Hypothetical question re basis periods

System
System Posts: 100,537 🤖 Admin 🤖
edited June 9 in General accounting discussion

Say a sole trader starts trading on 1 March 2006 and wants to prepare accounts to 28 Feb. How would you prepare their 2005/06 tax return as you'll not know what the profit for the first year is (to appotion) before the return needs to be filed.
I guess you'd just have to file estimates & amend the return later - is that what would happen?

Comments

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Hypothetical question re basis periods

    If the year end is 28 February 2007, surely the 2005/2006 Tax Return should not include these accounts?! :?:
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Hypothetical question re basis periods

    Shouldn't the 2005/06 return include 1 month's profit which then becomes the overlap profit?
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Hypothetical question re basis periods

    The basis period for the first tax year runs from the date the trade starts to the next 5 Apr
    1 Mar 06 to 5 Apr 06

    2nd year slightly more tricky
    Does a period of account end in 2nd tax year
    = Yes 28 Feb 2007
    How long is the period of account
    = less than 12 months
    Basis period is first twelve months of trade
    1 Mar 06 - 28 Feb 07

    This would produce overlap profits which can only be relieved on a change of accounting date or when the trade ceases

    Hope this helps
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Hypothetical question re basis periods

    yip, i follow what you're saying there, but my understanding is that for the first year although the basis period is from 1 March to 5th April, you'll not be assessed on the profits actually made during that period, but rather on one twelfth of the profits of the first year, and you'll not know that amount until after the tax becomes due. :?:
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Hypothetical question re basis periods

    You are absolutely right Jodie.

    You would have to submit provisional figures and then resubmit when the final figures are known.

    As a practical point, in these situations it is very likely that I would just prepare a short period of account to 5th April to avoid the hassle.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Hypothetical question re basis periods

    I agree with Dean - just do a short set of accounts, and explain to client that they will have (no choice here) a year end of 5 April - once you explain to them that they will have to pay tax twice, they soon see things from your point of view :lol:

    Claudia
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Hypothetical question re basis periods

    thanks :D, as i say, this is a hypothetical situation - i don't actually have any clients wanting a 28 Feb year end. i've got one with a year end of 31 Jan, but he's had that since the 80's so no first year worries there!

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