cessation
4.2. Penultimate tax year:

POA ending in penultimate tax year Basis period

= 12m That 12m POA (CYB)

No such POA (final POA > 12m) 12m to the normal year end date falling in the tax year
VD: Kevin ceased trading on 30/9/21. He has unrelieved overlap profits of £2,000. Tax-
adjusted TP:

Year ended 31/3/20 £50,000

1/4/20 - 30/9/21 £54,000

• Penultimate tax year: 20/21

No POA ending in penultimate tax year

➞ Basis period: 1/4/20 - 31/3/21

➞ Taxable TP for 21/22 = 54000 × 12/18

• Final tax year: 21/22

➞ Basis period: 1/4/21 - 30/9/21

➞ Taxable TP for 21/22 = 54000 × 6/18 - 2000

4.3. Relief for overlap profits:

Taxable TP (Final tax year) - Overlap profits

Note: Nếu đề cho ceased trading date & hỏi Taxable TP của final tax year:
- Đề cho sẵn unrelieved overlap profit b/f ➞ deduct
- Đề ko nhắc j đến overlap profit ➞ tự giác tính overlap profit để trừ đi

VD1: Darren ceased trading on 30/11/21. He has unrelieved overlap profits of £2,000. Tax-
adjusted TP:
Year ended 31/12/19 £14,000
Year ended 31/12/20 £10,000
Period ended 30/11/21 £8,000

• Final tax year: 21/22 (1)

➞ Basis period: 1/1/21 - 30/11/21 (4)

➞ Taxable TP for 21/22 = 8000 - 2000

• Penultimate tax year: 20/21 (2)

➞ Basis period: 1/1/20 - 31/12/20 (3)

➞ Taxable TP for 20/21 = 10000

VD2: John started trading on 1/1/20, but his business quickly ran into cash flow problems &
he ceased to trade on 28/2/22. Taxable TP:
year ended 31/12/20 £6,000
1/1/21 - 28/2/22 £2,800
Taxable TP for 21/22?
➞ đề hỏi final tax year & ko cho overlap profit ➞ tự tính

• 1st tax year: 19/20

➞ Basis period: 1/1/20 - 5/4/20

• 2nd / Penultimate tax year: 20/21

POA ended 31/12/20 = 12m

➞ Basis period: 1/1/20 - 31/12/20

• Overlap profit:
➞ Overlap period: 1/1/20 - 5/4/20

➞ Overlap profit = 6000 × 3/12 = 1500

• Final tax year: 21/22

➞ Basis period: 1/1/21 - 28/2/22

➞ Taxable TP for 21/22 = 2800 - 1500

5/ PARTNERSHIPS:
● Taxable trading profits của partnership được phân bổ cho các partners ➞ income tax

● Opening & closing year rules áp dụng cho partners join & leave partnership. Các
continuing partners còn lại vẫn tiếp tục áp dụng CYB.

● Tính taxable TP for tax year như sole trader ➞ phân bổ cho từng partners

● Nếu có sự thay đổi trong cách share profit ➞ chia POA thành 2 kỳ với 2 cách share
profit cho partners ≠ nhau ➞ time apportion salary & interest on capital

VD: Calder, Scott and Tim have been in partnership for several years. Taxable TP =
£136,000 for the year ended 31/5/21.
Until 30/9/20, partnership had shared profits equally. From 1/10/20, profit - sharing
agreement was amended as follows:

Calder Scott Tim

Salary per year £50,000 £40,000 £30,000

PSR 25% 35% 40%

Taxable TP for each partner in 21/22?

Calder Scott Tim

First PSR period

1/6/20 - 30/9/20

136000 × 4/12 ÷ 3 15111 15111 15111

Second PSR period

1/10/20 - 31/5/21

Salaries (× 8/12) 33333 26667 20000

PSR (25:35:40) 2667 3733 4267

Total 51111 45511 39378