- This topic has 2 replies, 2 voices, and was last updated 7 years ago by
.
- Posts
Hi,
Please could you help me understand the advantages of choosing the accounting date? Why the 5th April and not the 1st April? Why would choosing the 30th lead to potential overlap of profits?
Thank you!!Ashura has been employed by Rift plc since 1 January 2013. She has also been self-employed since 1 July 2015, preparing her first accounts for the nine-month period ended 5 April 2016. The following information is available for the tax year 2015–16:
Q.
State TWO advantages for Ashura of choosing 5 April as her accounting date rather than a date early in the tax year such as 30 April.
A:
(1) The application of the basis period rules is more straightforward.
(2) There will be no overlap profits.
(3) The basis period in the year of cessation will be a maximum of 12 months in length, rather than the potential 23 months which could arise with a 30 April year end.6th April to 5th April is the personal tax year, therefore if she chooses this date her self employed accounting year will align with her personal tax year.
If she chooses 5th April as her accounting date, then for tax year 15/16 she will be taxed on profits from 1st July 2015 to 5th April 2016. Then for tax year 16/17, she will be taxed on profits from 6th April 2016 to 5th April 2017.
If she chooses 30th April as her accounting date, then for tax year 15/16 she will be taxed on profits from 1st July 2015 to 5th April 2016. Then for tax year 16/17, she will be taxed on profits from 1st July 2015 to 30th April 2016. Therefore she will be taxed twice on most of her first year profits and these will be overlap profits. She won’t be able to get relief on this double taxation until she winds up the business which could be many years from now.
Therefore the answer to the question is (1) and (2). (3) is not correct because you cannot have a basis period more than 12 months long.
- You must be logged in to reply to this topic.