Basis Period Introduction

Basis Period Example: Period of account: 1st April 2022 to 31st March 2023 1st April 2022 6th April 2022

31st March 2023 5th April 2023

The period of account chosen by sole traders and partnerships is not always according to the tax year.

Basis Period Example: Period of account: 1st January 2022 to 31st December 2022 1st January 2022

31st December 2022 5th April 2022

6th April 2021

6th April 2022 5th April 2023

Basis Period ▪

Basis period are rules to create a link between the period of account and the tax years.

▪

The aim is to identify how much income/ profit is to be taxed in which tax year

Thank you…

5

Basis Period Current Year Basis

Current Year Basis For businesses that are a going concern i.e. are currently operational Basis Period Rule: Match the period of account to the tax year that it falls in

Example Period of account: 1st January 2022 to 31st December 2022

6th April 2022

5th April 2023

Therefore, the profits of the year ending 31st December, 2022 will be taxed in 22/23

Example Period of account: 1st July 2022 to 30th June 2023

6th April 2023

5th April 2024

Therefore, the profits of the year ending 30th June will be taxed in 23/24

Thank you…

10

Opening Year Rules Introduction

Opening Year Rules ▪

Applicable on a new business

▪

Initial links between the period of account and the tax year needs to be created

▪

After the first period of account is dealt with, the Current Year Basis (CYB) rule applies on the following period of accounts

1st Tax Year Rule ▪ Basis period will start from 1st day of trade till the following 5th of April.

Example 1st Period of Account: 1st October 2021 to 31st March 2022 – TATP £15,000 2nd Period of Account: 1st April 2022 – 31st March 2023 – TATP £24,000

Example 1st Period of Account: 1st October 2021 to 31st March 2022 2nd Period of Account: 1st April 2022 – 31st March 2023 ________________________________________________________________________________ 1st Tax Year Rule:

Start of trade: 1st October 2021 to following 5th April: 5th April 2022 – 2021/22 TATP £15,000 will be taxed in 2021/22 Now CYB rules can apply CYB: 1st April to 31st March 2023 – 2022/23

Example: Loss 1st Period of Account: 1st October 2021 to 31st March 2022 – (£15,000) 2nd Period of Account: 1st April 2022 – 31st March 2023 - £24,000 ________________________________________________________________________________

Basis Period: 2021/22: Opening year rule: Tax Adjusted Trading Loss of £15,000

2022/23: Ongoing business rule: Tax Adjusted Trading Profit of £24,000

Example 1st Period of Account: 1st July 2021 to 30th June 2022 2nd Period of Account: 1st July 2022 – 30th June 2023 ________________________________________________________________________________ 1st Tax Year Rule: Start of trade: 1st July 2021 to following 5th April: 5th April 2022 – 2021/22 TATP of 9 months will be taxed in 2021/22 But what of the remaining 3 months profits??

2nd Tax Year Rule If the first period of account

Is the period of account falling in the next tax year?

covers two or more tax years,

then the second link i.e. Basis

Yes

No

What is the length of the POA?

B.P.: 6th to 5th April

Period rules are as follows:

12 months

< 12 months

> 12 months

B.P.: Copy, paste POA

B.P.: 1st 12 months of trade

B.P.: Last 12 months of POA

Thank you…

19

Opening Year Rules POA = 12 months

2nd Tax Year Rule Is the period of account falling in the next tax year?

Yes

No

What is the length of the POA?

