Trading Profits - basis of assessment

Question 1

Why are rules needed?

Answer 1

Rules are needed to link a period of account of a business with a tax year to find the amount of taxable trading profits for that year.

Question 2

What is a basis period?

Answer 2

The period which is taxable in a particular tax year is called a basis period because it is the basis of assessment for that tax year.

Question 3

What is the current year basis (CYB)?

Answer 3

Under the current year basis, the basis period for the tax year is the taxable trading profits for the 12-month period of account ending in that tax year.

Question 4

Are special rules needed in the opening years of business?

Answer 4

Yes

Question 5

Which rule is applied in the first year?

Answer 5

In the first tax year, the actual basis applies.

Question 6

What is meant by the actual basis?

Answer 6

This means that the taxable trading profits for the first tax year are the taxable trading profits of the business from the date of commencement to the following 5 April.

Apportioned to nearest month.

Question 7

What does the basis of assessment for the second year depend on?

Answer 7

The basis of assessment in the second tax year

depends on the length of the period of account ending in the second tax year.

Question 8

How do overlap profits arise?

Answer 8

Choosing a period of account which ends on a date other than 5 April will result in this double counting and any trading profits taxed more than once are called overlap profits.

Question 9

What is the final tax year?

Answer 9

The final tax year is the tax year in which the business ceases to trade.

Question 9

what are the three tax year basis rules?

Answer 9

• commencement of trade
• ongoing business
• cessation of trade

Question 10

what is the rule for commencement of trade?

Answer 10

• the first year in which the trader will be taxed on is the year in which the trader starts trading
• tax profits from the start date to the following 5th April

Question 11

what is the rule for the late date accounting?

Answer 11

• tax profits as if it ends on 5th April if the year end date falls between 31st March - 4th April

Question 12

what is the rule of the company is ceasing to trade?

Answer 12

sole trader will be taxed from 6th April to the date of cessation

Question 13

what do we do is there is a change in profit sharing ratio for partnerships?

Answer 13

trading profit should be split into the periods of the different profit sharing agreements

Question 14

what steps are different different when taxing a partnership?

Answer 14

• Share tax adjusted profit between the partners using profit sharing agreement (salary, interest)
• Tax each partner individually using the tax year basis