BIM71020 - Computation of liability: basis periods - where first accounting date just before end of tax year

In applying the commencement rules for Years 1 and 2, accounts drawn up to 31 March, or 1, 2, 3 or 4 April are treated as equivalent to accounts prepared to 5 April unless the trader elects otherwise. This avoids the need to apportion profits, and prevents overlap profits arising, for the short period of up to 5 days at the end of in Year 1.

The basis period for the tax year in which a trade, profession or vocation commences (Year 1) is the profits arising in that tax year. Where a new business adopts an accounting date between 31 March and 4 April, if there were no special rules:

• If the business began between 1 and 5 April, up to 5 days worth of profits would be taxed for Year 1.
• If the business began on or after 6 April, up to 5 days worth of profits from the following accounts would need to be added to make up the profits for the full basis period to 5 April in Year 1.

By treating accounts drawn up to 31 March, or 1, 2, 3 or 4 April as equivalent to accounts prepared to 5 April in certain circumstances, the profits for the period of up to 5 days at the end of Year 1 are treated as Nil.

The circumstances in which this treatment applies are set out in ITTOIA05/S208 – S210. This legislation takes effect from 6 April 2005 and reflects the published practice accepted by HMRC before that date.

An election for these special rules not to apply must be made on or before the first anniversary of the normal self assessment filing date for the tax year to which it relates.

Example 1 – if there is an accounting date in Year 1

The trade commences on 1 October 2009. Accounts are prepared to 31 March 2010 and 31 March 2011.

The basis period for 2009-2010 ends on 31 March 2010. This is the accounting date in 2009- 2010.

The basis period for 2010-2011 is 12 months to 31 March 2011 in the normal way.

The 5 days profits from 1 to 5 April 2010, which would count as profits for 2009-2010 if there were no special rules, are already included in the basis period for 2010-2011.

Example 2 – no accounting date in Year 1 – trade commences before 1 April

The trade commences on 1 March 2010 and the first accounts are prepared to 31 March 2011.

The basis period for 2009-2010 starts on 1 March 2010 and ends on 31 March 2010. This is the date that corresponds to the first accounting date in Year 2 (2010-2011).

The basis period for 2010-2011 is 12 months from 1 April 2010 to 31 March 2011.

The 5 days profits from 1-5 April 2010, which would count as profits for 2009-2010 if there were no special rules, are already included in the basis period for 2010-2011.

Example 3 – no accounting date in Year 1 – trade commences after 31 March

The trade commences on 1 April 2010 and the first accounts are prepared to 31 March 2011.

The profits and losses for 2009-2010 are treated as Nil.

The basis period for 2010-2011 is 12 months to 31 March 2011, in the normal way.

The 5 days profits from 1 to 5 April 2010, which would count as profits for 2009-2010 if there were no special rules, are already included in the basis period for 2010-2011.