B.P.: 6th to 5th April

12 months

< 12 months

> 12 months

B.P.: Copy, paste POA

B.P.: 1st 12 months of trade

B.P.: Last 12 months of POA

Example

Tax adjusted trading profit

Period of account

£24000

1/1/2019 - 31/12/2019

£25000

1/1/2020 - 31/12/2020

£30000

1/1/2021 - 31/12/2021

£40000

1/1/2022 - 31/12/2022

Example

1st January 2019 -------------------------------------------------------- 31st December 2019 (12 months) 1st Tax Year Rule 1st January 2019 ---------------------- 5th April 2019 (3 months) Are the 1st period of account’s profits completely linked to a tax year? No – move on to the 2nd Tax Year Rule

Example

Tax adjusted trading profit

Period of account

Basis period

£24000

1/1/2019 - 31/12/2019 1/1/2019 - 05/4/2019

Tax year 18/19

Taxable profit £6000

Example

1st January 2019 ------------------------------- 31st December 2019

Is the period of account falling in the next tax year?

Next tax year

6th

April 2019 --------------------------------------------------------

5th

April 2020

Length of POA: 12 months

2nd Tax Year Rule 1st January 2019 ------------------------------- 31st December 2019

Yes

What is the length of the POA?

12 months

B.P.: Copy, paste POA

Example

Tax adjusted trading profit

Period of account

Basis period

£24000

1/1/2019 - 31/12/2019 1/1/2019 - 05/4/2019 1/1/2019 - 31/12/2019

Overlapping profits £6,000 for 3 months

Tax year

Taxable profit

18/19

£6000

19/20

£24000

Example

Tax adjusted trading profit

Period of account

£24000

1/1/2019 - 31/12/2019 1/1/2019 - 05/4/2019

£25000

Basis period

Tax year

Taxable profit

18/19

£6000

1/1/2019 - 31/12/2019

19/20

£24000

1/1/2020 - 31/12/2020 1/1/2020 - 31/12/2020

20/21

£25000

Overlapping profits £6,000 for 3 months

Example

Tax adjusted trading profit

Period of account

Basis period

£24000

1/1/2019 - 31/12/2019 1/1/2019 - 05/4/2019

Tax year

Taxable profit

18/19

£6000

1/1/2019 - 31/12/2019

19/20

£24000

£25000

1/1/2020 - 31/12/2020 1/1/2020 - 31/12/2020

20/21

£25000

£30000

1/1/2021 - 31/12/2021 1/1/2021 - 31/12/2021

21/22

£30000

Overlapping profits £6,000 for 3 months

Example Tax adjusted trading profit

Period of account

Basis period

£24000

1/1/2019 - 31/12/2019 1/1/2019 - 05/4/2019

Tax year

Taxable profit

18/19

£6000

1/1/2019 - 31/12/2019

19/20

£24000

£25000

1/1/2020 - 31/12/2020 1/1/2020 - 31/12/2020

20/21

£25000

£30000

1/1/2021 - 31/12/2021 1/1/2021 - 31/12/2021

21/22

£30000

£40000

1/1/2022 - 31/12/2022 1/1/2022 - 31/12/2022

22/23

£40000

Overlapping profits £6,000 for 3 months

Thank you…

30

Opening Year Rules POA < 12 months

2nd Tax Year Rule Is the period of account falling in the next tax year?

Yes

No

What is the length of the POA?

B.P.: 6th to 5th April

12 months

< 12 months

> 12 months

B.P.: Copy, paste POA

B.P.: 1st 12 months of trade

B.P.: Last 12 months of POA

Example Tax adjusted trading profit

Period of account

£12000

1/1/2019 - 30/6/2019

£30000

1/7/2019 - 30/6/2020

£30000

1/7/2020 - 30/6/2021

£40000

1/7/2021 - 30/6/2022

Example

1st January 2019 -------------------------------------------------------- 30th June 2019 (6 months) 1st Tax Year Rule 1st January 2019 ---------------------- 5th April 2019 (3 months) Are the 1st period of account’s profits completely linked to a tax year? No – move on to the 2nd Tax Year Rule

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£12000

1/1/2019 - 30/6/2019

1/1/2019 - 5/4/2019

18/19

£6000

Example

1st January 2019 ------------------------------- 30th June 2019

Is the period of account falling in the next tax year?

