COURSE: ACCA – TAXATION (TX)

Lecture Topic: Basis Periods

The following definitions should be noted:

(i) A period of account is a period for which the business prepares accounts.

(ii) The accounting date is the date to which the accounts are prepared (i.e., the last day in the period of account).

(iii) Income Tax is calculated for a tax year which runs from 6 April in one year to 5 April n the next year.

1. Introduction
o Income tax is charged for tax years, but most businesses do not have periods of account ending on 5 April.

o Therefore, there needs to be a system for attributing profits earned in a period of account to a particular tax year.

o The approach is to find the basis period for each tax year. The profits for the basis period are taxed in the
corresponding tax year.

o If a basis period is not identical to a period of account, the profits of periods of account are time-apportioned as
required to compute the profits for the basis period.

o There are special rules to deal with each tax year that a business has been in operation.

1.1 The First Tax Year

The first tax year is the year during which the trade commences, e.g., if the trade commences on 1 June 2019, then the first
tax year of that business is 2019/2020.

The basis period for the first tax year runs from the date the trade starts to the next 5 April.

1.2 The Second Tax Year

(a) If there is an accounting date falling in the second tax year, and that accounting date is at least 12 months after the start
of trading, then:

The basis period is the 12 months ending with the accounting date that falls in the second tax year.

(b) If there is an accounting date falling in the second tax year, and that accounting date is less than 12 months after the
start of trading, then:

The basis period is the first 12 months of trading.

(c) If there is no accounting date falling in the second tax year, then:

The basis period is the second tax year itself.

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1.3 The Third Tax Year
o The basis period for the third tax year is the 12 months ending with the accounting date that falls in the third tax
year.

1.4 Later Tax Years (from the fourth tax year onward)
o For later tax years, the basis period is the period of account ending in the tax year.

o This is called current year basis of assessment (cyb).

1.5 The Final Tax Year

o The final tax year is the tax year during which the trade ceases. Once the final tax year has been established the
following rules apply:

(a) If a trade starts and ceases in the same tax year, the basis period for that tax year runs from the commencement
date to the cessation date.

This rule overrides the normal basis period rule for the first tax year.

(b) If the final tax year is the second tax year, third tax year or a later tax year, the basis period runs from the end of
the basis period for the previous tax year to the date of cessation.

This rule overrides the basis period rules that normally apply in the second, third and later tax years.

1.6 Overlap Profits

o Profits which have been taxed more than once are called overlap profits. The overlap profits are carried forward and
are normally deducted from the final year’s taxable profits.

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Questions

1.
Larry started to trade on 1 January 2018 and decided that his normal year end date will be 31 December.

His trading profits for his first three periods of account were:
£
Year ended 31 December 2018 24,000
Year ended 31 December 2019 36,000
Year ended 31 December 2020 48,000

Calculate the trading profit assessment for each tax year that Larry was in business.

2.
Curly starts to trade on 1 January 2018. His tax adjusted trading profits for his first three (3) periods of account were:

Eight (8) months to 31 August 2018 £16,000

Year ended 31 August 2019 £36,000
Year ended 31 August 2020 £40,000

(a) Calculate the amount of trading profits that will have been assessed on Curly for the tax years 2017-18, 2018-19,
2019-20 and 2020-21 respectively.

(b) Identify the amount of any overlap profits.

3.
Moe starts to trade on 1 March 2010 making up a 14 month set of accounts to 30 April 2011. His trading profits for his first
three (3) periods of account were:

Fourteen (14) months to 30 April 2011 £56,000

Year ended 30 April 2012 £45,000
Year ended 30 April 2013 £38,000

Calculate the amount of trading profits that will have been assessed on Moe for the tax years 2009-10, 2010-11, 2011-12
and 2012-13 respectively, clearly identifying the amount of any overlap profits.

4.
Shemp has been in business as a sole trader for many years making up accounts to 30 November each year. He ceased
business on 31 January 2022. His tax adjusted profits for his final three periods of account have been:

Year to 30 November 2020 £18,000

Year to 30 November 2021 £20,000
Period to 31 January 2022 £3,000

Shemp has £1,000 unused overlap profits brought forward from the opening years of his business.

From the information given above calculate Shemp’s assessable trading profits for the tax years 2020-21 and 2021-22,
clearly stating, for each tax year the basis period that applies.