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QUESTION
On 6 April 2022, Simon commenced employment with Echo Ltd. On 1 January 2023, he commenced in partnership with Art, preparing accounts to 30 April.ANSWER
(1)The interval between earning profits and paying the related tax liability will be 11 months longer. This can be particularly beneficial whereprofits are rising.(2)It will be possible to calculate taxable profits well in advance of the end of the tax year, making it much easier to implement tax planning and make pension contributions.
COMMENT
I don’t understand the answer.
11 months longer? why? I suppose Simon still needs to submit its Personal Income Tax up to 5/4 and include pro quota his earnings from the partnership, no?I’m not sure I understand as the question isn’t shown – just data. Where did you get the question?
This is the full question, but in general I have seen this topic of the accounting date choice popping up a few times and I have a hard time understanding what difference it makes..
This scenario relates to two requirements.
On 6 April 2022, Simon commenced employment with Echo Ltd.
On 1 January 2023, he commenced in partnership with Art, preparing accounts to 30 April.
The following information is available for the tax year 2022-23:
Employment
(1) During the tax year 2022-23, Simon was paid a gross annual salary of £23,700.
(2) Throughout the tax year 2022-23, Echo Ltd provided Simon with living accommodation.
The company had purchased the property in 2007 for £89,000, and it was valued at £143,000 on 6 April 2022.
The annual value of the property is £4,600.
The property was furnished by Echo Ltd during March 2022 at a cost of £9,400.
The living accommodation is not job related.
(3) On 1 December 2022, Echo Ltd provided Simon with an interest-free loan of £84,000, which he used to purchase a holiday cottage.
Partnership
(1) The partnership’s tax adjusted trading profit for the four-month period ended 30 April 2023 is £29,700. This figure is before taking account of capital allowances.
(2) The only item of plant and machinery owned by the partnership is a motor car which cost £18,750 on 1 February 2023.
(3) Profits are shared 40% to Simon and 60% to Art. This is after paying an annual salary of £6,000 to Art.
The motor car has CO2 emission rate of 155g per kilometre. It is used by Art and 40% of the mileage is for private journeys.
Property income
(1) Simon owns a freehold house which is let out furnished.
The property was let throughout the tax year 2022-23 at a monthly rent of £660.
(2) During the tax year 2022-23, Simon paid council tax of £1,320 in respect of the property.
He also replaced the property’s washing machine during March 2023.
The old washing machine was sold for £70, being replaced by a washer-dryer costing £970.
The cost of a similar washing machine would have been £730.
(b) State TWO advantages for the partnership of choosing 30 April as its accounting date rather than 5 April.(2 marks)This question is about choosing an accounting date and overlap/basis periods
5th April means no overlap and assessed on actual basis
30th April produces 11 months overlap profits which cannot be used unless the business ceases or moves it’s accoutning date closer to next 5th April.
You then have to apply the basis period rules (per the manual) to the question to work out which is best.
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