Tax Year Basis of Assessment
1 From a Profit and Loss account to an Income Tax computation
1. Steps:
Step 1: Adjust the accounting profits for the period of account.
Step 2: Calculate any capital allowances (P&M and SBAs) for the period of account.
Step 3: Deduct the capital allowances from the adjusted accounting profits to arrive at ‘tax adjusted trading profits’ for the period of account.
Step 4: Match the period(s) of account to a tax year under the ‘tax year basis’ rules.
Step 5: Put the trading income figure from Step 4 into the Income Tax computation.
(a) A period of account is the period covered by the profit and loss account but Income Tax computations are prepared for tax years, so a period of account must be matched to a tax year.
(b) A trader may have a year end of 5 April, in which case matching a period of account to a tax year is straightforward, but a trader can choose whatever year end they like.
(c) If the year end is 31 March, then the first few days in April are ignored; i.e. the trading profits of the year ended 31 March 2026 will be taxed in 2025/26.
(d) Special rules are applied when the year end is not 5 April (or 31 March) and also when a trader starts or ceases to trade.
2. Starting To Trade
(a) In the tax year that a trader starts to trade, the assessable trading profits are those that arose from the date trade started until the end of the tax year (5 April), although you should work to the nearest month in the exam; i.e. to 31 March rather than 5 April.
(b) Profits and losses are deemed to arise evenly, and therefore may need to be time apportioned.
Stuart starts to trade on 1 November 2025 and chooses an accounting date of 30 September.
For the accounting period 1 November 2025 to 30 September 2026, tax adjusted trading profits are £22,000.
The first tax year of trade is 2025/26, so the trading income assessment for that year is the profits from 1 November 2025 to 5 April 2026, which is 5 months.
That time period lies completely within the first accounting period which runs from 1 November 2025 to 30 September 2026 which is 11 months.
The trading income assessment for 2025/26 is therefore 5/11 x £22,000 = £10,000.
Alex starts to trade on 1 June 2025 and chooses an accounting date of 31 December.
For the accounting period 1 June 2025 to 31 December 2025, tax adjusted trading profits are £8,000, and for year ended 31 December 2026 they are £24,000.
The first tax year of trade is 2025/26, so the trading income assessment for that year is the profits from 1 June 2025 to 5 April 2026, which is 10 months.
That time period spans the first two accounting periods, so the trading income assessment for 2025/26 is:
£ | ||
1 June 2025 - 31 December 2025 = 7 months | 8,000 | |
1 January 2026 - 5 April 2026 = 3 months, therefore 3/12 x £24,000 | 6,000 | |
Trading income to the Income Tax computation for 2025/26 | 14,000 |
3. Continuing Trades
For continuing trades, the trading profit from 6 April to the following 5 April are assessed (but working to the nearest month, that effectively means the trading profit from 1 April to the following 31 March).
Continuing from Illustration 2, Alex's tax adjusted trading profits for the year ended 31 December 2027 are £36,000.
The trading income assessment for 2026/27 is as follows:
£ | ||
6 April 2026 - 31 December 2026 = 9 months, so 9/12 x £24,000 | 18,000 | |
1 January 2027 - 5 April 2027 = 3 months, therefore 3/12 x £36,000 | 9,000 | |
Trading income to the Income Tax computation for 2026/27 | 27,000 |
4. Cessation of trade
For trades that are ceasing, the trading profits from 6 April to the date of cessation are assessed in the final tax year of trade.
Continuing from Illustration 3, Alex ceased to trade on 28 February 2028. His tax adjusted trading profits for the two months ending 28 February 2028 are £1,500.
The trading income assessment for 2027/28 is as follows:
£ | ||
6 April 2027 - 31 December 2027 = 9 months, so 9/12 x £36,000 | 27,000 | |
1 January 2028 - 28 February 2028 | 1,500 | |
Trading income to the Income Tax computation for 2027/28 | 28,500 |
5. Losses
Loss reliefs are covered in the next chapter, but the procedure for allocating losses to a tax year is exactly the same as that for allocating profits.
Sarah's tax adjusted trading profits and losses are as follows:
Profit/(loss) | ||
Year ended 31 October 2025 | (18,000) | |
Year ended 31 October 2026 | 6,000 | |
The trading income/(loss) for 2025/26 is as follows: | ||
£ | ||
6 April 2025 - 31 October 2025 = 7 months, so 7/12 x £(18,000) | (10,500) | |
1 November 2025 - 5 April 2026 = 5 months, so 5/12 x £6,000 | 2,500 | |
Loss for 2025/26 | (8,000) |
Where a trading loss arises in a tax year, NIL is entered into the Income Tax computation for that year and then the trader will decide how to relieve the loss (see Chapter 7).
Sam started to trade on 1 December 2024 and has had the following tax adjusted trading profits and losses:
£ | ||
1 December 2024 - 31 December 2025 | Profit | 13,000 |
Year to 31 December 2026 | Profit | 18,000 |
Year to 31 December 2027 | Loss | (6,000) |
Sam ceased to trade on 31 January 2028. The profit in this final month of trade was £900.
Calculate his assessable profits/(allowable losses) for all relevant tax years.