Chapter 8

Basis Period

The Second Tax Year

Note: If there is no accounting date falling in the second tax year, because the first period of account is a very long one
which does not end until a date in the third tax year, the basis period for the second tax year is the year itself (from 6
April to 5 April).

Overlap Profits
Profits which have been taxed more than once are called overlap profits.

When a business starts, some profits may be taxed twice because the basis period for the second year includes some or
all of the period of trading in the first year or because the basis period for the third year overlaps with that for the
second year, or both.

Overlap profits are relieved when the trade ceases by being deducted from the final year's taxable profits.

Period of 12 months or more ending in second year

John starts to trade on 1 January 2020 preparing accounts to 31 December 2020.

Short period ending in second year

Janet starts to trade on 1 January 2020 preparing accounts as follows:

• Six months to 30 June 2020

• 12 months to 30 June 2021

No period ending in second year

Jodie starts to trade on 1 March 2020 preparing a 14 month set of accounts to 30 April 2021.

The Third Tax Year

(a) If there is an accounting date falling in the second tax year, the basis period for the third tax year is the 12 month
period of account ending in the third tax year (current year basis).

(b) If there is no accounting date falling in the second tax year, the basis period for the third tax year is the 12 months to
the accounting date falling in the third tax year.

1. Wilma starts to trade on 1 October 2019. She made taxable profits of £9,000 for the first nine months to 30 June 2020
and £30,000 for the year to 30 June 2021.

2. Thelma starts to trade on 1 March 2020. Her first accounts, covering the 16 months to 30 June 2021 show a profit of
£36,000. The taxable profits for the first three tax years are as follows.

3. Peter commenced trading on 1 September 2015 preparing accounts to 30 April each year with the following results

The Final Year

• 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.

• To identify the basis period for the final tax year:

– 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