Computation of liability: introduction to 'previous year' basis period rules
For a trade, profession or vocation which commenced before 6 April 1994:
- The ‘previous year’ basis period rules applied for 1995-1996 and earlier years. This paragraph gives an outline of those rules.
- There were transitional rules for 1996-1997 to bring the trade on to the current year basis, see BIM81105.
- Traders who change their accounting date or cease to trade after 1997-98 may claim transitional overlap relief, see BIM81110.
The general rule under the ‘previous year’ basis of assessment was that for any tax year, Income Tax was charged on the profits of the previous tax year. Where accounts were prepared for a 12 month period to a date in the previous tax year, the assessment for the current tax year was based on the profits shown by those accounts.
Example: where a trader had been in business for many years and made up their accounts each year to 31 December, their basis period for 1992-1993 would have been the 12 months to 31 December 1991.
Different rules applied to the early years after the trade commenced, and to the year of cessation and the years immediately before it.
The following table summarises the basis period rules for each year under the ‘previous year’ basis:
|1||Date trade commenced to 5 April in Year 1.|
|2||12 months from date trade commenced (unless a claim was made for both Years 2 and 3 to be based on the ‘actual profits’ of those years).|
|3||(a) Where future accounting date in Year 2 is more than 12 months after date trade commenced - 12 months to that date (unless a claim for actual profits was made).|
|(b) Where future accounting date in Year 2 is less than 12 months after date trade commenced - 12 months from date trade commenced (unless a claim for actual profits was made).|
|4 onwards||12 months to accounting date ending in previous tax year (see General Rule).|
|Antepenultimate and penultimate years||Where aggregate profits of the antepenultimate and penultimate years exceeded the amounts assessed for those two years under the General Rule, the assessments were adjusted to the actual profits for those years.|
|Year trade ceased||6 April in final year to date of cessation.|
Note that under the General Rule, the assessment for the penultimate year was based on the profits of the accounting period ending in the previous year. The assessment for the final year was based on the current year profits. As a result, some profits in the closing years were not taxed.
Example: Julie traded for many years with an accounting date of 30 April. She ceased trading on 30 June 1992. Under the previous year rules, her final basis periods were:
|1991-1992||12 months to 30 April 1990|
|1992-1993||6 April 1992 to 30 June 1992|
The profits for the period 1 May 1990 to 5 April 1992 were not taxed. If, alternatively, the penultimate and antepenultimate years were assessed on an ‘actual basis’, this closing years profits gap would arise two years earlier.
Businesses which commenced trading under the previous year basis and continued trading under the current year basis lost the advantage of the closing years profits gap and were potentially subject to an acceleration of taxable profits as they transferred to the current year basis. Transitional relief was given to adjust for these factors. See BIM81105 and BIM81110.