Basis of assessment

Okay, firstly keep trying questions on that and you will get the hang of it. It is important to work out a basis for charging tax. Think of it like this:

EXAMPLE:
Nick starts his consultancy business on 1 January 2007. His profits are:

Six-months to 30 June 2007 = £25,200
12 months to 30 June 2008 = £21,600

How do we assess profits for TAX YEARS 2006/07, 2007/08 and 2008/09?

STEP 1
First year is simple, calculate profits till the next 5th of April

When did Nick start? in January 2007
When’s the next 5.4? on 5th April 2007
How many months? 3 months so 1st tax year’s profits will be 3 months from January 2007-March 2007

1st year sorted

STEP 2
2nd Tax year
Does the accounting period end in 2nd tax year? Yes it does since 30.June 2007 is in the 2nd tax year.
(what you’re thinking of is, the first a/c period i.e. 1.1.7 – 30.6.7 does it finish in tax year 6.4..7 – 5.4.8 ?)

If it does there are only 2 situations:
2ND TAX YEAR – SCENARIO 1
(As above is less than 12months)
We’ll calculate profits of 1st twelve months of trading. In the above example he started trading in January, so we’ll include profits of 12months to December 2007.

2ND TAX YEAR – SCENARIO 2
If the accounting date that ends in the 2nd tax year is 12 months from when he started trading then we will use the accounting date end as the basis. So if Nick started trading in July 2006 (instead of jan 2007) we would include profits from July 2006-June 2007 i.e. 12 months.

Afterwards simply use the accounting date, so in year three the basis period will be simply the accounting date i.e. 1.7.7 – 30.6.8

Hope it helps you.