Chapter 7 Current year basis and opening year rules Flashcards
7.2 Current year basis
A trader is allowed to make up accounts to whichever date he chooses, however he must allocate those profits to a tax year. We therefore tax the profits of a 12-month accounting period which ends in the tax year.
7.3 Commencement of Trade
Special rules apply when someone starts to trade, a trade actually commences when the main activity starts.
7.4 The first tax year
For the first tax year of trade, the period which we recognize for tax purposes (basis period) is straightforward. The profits are taxed from the date the trade started to the following 5 April.
7.5 The Second tax year
Determining the period which we recognize for tax purposes is for complicated. We first look at whether there is an accounting period ending in the second tax year. If the answer is yes, then we look at how long the accounting period is. If the accounting period is equal to or greater than 12 months, we tax the profits for the 12 months leading up to the accounting date.
If the accounting period is less than 12 months, we tax the profits in the first 12 months of trading. If there is not an accounting period in the second tax year of trading, the basis period for the second year is that actual tax year.
Under the current year basis rules (CYB) if a trader is trading throughout the whole of the tax year, we must tax exactly 12 months’ worth of profit. Consequently, if the first set of accounts is more than 12 months, we tax the last 12 months leading up to the end of the accounting period. Conversely, if the first set of accounts is less than 12 months long, we tax the first 12 months of trading, this will tax some of the appropriate profits from the next accounting period.
If there is no accounting date ending in the second tax year, we take the tax year itself to be the basis period.
The rules sometimes mean we tax the some of the same profits in two tax years. We will receive tax relief on this profit later.
7.6 The Third tax year
By the third tax year of trading, the amounts on which the trader will be taxed will usually be determined by the normal CYB rules (taxing the profits of the 12-month accounting period). This rule does not apply if the second year’s basis period is actually the second tax year, if this is the case, in the third tax year we tax the profits of the 12 months to the accounting date.