Next tax year

6th April 2019 -------------------------------------------------------- 5th April 2020 Length of POA: < 12 months

2nd Tax Year Rule 1st January 2019 ------------------------------- 31st December 2019 We will be borrowing from the next POA

Yes

What is the length of the POA?

< 12 months

B.P.: 1st 12 months of trade

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£12000

1/1/2019 - 30/6/2019

1/1/2019 - 5/4/2019

18/19

£6000

1/1/2019 - 31/12/2019 19/20

Working: £27000 = £12000 + (£30000 x 6/12)

£27000 (w)

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£12000

1/1/2019 - 30/6/2019

1/1/2019 - 5/4/2019

18/19

£6000

£30000

1/7/2019 - 30/6/2020

1/1/2019 - 31/12/2019 19/20

£27000 (w)

1/7/2019 - 30/06/2020 20/21

£30000

Overlap profit = £6,000 for 3 months and ( £30,000 x 6/12) £15000 for 6 months, so total overlapping profits are £21,000

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£12000

1/1/2019 - 30/6/2019

1/1/2019 - 5/4/2019

18/19

£6000

1/1/2019 - 31/12/2019 19/20

£27000 (w)

£30000

1/7/2019 - 30/6/2020

1/7/2019 - 30/06/2020 20/21

£30000

£30000

1/7/2020 - 30/6/2021

1/7/2020 - 30/6/2021

21/22

£30000

£40000

1/7/2021 - 30/6/2022

1/7/2021 - 30/6/2022

22/23

£40000

Overlap profit = £6,000 for 3 months and ( £30,000 x 6/12) £15000 for 6 months, so total

overlapping profits are £21,000 Working: £27000 = £12000 + (£30000 x 6/12)

Thank you…

40

Opening Year Rules POA > 12 months

2nd Tax Year Rule Is the period of account falling in the next tax year?

Yes

No

What is the length of the POA?

B.P.: 6th to 5th April

12 months

< 12 months

> 12 months

B.P.: Copy, paste POA

B.P.: 1st 12 months of trade

B.P.: Last 12 months of POA

Example Tax adjusted trading profit

Period of account

£30000

1/1/2019 - 31/3/2020

£30000

1/4/2020 - 31/3/2021

£30000

1/4/2021 - 31/3/2022

£40000

1/4/2022 - 31/3/2023

Example

1st January 2019 -------------------------------------------------------- 31st March 2020 (15 months) 1st Tax Year Rule 1st January 2019 ---------------------- 5th April 2019 (3 months) Are the 1st period of account’s profits completely linked to a tax year? No – move on to the 2nd Tax Year Rule

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£30000

1/1/2019 - 31/3/2020

1/1/2019 - 5/4/2019

18/19

£6000

Example

1st January 2019 ------------------------------- 31st March 2020

Is the period of account falling in the next tax year?

Next tax year Yes

6th April 2019 -------------------------------------------------------- 5th April 2020 Length of POA: > 12 months

2nd Tax Year Rule 1st April 2019 ------------------------------- 31st March 2020

What is the length of the POA?

> 12 months B.P.: Last 12 months of POA

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£30000

1/1/2019 - 31/3/2020

1/1/2019 - 5/4/2019

18/19

£6000

1/4/2019 - 31/3/2020

19/20

£24000

No overlapped profits

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£30000

1/1/2019 - 31/3/2020

1/1/2019 - 5/4/2019

18/19

£6000

1/4/2019 - 31/3/2020

19/20

£24000

£30000

1/4/2020 - 31/3/2021

1/4/2020 - 31/3/2021

20/21

£30000

£30000

1/4/2021 - 31/3/2022

1/4/2021 - 31/3/2022

21/22

£30000

£40000

1/4/2022 - 31/3/2023

1/4/2022 - 31/3/2023

22/23

£40000

Thank you…

49

Opening Year Rules POA covers 3 tax years

2nd Tax Year Rule Is the period of account falling in the next tax year?

