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Tax, Accountancy and VAT

ACCA

Basis Periods

The basis period rules are complex, but in some circumstances can offer significant cash flow savings in the early years of a growing business.

Does my sole trader Year End have to be the same as the tax year?

No. You can choose any period for your accounts, and not necessarily 12 months long. This creates complications during the early years. The rules (known as the basis year rules) work as follows:

Year 1 Tax is paid on profits between start of business and end of tax year.
Year 2
Period 12 months or less, ends during year Tax is paid on profits of first 12 months trading
Period 12 months or more, ends during year Tax is paid on 12 months profits to the accounting date
No period end during year Tax is paid on profits of the tax year
Year 3 Tax is paid on profits of the period ending during year 3

Notes: Example:

Flintoff commences trade on July 1st 2015 and draws up accounts to June 30th each year. Profits for the first year are £9,000 (due to start up expenses and time to build up sales) and for the second year £30,000 (evenly spread over the year).

Tax Year Relevant accounts Profit for tax
2015-16 July 1st 15- Mar 31st 16 £6,750
2016-17 July 1st 15-June 30th 16 £9,000
2017-18 July 1st 16-June 30th 17 £30,000

Notes:
Now suppose instead that Flintoff drew up accounts to September 2016:

Tax Year Relevant accounts Profit for tax
2015-16 July 1st 15- Mar 31st 16 £10,800
2016-17 July 1st 15- Sep 30th 16 £14,400
2017-18 Oct 1st 16- Sep 30th 17 £30,000

Notes: This may all appear rather artificial, and to an extent that is true. However: IR 222 How to Calculate your Taxable Profits explains this further, with examples. http://www.hmrc.gov.uk/helpsheets/hs222.pdf

1Provided it is completed online. From SA year 2007-8 paper returns must be filed by October 31st.


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