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HMRC internal manual

Business Income Manual

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Computation of liability: basis periods - where first accounting date just before end of tax year

S208-S210 Income (Trading and Other Income) Act 2005

In applying the commencement rules for Years 1 and 2, accounts drawn up to 31 March, or 1, 2, 3 or 4 April are treated as equivalent to accounts prepared to 5 April unless the trader elects otherwise. This avoids the need to apportion profits, and prevents overlap profits arising, for the short period of up to 5 days at the end of Year 1.

The basis period for the tax year in which a trade commences (Year 1) is the period between the date of commencement and the end of that tax year. Where a new business adopts an accounting date between 31 March and 4 April, if there were no special rules:

  • If the business began between 1 and 5 April, up to 5 days worth of profits would be taxed for Year 1.
  • If the business began on or after 6 April, up to 5 days worth of profits from the following accounts would need to be added to make up the profits for the full basis period to 5 April in Year 1.

By treating accounts drawn up to 31 March, or 1, 2, 3 or 4 April as equivalent to accounts prepared to 5 April in certain circumstances, the profits for the period of up to 5 days at the end of Year 1 are treated as Nil.

An election for these special rules not to apply must be made on or before the first anniversary of the normal self assessment filing date for the tax year to which it relates.

Example 1 - if there is an accounting date in Year 1

The trade commences on 1 October 2012. Accounts are prepared to 31 March 2013 and 31 March 2014.

The basis period for 2012-13 ends on 31 March 2013. This is the accounting date in 2012-13.

The basis period for 2013-14 is 12 months to 31 March 2014 in the normal way.

The 5 days profits from 1 to 5 April 2013, which would count as profits for 2012-13 if there were no special rules, are deferred to the basis period for 2013-14.

Example 2 - no accounting date in Year 1 - trade commences before 1 April

The trade commences on 1 March 2013 and the first accounts are prepared to 31 March 2014.

The basis period for 2012-2013 starts on 1 March 2013 and ends on 31 March 2013. This is the date that corresponds to the first accounting date in Year 2 (2013-2014).

The basis period for 2013-2014 is 12 months from 1 April 2013 to 31 March 2014.

The 5 days profits from 1-5 April 2013, which would count as profits for 2012-2013, if there were no special rules, are deferred to the basis period for 2013-2014.

Example 3 - no accounting date in Year 1 - trade commences after 31 March

The trade commences on 1 April 2013 and the first accounts are prepared to 31 March 2014.

The profits and losses for 2012-2013 are treated as Nil.

The basis period for 2013-2014 is 12 months to 31 March 2014, in the normal way.

The 5 days profits from 1 to 5 April 2013, which would count as profits for 2013-2013 if there were no special rules, are deferred to the basis period for 2013-2014.