Chapter 4: Sole Traders - Basis periods Flashcards
True or False
A trader can make up their accounts for any accounting period.
True
What is Current year basis?
HMRC will tax profits in the fiscal year in which the accounting period ends.
Known as Current Year Basis
First year of trade
For example:
Sole trader began trading 01/01/2021.
Year end 31/01/2021
Profits of £240,000
How much to be taxed in the first year of trade?
HMRC will tax profits from the First day of trade to the next 5 April
01/01/2021 - 05/04/2021
£240,000 * 3/12 = £60,000
Ignore 5 days in April - calculate to the nearest month
Second year of trade
Actual Basis
Ref material
HMRC will tax 12 months of profit that ends in the 2nd fiscal year
2nd year of trade - Less than 12 months
Ref material
First 12 months are taxed
2nd year of trade - more than 12 months
Ref Material
Last 12 months are taxed
2nd year of trade - no accounting period
Ref material
Actual Basis
Profits that arise in that year are taxed instead
3rd year of trade
Ref material
12 months of adjusted profits to the end of the accounting period ending in the fiscal year
Overlap profits
profits which have been taxed more than once
Ceasing trade
Ref material
All untaxed profits are assessed in the final year and any overlap profits are deducted
Choice of accounting date - avoiding overlapping profits
Select 31 March or 5 April
Administratively straightforward
However businesses often make little or no profits in the early year of trading
Choice of accounting date - Timing of tax payments and fillings
31 March 2021 and 30 April 2021
First tax year
Filing Date
Balancing payment date
31 Mar 2021
First tax year : 2020/21
Filing Date: 30 Jan 2022
Balancing payment date: 31 January 2022
30 April 2021
First tax year: 2021/22
Filing Date: 31 Jan 2023
Balancing payment date: 31 Jan 2023
