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Hi sorry to bother you again!
There is a question in my BPP study text and it involves a change of accounting date. The scenario basically goes like this:
Trader starts trade on 1.10.08 and preps accounts to 30 Sept until they decide to change account by preparing accounts for the 15 months to 31.12.11.
Trade results were: Yr to 30.9.09 – £24,000, Yr to 30.9.10 – £48,000 and 15 mth to 31.12.11 – £75,000.This gives taxabale profits for the 1st tax year:
2008/09 (1.10.08 – 5.4.09) Working 6/12 x £24,000 £12,000
2nd tax year:
2009/10 (1.10.08 – 30.9.09) CYB £24,000
3rd tax year:
2010/11 (1.10.09 – 30.9.10) CYB £48,000OVERLAP PROFITS OF £12,000 ARISING FROM THE 1ST 6 MTHS TO 5.4.09
Now in the text, it shows that when the change of accounting date occurs it goes as follows:
4th tax year:
2011/12 (1.10.10 – 31.12.11) taxable profits £75,000
Less overlap profits 3/6 x £12,000 ( £6,000)What i do not understand and cant find any explanation whatsoever for is why only 3 months of the overlap profits are relieved. There is NO explanation at all in the text. I think its something to do with the fact that the changeover caused 15 months of profits to be assessed, therefore 15 months less 12 months is 3 months. However as this is not backed up with any reasoning, explanation or evidence I am just doing guesswork! I cant go into my exam with guesswork as my background knowledge! Can you please enlighten to an explanation of why the full 6 months of overlaps are not relieved at change of accounting date?
I thank you very much for you help! I also cant see where it is explained in the OT notes but I may be overlooking it!
Stacey
The example you quote is the situation where in the tax year of assessment, here 2011/12, you have a long period of account (15 months) that ends. Your reasoning is exactly right that from the 2nd tax year onwards until the final tax year HMRC will assess the trader on 12 months of profit – the only question is which 12 months! Therefore as we have the profits of a 15 month period we need to credit back 3 months of the overlap profits to bring the assessment back down to 12 months.
The remaining 3 months of overlap profit would be deducted as normal in establishing the assessment for the final tax year.
See OT notes page 43, scenario 2 followed by example 6 – hope this helps
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