Yes

No

What is the length of the POA?

2 B.P.: 6th to 5th April

12 months

< 12 months

> 12 months

B.P.: Copy, paste POA

B.P.: 1st 12 months of trade

B.P.: Last 12 months of POA

3 B.P.: Last 12 months of POA

Example Tax adjusted trading profit

Period of account

£36000

1/1/2018 - 30/6/2019

£30000

1/7/2019 - 31/6/2020

£30000

1/7/2020 - 31/6/2021

£40000

1/7/2021 - 31/6/2022

Basis period

Tax year

Taxable profit

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£36000

1/1/2018 - 30/6/2019

1/1/2018 - 5/4/2018

17/18

£6000

£30000

1/7/2019 - 31/6/2020

£30000

1/7/2020 - 31/6/2021

£40000

1/7/2021 - 31/6/2022

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£36000

1/1/2018 - 30/6/2019

1/1/2018 - 5/4/2018

17/18

£6000

6/4/2018 - 5/4/2019

18/19

£24000

£30000

1/7/2019 - 31/6/2020

£30000

1/7/2020 - 31/6/2021

£40000

1/7/2021 - 31/6/2022

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£36000

1/1/2018 - 30/6/2019

1/1/2018 - 5/4/2018

17/18

£6000

6/4/2018 - 5/4/2019

18/19

£24000

1/7/2018 - 30/6/2019

19/20

£24000 (w)

£30000

1/7/2019 - 31/6/2020

£30000

1/7/2020 - 31/6/2021

£40000

1/7/2021 - 31/6/2022

Working £36,000 x 12/18 = £24,000 Overlapping profits 36,000 x 9/12= £18,000

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£36000

1/1/2018 - 30/6/2019

1/1/2018 - 5/4/2018

17/18

£6000

6/4/2018 - 5/4/2019

18/19

£24000 (w)

1/7/2018 - 30/6/2019

19/20

£24000 (w)

£30000

1/7/2019 - 31/6/2020

1/7/2019 - 30/6/2020

20/21

£30000

£30000

1/7/2020 - 31/6/2021

1/7/2020 - 30 /6/2021

21/22

£30000

£40000

1/7/2021 - 31/6/2022

1/7/2021 - 30/6/2022

22/23

£40000

Working £36,000 x 12/18 = £24,000 Overlapping profits 36,000 x 9/12= £18,000

Thank you…

57

Basis Period Closing Year Rules

Closing Year Rule ▪

Basis period will be that period of account or periods of accounts whichever are ending in the tax year of cessation.

▪

In cessation tax year all of the overlap profits will be deducted

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£30000

1/7/2019 - 31/6/2020

1/7/2019 - 30/6/2020

20/21

£30000

£30000

1/7/2020 - 31/6/2021

1/7/2020 - 30 /6/2021

21/22

£30000

£40000

1/7/2021 - 31/6/2022

1/7/2021 - 30/6/2022

22/23

£22,000

Overlapping profits = £18,000 In 2022/23 TATP will be 40,000 – 18,000 = 22,000

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£30000

1/7/2019 - 31/6/2020

1/7/2019 - 30/6/2020

20/21

£30000

£30000

1/7/2020 - 31/6/2021

1/7/2020 - 30 /6/2021

21/22

£40000

1/7/2021 - 31/3/2022

1/7/2021 - 31/3/2022

21/22

Overlapping profits = £18,000

Example Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£30000

1/7/2019 - 31/6/2020

1/7/2019 - 30/6/2020

20/21

£30000

£30000

1/7/2020 - 31/6/2021

£40000

1/7/2021 - 31/3/2022

1/7/2020 - 31/3/2022

21/22

£52,000

Overlapping profits = £18,000 In 2021/22 TATP will be 30,000 + 40,000 – 18,000 = 52,000

