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Hello,
I have major difficulty in calculating overlap profits and identifying tax years.
I have a challenge in understanding how this particular area was explained (Using BBP study text). For tax years, how do you identify the 2nd year taxable profits and onwards? And how do you identify the overlap profits especially if there is more than one period of overlap profits?
Please, be as simple as you can manage to be.
Thank you.
Hello,
What you have to remember is that a tax year, also known as a ‘fiscal year’ runs from the 6th April – 5th April.
Where as an accounting period is what the company has its accounts written from, this could be 6 months, 12 months or even 18 months.
What you need to do for these types of questions is understand the rules that apply and the scenario given (ie if a company has been trading for many years or whether it has just started – that will then allow you to determine what rule to use.
This can be confusing with all the dates etc, but personal the easiest and the clearest way to comprehend this type of question is to draw a timeline, which will minimise confusion.
In my next post, I will help you identify how to determine what rule to use and when. Hope this helps partly !
I am aware of the accounting year vs the accounting period. However, sometimes, in the examples that are illustrated in the book, there is no consistency in the periods that the calculate the profits from. For example if a business just started and made up accounts for 12 months but those 12 months fall into 2 tax periods (say June2013-May2014). The taxable profits for 2013/14, would be from June to March 2013 and for 2014/2015 would be April to May. But if it is for many years of trading, they do something different, which is where i get confused.
These are called “basis of assessment rules” goggle it and you will get some thing like:
first year rule
second year rule
third year rule.
In normal way company’s year end determine in which year its income will be considered. for example company’s year end is june 2014. It will be considered income of tax year ” April 2014 to March 2015″ (few days omitted) and taxed accordingly to the rates of that year. But in the opening years this rule does not apply, i.e in the year one , two usually form third year normal rules apply as given above. (If you learn these rules you will find few months taxed twice and this is overlap which is over payment of tax and by law adjusted when the company winds up or changes its year end.Hi nicouzumaki, I hope that by now you have both read the course notes on this subject and listened to the lectures which are now available for chapter 6.
I would also ask you to ignore other answers to your query here as however well meaning the writers may be much of what they say is confused and wrong! Their answers refer to the “company’s” year end!! This is horribly wrong as we are dealing here with UNINCORPORATED traders who are subject to income tax NOT companies which are charged to corporation tax in a very different way!!
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