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Business Income Manual

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Computation of liability: basis periods - change of accounting date in the opening years of trade

S215 Income (Trading and Other Income) Act 2005

There are special rules for a change of accounting date which takes place in the opening years of trade.

The conditions which have to be met for changes of accounting date in year 4 and later years to be effective (see BIM81045) do not apply to changes which occur in years 1, 2 or 3. Where a change of accounting date occurs in those early years, basis periods are determined as follows:

Year 1

The normal basis period rules for Year 1 apply, see BIM81015. The basis period for Year 1 is always the period from the date that the trade commenced to 5 April at the end of Year 1.

Year 2

The normal basis period rules for Year 2 apply, see BIM81015. The basis period for Year 2 is:

  • 12 months to the accounting date in Year 2 - if that date is 12 months or more after the date of commencement;
  • 12 months from the date trading commenced - if the accounting date in Year 2 is less than 12 months after the date of commencement.

Where no accounts end in Year 2, and the accounting dates in Years 1 and 3 are not the same, there is a change of accounting date in Year 2. This is because Year 2 is the first tax year in which accounts are not drawn up to the old accounting date, see BIM81035.

Year 3

If the new accounting date in Year 3 is 12 months or less after the end of the basis period for Year 2, the basis period for Year 3 is 12 months to the accounting date in Year 3, see BIM81015.

If the new accounting date in Year 3 is more than 12 months after the end of the basis period for Year 2, the basis period for Year 3:

  • Begins immediately after the basis period for Year 2; and
  • Ends with the new accounting date in Year 3.

Example 1 - change of accounting date in Year 2 - new date more than 12 months after commencement

A new trade starts on 1 July 2012 and prepares its first accounts to 31 December 2012. The second accounts involve a change of accounting date to 30 September 2013 and accounts are prepared to 30 September each year thereafter.

The basis periods are:

2012-2013 Year 1 9 months from 1 July 2012 to 5 April 2013
     
2013-2014 Year 2 12 months to 30 September 2013
2014-2015 Year 3 12 months to 30 September 2014

The basis period for 2013-2014 is 12 months to the accounting date in Year 2 (30 September 2013) as that date is 12 months or more after the date of commencement.

The 6 month period from 1 October 2012 to 5 April 2013 is an overlap period. The profits for this overlap period will qualify for overlap relief in a later year, see BIM81075.

Example 2 - change of accounting date in Year 2 - new date less than 12 months after commencement

A new trade starts on 1 July 2012 and prepares its first accounts to 31 December 2012. The second accounts involve a change of accounting date to 30 April 2013 and accounts are prepared to 30 April thereafter.

The basis periods are:

2012-2013 Year 1 9 months from 1 July 2012 to 5 April 2013
     
2013-2014 Year 2 12 months to 30 June 2013
2014-2015 Year 3 12 months to 30 April 2014
2015-2016 Year 4 12 months to 30 April 2015

The basis period for 2013-2014 is the 12 months from commencement. Although there has been a change of accounting date in Year 2, the new date (30 April 2013) falls less than 12 months after trading commenced on 1 July 2012.

The 9 month period from 1 July 2012 to 5 April 2013 is an overlap period. The profits for this overlap period will qualify for overlap relief in a later year, see BIM81075.

The basis period for 2014-2015 (Year 3) is 12 months to the accounting date in 2014-2015 as this is 12 months or less after the end of the basis period for Year 2.

The 2 month period from 1 May 2013 to 30 June 2013 is also an overlap period. The profits for this overlap period will qualify for overlap relief in a later year, see BIM81075.

Example 3 - change of accounting date in Year 2 - accounts not prepared to a date in Year 2

A new trade starts on 1 July 2012 and prepares its first accounts to 31 December 2012. The second accounts involve a change of accounting date to 30 April 2014 and accounts are prepared to 30 April thereafter.

The basis periods are:

2012-2013 Year 1 9 months from 1 July 2012 to 5 April 2013
     
2013-2014 Year 2 12 months to 30 June 2013
2014-2015 Year 3 12 months to 30 April 2014
2015-2016 Year 4 12 months to 30 April 2015

There is a change of accounting date in 2013-2014, the first year to which accounts are not prepared to the old accounting date of 31 December. As no accounts are drawn up to a date in 2013-2014, the accounting date for that year is 30 April 2013, the date in 2013-2014 which corresponds to the new date (30 April) to which accounts will be drawn up in later years.

The basis period for 2013-2014 is the 12 months from commencement. Although there has been a change of accounting date in Year 2 the new date (30 April 2013) falls less than 12 months after trading commenced on 1 July 2012.

The 9 month period from 1 July 2012 to 5 April 2013 is an overlap period. The profits for this overlap period will qualify for overlap relief in a later year, see BIM81075.

The basis period for 2014-2015 (Year 3) is 12 months to the accounting date in 2014-2015 as this is 12 months or less after the end of the basis period for Year 2.

The 2 month period from 1 May 2013 to 30 June 2013 is also an overlap period. The profits for this overlap period will qualify for overlap relief in a later year, see BIM81075.

Example 4 - change of accounting date in Year 3 - new date less than 12 months after Year 2 basis period

A new trade starts on 1 October 2014 and prepares its first accounts to 30 September 2015. The second accounts are prepared for 9 months from 1 October 2015 to 30 June 2016

The basis periods are:

2014-2015 Year 1 6 months from 1 October 2014 to 5 April 2015
     
2015-2016 Year 2 12 months to 30 September 2015
2016-2017 Year 3 12 months to 30 June 2016

Because the accounts to the new accounting date in Year 3 are for less than 12 months, the basis period for Year 3 is 12 months to the new accounting date in Year 3 (30 June 2016).

The 6 month period from 1 October 2014 to 5 April 2015 is an overlap period. The profits for this overlap period will qualify for overlap relief in a later year, see BIM81075.

The 3 month period from 1 July 2015 to 30 September 2015 is also an overlap period. The profits for this overlap period will qualify for overlap relief in a later year, see BIM81075.

Example 5 - change of accounting date in Year 3 - new date 12 months or more after Year 2 basis period

A new trade starts on 1 July 2012 and prepares its first accounts for 11 months to 31 May 2013. The second accounts are prepared for 18 months from 1 June 2013 to 30 November 2014.

The basis periods are:

2012-2013 Year 1 9 months from 1 July 2012 to 5 April 2013
     
2013-2014 Year 2 12 months to 30 June 2013
2014-2015 Year 3 17 months from 1 July 2013 to 30 November 2014
2015-2016 Year 4 12 months to 30 November 2015

Because the accounts to the new accounting date in Year 3 are for more than 12 months, the basis period for Year 3 begins immediately after the basis period for Year 2 and ends with the new accounting date in Year 3.

The 9 months period from 1 July 2012 to 5 April 2013 is an overlap period. The profits for this overlap period will qualify for overlap relief in a later year.

As the basis period for 2014-2015 is longer than 12 months (by 5 months), overlap relief for 5 months worth of the 9 months overlap profits can be given in 2014-2015, see BIM81090.