Thank you…

63

Basis Period Planning

Choosing an Accounting End Date ▪

Better cashflow management

▪

Tax saving in certain cases

Choosing an Accounting End Date Before 5th April

After 5th April

• No overlap profits arise

• Overlap profits created

• Reduced time to consider tax planning

• Time to work out tax planning measures

aspects

• Tax return and associated tax payment due soon

• Maximum interval in submitting of return

and paying the tax liability

Considerations for Opening Years ▪

Possibility of overlapped profits is higher

▪

Reduced profit in the initial period of account to keep a control on the tax amount

▪

Increased allowable expenses:

•

Pre-trading expenditure

•

Leasing capital items

Thank you…

Basis Period Change of Accounting Date: Introduction

Introduction ▪

Accounting end date of an ongoing business can be changed for any reason

▪

Application of special basis period rules on the new period of account created, to bring business back to current year basis

Conditions ▪

Period of account to the new end date ≤ 18 months

▪

No change to account end date in the previous 5 tax years •

If accounting date end changed in previous 5 tax years: approval of HMRC needed for the current proposed accounting end date change – commercial purpose

▪

Notify HMRC: By 31 January following the tax year in which the change is made

Impact ▪

New period of account < or > 12 months (cap of 18 months)

▪

Application of special basis period rules: •

Overlap profits created

•

Overlap profits relieved

Possible Scenarios Change in accounting date

Period of Account ending in the tax year < 12 months

Period of Account ending in the tax year > 12 months

Period of Account skips a tax year

B.P: 12 m to new POA end date

B.P: the POA itself plus option to relieve overlap profits

1 B.P: 12 m to new POA end date falling in the skipped tax year 2 B.P: 12 months to actual new POA end date

Thank you…

Basis Period Change of Accounting Date: New POA < 12 months

Rule ▪ 12 months to the new accounting date

Example

Tax adjusted trading profit

Period of account

£12000

1/4/2020 – 31/3/2021

£15000

1/4/2021 – 30/6/2021

£25000

1/7/2021 – 30/6/2022

Example

Tax adjusted trading profit

Period of account

Basis period

£12000

1/4/2020 – 31/3/2021

1/4/2020 – 31/3/2021

Tax year 20/21

Taxable profit £12000

Example

1st April 2021 -------------------------------------------------------- 30th June 2021 (3 months) Change of Accounting Date Rule: New POA < 12 months ending in the tax year 1st July 2020 ---------------------- 30th June 2021 (12 months) 3 months profits of the actual new POA itself plus 9 months profits of the previous POA overlapped

Example

Tax adjusted trading profit

Period of account

Basis period

£12000

1/4/2020 – 31/3/2021

1/4/2020 – 31/3/2021

20/21

£12000

£15000

1/4/2021 – 30/6/2021

1/7/2020 – 30/6/2021

21/22

£24000 (W1)

(W1) Taxable profits = (£12,000 x 9/12) + £15,000 = £24,000 Overlapping profits = (£12,000 x 9/12) = £9,000

Tax year

Taxable profit

Example

Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£12000

1/4/2020 – 31/3/2021

1/4/2020 – 31/3/2021

20/21

£12000

£15000

1/4/2021 – 30/6/2021

1/7/2020 – 30/6/2021

21/22

£24000

£25000

1/7/2021 – 30/6/2022

1/7/2021 – 30/6/2022

22/23

£25000

Thank you…

Basis Period Change of Accounting Date: New POA > 12 months

Rule ▪ The basis period is the entire new period of account itself ▪ The basis period will exceed twelve months ▪ In this situation, overlap profits brought forward can be relieved

▪ The overlap can reduce the number of months of profit taxed down to twelve, but no further

