Lecture 7 self employment 2

TAX LECTURE 7

OUTCOMES:
 Apply the basis of assessment for trading income
 Compute ‘overlap profits’ and show how relief is obtained
 Calculate the effect on profits of a change of accounting date
 Show how adjustments to a profit and loss account can produce a loss
 Identify the forms of relief for trading losses and compute assessments after loss relief
 Advise a taxpayer on the optimum use of losses
 Advise on the Income Tax consequences of starting up a business


CURRENT YEAR BASIS OF ASSESSMENT:
 Tax year is 6th April to 5th April
 Unlikely to coincide with business accounts
 Current year basis (cyb) matches adjusted profits to tax years
 Basis period for a tax year is the accounting year ending in that tax year


OPENING YEAR RULES:
Tax year Basis period
1 Date of commencement to the following 5 April
(the ‘actual’ basis) (31 March for convenience)

2 (a) 12 months to the accounting date in the
second tax year (if possible)

Or

(b) The first 12 months of trading (if accounting
date in the second tax year is less than 12 months
after commencement)
3 Current year basis
4 etc. Current year basis


OVERLAP PROFITS:
 Because basis periods can overlap, profits can be taxed more than once
 Deducted from the final year’s profits
 If overlap profits > final year profits = loss (see later)
 Overlap profits created can also be used on change of accounting date


LECTURE ACTIVITY:
1. A business starts on 1/1/22, and draws up
accounts to 31/12/22. What is the basis of assessment for 2021/22 and 2022/23?
2021/22 : 1/1/22 to 31/3/22

, 2022/23 : 1/1/22 to 31/12/22

2. Assuming that the business makes profits of £12,000 in the first 12 months, quantify the
overlap profits.
2021/22 : 3/12 x £12,000 = £3,000
2022/23 = £12,000
Overlap profits = £3,000

3. How will overlap profits be relieved?
By deduction from final year’s assessment, or on a change of accounting date


YEARS OF ASSESSMENT:

5 April 2023
5 April 2022
5 April
2021 Current year
Actual
3000 12000


31 Dec 2022 31 Dec 2023
1 Jan 2022
Profits 12000

Start business


EXAMPLE:
A business commences on 1st January 2022, and prepares accounts to 30th June 2022 (profit £8,000),
and annually thereafter. It makes £24,000 for the year to 30 June 2023.
2021/22: 1.1.22-31.3.22:
3/6 x 8,000 = £4,000
2022/23 1.1.22 - 31.12.22:
£8,000 + £12,000 (6/12 x 24,000)
£20,000
2023/24: y/e 30.6.23: £24,000
Overlap profit = £4,000 +12,000 = £16,000

YEARS OF ASSESSMENT:

5 April 2022
5 April 2021 5 April 2013
actual Current year:
4000 8000+6/12x24000