Professional Documents
Culture Documents
Basis Period
Basis Period
Introduction
Basis Period
The period of account chosen by sole traders and partnerships is not always according to
▪ Basis period are rules to create a link between the period of account and the tax years.
▪ The aim is to identify how much income/ profit is to be taxed in which tax year
Thank you…
5
Basis Period
Current Year Basis
Current Year Basis
For businesses that are a going concern i.e. are currently operational
Therefore, the profits of the year ending 31st December, 2022 will be taxed in 22/23
Example
Therefore, the profits of the year ending 30th June will be taxed in 23/24
Thank you…
10
Opening Year Rules
Introduction
Opening Year Rules
▪ Initial links between the period of account and the tax year needs to be created
▪ After the first period of account is dealt with, the Current Year Basis (CYB) rule applies on
▪ Basis period will start from 1st day of trade till the following 5th of April.
Example
1st Period of Account: 1st October 2021 to 31st March 2022 – TATP £15,000
2nd Period of Account: 1st April 2022 – 31st March 2023 – TATP £24,000
Example
________________________________________________________________________________
Start of trade: 1st October 2021 to following 5th April: 5th April 2022 – 2021/22
1st Period of Account: 1st October 2021 to 31st March 2022 – (£15,000)
2nd Period of Account: 1st April 2022 – 31st March 2023 - £24,000
________________________________________________________________________________
Basis Period:
________________________________________________________________________________
Start of trade: 1st July 2021 to following 5th April: 5th April 2022 – 2021/22
19
Opening Year Rules
POA = 12 months
2nd Tax Year Rule
Is the period of account falling in the
next tax year?
Yes No
Are the 1st period of account’s profits completely linked to a tax year?
Yes
6th April 2019 -------------------------------------------------------- 5th April 2020
30
Opening Year Rules
POA < 12 months
2nd Tax Year Rule
Is the period of account falling in the
next tax year?
Yes No
Are the 1st period of account’s profits completely linked to a tax year?
Overlap profit = £6,000 for 3 months and ( £30,000 x 6/12) £15000 for 6 months, so total
Overlap profit = £6,000 for 3 months and ( £30,000 x 6/12) £15000 for 6 months, so total
40
Opening Year Rules
POA > 12 months
2nd Tax Year Rule
Is the period of account falling in the
next tax year?
Yes No
Are the 1st period of account’s profits completely linked to a tax year?
No overlapped profits
Example
49
Opening Year Rules
POA covers 3 tax years
2nd Tax Year Rule
Is the period of account falling in the
next tax year?
Yes No
57
Basis Period
Closing Year Rules
Closing Year Rule
▪ Basis period will be that period of account or periods of accounts whichever are ending
63
Basis Period
Planning
Choosing an Accounting End Date
• Reduced time to consider tax planning • Time to work out tax planning measures
• Tax return and associated tax payment and paying the tax liability
due soon
Considerations for Opening Years
▪ Reduced profit in the initial period of account to keep a control on the tax amount
• Pre-trading expenditure
▪ Accounting end date of an ongoing business can be changed for any reason
▪ Application of special basis period rules on the new period of account created, to bring
• If accounting date end changed in previous 5 tax years: approval of HMRC needed
for the current proposed accounting end date change – commercial purpose
▪ Notify HMRC: By 31 January following the tax year in which the change is made
Impact
Change in accounting
date
Change of Accounting Date Rule: New POA < 12 months ending in the tax year
▪ The overlap can reduce the number of months of profit taxed down to twelve, but no
further
Example
Change of Accounting Date Rule: New POA > 12 months ending in the tax year
1. Pick up the new POA end date and deduct 1 year/ 12 months from it
2. Create the Basis Period using 12 months to date worked out in step 1
▪ The 2nd Basis Period will be the 12 months to the new POA end date
1st B.P.: 12 months to this date: 1st July 2020 – 30th June 2021
2nd B.P.: 12 months to new POA end date: 1st July 2021 – 30th June 2022
Example