Basis Periods

oh confused one

This is my big sticking point it just will not sink in and my tutor was absolutely no help at all - in fact he was quite dismissive of my not understanding it - and pointed out if I didn't know something that simple why was I doing the exam (nice person he is).
Can someone please please give me an easy way to understand this - I am getting so stressed about it

pirate

Hiya oh confused one
someone just put another thread on the same topic and its got a good answer if you want to take a look but I will have a stab at giving you a hand.

Basically think of it like this the day the company starts is the first day of the basic period so if a company starts on 1 june 2009 and produces acounts tothe 31 May 2010,then the first period of assessment is the tax year 09/10

Next we need to work out the amount we will tax them on.
so if this year produced taxable profits of 90,000 then because the tax year runs from
6th April to 5th April, we need to adjust for the first year
so we have 12 months of accounts but we only need to pay tax in the first year on 10 months of them so we pay tax on £75000.

Ok so now for year 2 which will be assessed in the tax year 10/11.
Year 2 is the tricky one as there could be 3 options (no for this company)
the next question to ask is do we account accounting date which ends in this tax year
we do in this example as the account run up to 31st May 2010 .
Next question is is there at least 12 months of accounts which run up to the accounting date and in this case there is so we can use the whole of the accounts from 1 June 09 to 31 May 2010. So in the 10/11 tax year we pay tax on £90,000

As we have already paid tax on £75000 of this £90,000 we effectively pay tax twice in the first two year as we have paid tax on the first 10 months of the business which is on £75000 of profits twice, so we have overlap profits of £75000,

This is fairly simple and covers most scenarios
but if you end up with a long set of accounts as the first set of accounts say for 20 months or something, then you need to ask a third question when assessing the basis period for the second year
The third question is is there an end accounting date which falls into this second tax year and if the answer is no then you always use the actual tax year as a basis

Here is an example
Oh confused one starts a business on 01 feb 2009
and produces accounts until 30 June2010. this is effectively a set of accounts that is for 17 months. the profits for this period are 34,000
So the first year is
the tax year will be 08/09. We will pay tax on 2 months from feb 09 to 5th April 2009 so it will be 34000 x 2/17= 4,000
the next tax year the 2nd one is 09/10. Which is April 09 to April 2010. Lets ask our questions are there at least 12 months accounts, the answer is yes. The next question do we have a date in our accounts that ends in the tax year, well it ends on 30 June 2010 so the answer is no, therefore we will do for the actual tax year 6th April 2009 and 5th April 2010.
So we do 34000 x 12/17 = 24000
Now for year 3. Which is April 2010 to April 2011 Do we have a set of accounts for 12 months and we do and do we have an accounting date that ends in that tax year and we do, its the 12 June 2010
So we do the 12 months to 12 June 2010
So 34000 x 12/17 = 24000

As you can see from a set of accounts 17 months long which had profits of 34000 we have been taxed on 4000 + 24000+ 24000 so we have been taxed on 52000
Our overlap profits happens in the second year from 1 July 2009 to the 5th April 2010 which is 9/17 *34000 = £18000

Hope this helps.

Now he is an example for you to try

Person starts business on 1 dec 2008 and accounts are produced until 30 June 2009 and then for 12 months thereafter
Period to 30 June 2009 is 70,000
Period to 30 June 2010 is 60000

What are her taxable profits for the first 3 years

oh confused one

I just tried that example and couldn't make sense of it as the start was Dec 08 with the accounts being made up to June 09 only 7 months should I have taken it to June 10 and added the profits together - understood your other example tho

pirate

Basically

Year 1 is 08/09 so Dec 08 to April 09 so 4 months
we have 7 months of accounts. so its 4/7 giving 40,000 for 08/09

Year 2 ask the question have we an end date and the answer is yes and we ask have we got 12 months, if its less than 12 months then the basis is the first 12 months of the business
so we use Dec 08 to 30 June so 7 months
and then we use 5 months of the accounts we have for the next period
so 5/12 x 60,000k = 25000
toal is 70,000 + 25000

Essentialyl the first year is look at the start date and that the basis for working out the tax year. You just then calculate how many months there are between this and the end of the tax year which will always be 5th April

Year 2 is the complex one, so if we have 12 months of accounts and they end in the 2nd tax year ie between 6April xxxx and 5th april xxx then we can use them regardless of whether it started in that tax year
If we dont have 12 months of accounts for the second year then we just work out what 12 months of accounts would be.

I HTH it took me ages and I did loads of examples

but the rules have helped me a lot

K

oh confused one

So would the tax for this then be:-

Year one 4/7 of the profit to june 09

Year two the full 7 months profit to june 09 plus 5/12 of the following year profit (june 10)

oh confused one

BTW - thank you for all your help I am now fairly confident if it comes up I will cope

pirate

You've got it..you''ll be fine
Good luck later

Karen

pirate

Hey confused one

how did you do with the basis periods on the exam dare I ask

K

oh confused one

thought I had done ok but reading some of the answers on here now I am not sure at all - I need to see the paper again to double check. I did the 9 month bit then I did 3/12 to take it to the end of the tax year then I did the whole 12 months again - or something like that - brain too mashed to remember - as for the rest of the paper - well I WILL be resitting