BIM74065 - Abolition of the cash basis: accounts drawn up to 05/04/2000

Text of Tax Bulletin article

Where a business has drawn up accounts to 5 April 2000 ( which here means 5 April and not 31 March) and no accounts were made up to a date earlier in the tax year 1999/00, the catching up charge is to be calculated as at 6 April 2000 and spread over the ten years of assessment 2000/01 to 2009/10 inclusive (subject to any election to accelerate payment).

The text of an article on this in the February 1999 Tax Bulletin is as follows

The last issue of Tax Bulletin (December 1998, page 606) mentioned the changes made in the 1998 Finance Act to the system of taxing professional businesses. One consequence of the legislation is that there is a 'catch-up' charge when a business changes from its old basis (often a 'cash' or 'conventional' basis) to the new basis required by statute (a `true and fair view` basis).

The `catch-up` charge works by calculating an 'adjustment' amount and then charging this amount to tax, generally speaking over ten years. The `adjustment` amount is in effect the difference between `opening` figures on the new basis and `closing` figures on the old basis. The Appendix (see example 1 in BIM74055) to this article shows how this works for a business with a 30 April year end. For simplicity this article, and the Appendix, refer to `accounts` being drawn up on the old and new basis although the legislation affects only the computation of profits for tax purposes. Thus businesses can continue to draw up accounts on whatever basis suits their needs and then make any adjustments required by the legislation before entering figures in their tax return.

The new basis applies for all accounting periods beginning after 6 April 1999, and the `adjustment` amount is calculated as at the first day of the first period on the new basis. This will be a date between 7 April 1999 and 6 April 2000 (inclusive). The result will be that (as the example in the Appendix shows) the charge to tax is normally for ten tax years starting with 1999-2000 (subject to any election to accelerate payment). However, where a business draws up accounts to 5 April 2000, and no accounts are drawn up to an earlier date in the tax year 1999-2000, the 'adjustment' will be calculated as at 6 April 2000 and it will be charged to tax over the ten tax years starting with 2000-01 (subject to any election to accelerate payment).

Where accounts are drawn up to any earlier date in 1999-2000 (including 31 March 2000 even though this is treated for some purposes as the end of the tax year) the `adjustment` is charged to tax over the ten tax years starting with 1999-2000.

The instalments of the 'catch-up' charge will need to be included in tax returns, generally for the year ended 5 April 2000 and later years. We shall be giving guidance with those tax returns as to how the `catch-up` charge should be returned.