TXdifficulty in Trading Profit – Basis Periods

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1st year is ALWAYS tax from start of trading to April. 2nd year will follow the below rules Is there a period of account ending in the 2nd tax year no --> tax april to april is there a period of account ending in the 2nd tax year --> yes, how long is the period of account for period of account less than 12 months, if so tax the first 12 months of trade if the period of account is for 12 months or more, tax from the end of accounting period 12 months back

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.

Please note, some topics covered within the published F6 course notes have been excluded from the syllabus and will not be examined in June 2014! Please exclude the following in your set of course notes: Chapter 6 Remove section 2 on Change of accounting date Chapter 14 CGT – Individuals – reliefs. Remove: section 4 – Transfer of a business to a limited company – incorporation relief Whole of Chapter 23 Overseas aspects – companies Practice Questions and Answers: 37 and 44 https://opentuition.com/acca/f6/