Basis periods and capital allowances

Anne Boleyn
Anne Boleyn Registered Posts: 196 Dedicated contributor 🦉
Hi Everyone

This is the first time I've had to deal with basis periods since my studies, I would appreciate some help. This is what I have at the moment.

Client started trading 01/12/06
1st year 01/12/06 - 05/04/07
2nd year 01/12/06 - 30/11/07
3rd year 01/12/07 - 30/11/08

In the first year the net profit in the accounts was £1808 then with add backs and deducting the Capital allowances the resulting figure is (£2574). This was entered onto the 2007 TR by previous accountants.

When I work out the profits for the second year, which start with £3401 plus depreciation £1744 do I deduct the whole of the years Capital allowances although they were included within the first year? The profits are included twice so maybe the CA's are as well.

My gut feeling is not as they would be getting them twice but I'm not sure. Each time I convince myself that one way is right I start to think the other is.

I'm sorry if this is obvious to everyone but me, I would be grateful for some guidance.


  • Poodle
    Poodle Registered Posts: 711 Epic contributor 🐘
    Hi Anne,

    Forget the actual logistics of how you adjust for CA's in early years, why are you doing this anyway.

    Unless the individual has income elsewhere, when you add back the depreciation then the profits are only £5,145 and since this would be under the personal allowance for 2007-08 you do not have to use (waste!) the capital allowances this year, roll them forward and use against futue profits.

    You should also look at what the previous accountant did and possibly adjust the 2007 tax return to remove the wasteful use of CA's there, to offset in the future as well.

  • JodieR
    JodieR Registered Posts: 1,002 Beyond epic contributor 🧙‍♂️
    Aside from the capital allowances which I agree with Poodle on, you need to decide when the client's books are drawn up to. If the previous accountant drew up the accounts to 05/04/07 then it would be simpler for you to draw up the next year from 06/04/7 to 05/04/08 and declare this amount on the 2007/08 return.
    If for whatever reason the client wants a year end of 30/11 each year, then the amount declared on the 2006/07 tax return should have been calculated as the profit for year end 30/11/07 divided by 12(months) multiplied by 4(months - December to March). Really this calculation should be in days. As £3401 / 12 x 4 does not equal the £1808 declared, my guess is that either estimated figures were used as the return was submitted before the end of November 07, or, as in my first suggestion, the accounts were just drawn up to 5 April.

    If you do want to keep the year end as 30 November then you'll need to amend the 2006/07 return with the final figures, and then whatever profit you declare on that return will be your 'overlap profit' on future returns and can be deducted off the final profits when the client ceases trading. You will then just declare the profits for the y/end 30/11/07 on the 2007/08 return, profits for y/end 30/11/08 on 2008/09 etc.

    Just another quick note - if you do go down the overlap profits route there is no box on the short self employment supp pages for the overlap figure, but I have spoken to HMRC about this and they say that you can just make a note in the additional information box.

  • Anne Boleyn
    Anne Boleyn Registered Posts: 196 Dedicated contributor 🦉

    Thanks to you both for taking the trouble to reply. Client wants to keep 30/11 as year end and there was other income in the first year.
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