Example

Tax adjusted trading profit

Period of account

£12000

1/1/2020 – 31/12/2020

£30000

1/1/2021 – 31/3/2022

£25000

1/4/2022 – 31/3/2023

Overlap profits of 4 months were £12000

Example

Tax adjusted trading profit

Period of account

Basis period

£12000

1/1/2020 – 31/12/2020 1/1/2020 – 31/12/2020

Tax year 20/21

Taxable profit £12000

Example

1st January 2021 -------------------------------------------------------- 31st March 2022(15 months) Change of Accounting Date Rule: New POA > 12 months ending in the tax year 1st January 2021 ---------------------- 31st March 2022 (15 months) 3 months in excess of the regular 12 months basis period So 3 months worth of overlap profits can be relieved in this situation

Example

Tax adjusted trading profit

Period of account

Basis period

£12000

1/1/2020 – 31/12/2020 1/1/2020 – 31/12/2020

20/21

£12000

£30000

1/1/2021 – 31/3/2022

21/22

£21000

1/1/2021 – 31/3/2022

Overlap profits relief = £30000 - (£12,000 x 3/4) = £21,000

Tax year

Taxable profit

Example

Tax adjusted trading profit

Period of account

Basis period

Tax year

Taxable profit

£12000

1/1/2020 – 31/12/2020 1/1/2020 – 31/12/2020

20/21

£12000

£30000

1/1/2021 – 31/3/2022

1/1/2021 – 31/3/2022

21/22

£21000

£25000

1/4/2022 – 31/3/2023

1/4/2022 – 31/3/2023

22/23

£25000

Thank you…

Basis Period Change of Accounting Date: Skipped Tax Year

Example

Tax adjusted trading profit

Period of account

£12000

1/4/2020 – 31/3/2021

£30000

1/4/2021 – 30/6/2022

£36000

1/7/2022 – 30/6/2023

Example

Tax adjusted trading profit

Period of account

Basis period

£12000

1/4/2020 – 31/3/2021

1/4/2020 – 31/3/2021

Tax year 20/21

Taxable profit £12000

Example

Tax adjusted trading profit

Period of account

Basis period

£12000

1/4/2020 – 31/3/2021

1/4/2020 – 31/3/2021

£30000

1/4/2021 – 30/6/2022

Tax year 20/21 21/22

Taxable profit £12000

Rule ▪ There will be 2 basis periods created ▪ The 1st Basis Period will be arrived at in 2 steps: 1. Pick up the new POA end date and deduct 1 year/ 12 months from it 2. Create the Basis Period using 12 months to date worked out in step 1 ▪ The 2nd Basis Period will be the 12 months to the new POA end date ▪ Overlapping will occur

Example

1st April 2021 -------------------------------------------------------- 30th June 2022(15 months) Change of Accounting Date Rule: Tax Year Skipped 1st Basis Period 30th June 2022 – 1 year = 30th June 2021 1st B.P.: 12 months to this date: 1st July 2020 – 30th June 2021 2nd B.P.: 12 months to new POA end date: 1st July 2021 – 30th June 2022

Example

Tax adjusted trading profit

Period of account

Basis period

£12000

1/4/2020 – 31/3/2021

1/4/2020 – 31/3/2021

20/21

£12000

£30000

1/4/2021 – 30/6/2022

1/7/2020 – 30/6/2021

21/22

£15000 (W1)

1/7/2021 – 30/6/2022

22/23

£24000 (W2)

W1: Taxable profits = (£30000 x 3/15) + (£12,000 x 9/12) = £15,000

W2: (£30000 x 12/15) = £24,000 Overlap profits = (£12,000 x 9/12) = £9,000

Tax year

Taxable profit

Example

Tax adjusted trading profit

Period of account

Basis period

£12000

1/4/2020 – 31/3/2021

1/4/2020 – 31/3/2021

20/21

£12000

£30000

1/4/2021 – 30/6/2022

1/7/2020 – 30/6/2021

21/22

£15000

1/7/2021 – 30/6/2022

22/23

£24000

1/7/2022 – 30/6/2023

23/24

£36000

£36000

1/7/2022 – 30/6/2023

Tax year

Taxable profit

Thank you…