difficulty in Trading Profit – Basis Periods

there?? are you still having troubles? let me know at: tareeki@yahoo.com

Here are the rules:

OPENING YEAR RULES:

These rules apply to when an individual commences trading

1. First Tax Year – use the ACTUAL BASIS, what this means is that you tax trade profits from the date of when he commenced business to the end of the tax year i.e 5th April.

FOR EXAMPLE
XYZ commenced trading on 1st January 2012, and draw up his first set of accounts to June 2012 and made profits of £50,000. Over here, you would only tax profits from Jan till end of March (i.e 3 out the 6 months)

2. Second Tax Year – you ask yourself the following set of questions
(Does an accounting period end in the 2nd tax year? By the way, an accounting period is the dates from which the individual makes his accounts to.)

If the answer to the question is YES, you then look at whether the accounting period is:
– Less than 12 months (TAX PROFITS OF FIRST 12 MONTHS OF TRADE)
– 12 Months Exact (CURRENT YEAR – INCLUDE THE WHOLE AMOUNT)
– More than 12 months (TAX PROFITS TO 12 MONTHS OF ACCOUNTING PERIOD)

If the answer is NO, you then tax profits for that period from April 6th to April 5th (i.e. 12 months)

CLOSING YEAR RULES:

These rules relate to when an individual ceases to trade.

Penultimate Tax Year (second to last tax year), use CURRENT YEAR BASIS, i.e. include all profits of the accounting period to which the tax year relates.

Final Tax Year – Tax any remaining profits which have not been taxed and also deduct at this point your overlap profits. This is the only time you can get a deduction for your overlap profits, when you cease trading.

TOP TIP: Use timelines for these types of questions, it makes plotting all years easier and easier to handle and calculate.