TXF6 UK
Syllabus B. Income Tax And Nic Liabilities B3. Income from self-employment

ACCA TX F6 UK Syllabus B. Income Tax And Nic Liabilities - B3f. Assessable profits on commencement - Notes6 / 11

Syllabus B3f)

Compute the assessable profits on commencement

Step 1: The first tax year (TY1)

The first tax year is the year during which the trade commences.

For example:
if a trade commences on 1 June 2020 the first tax year is 2020/21 (06/04/2020 – 05/04/2021)

The basis period for the first tax year runs from the date the trade starts to the next 5 April.

So a trader commencing in business on 1 June 2020 will be taxed on profits arising from 1 June 2020 to 5 April 2021 in 2020/21.

Step 2: The second tax year (TY2)

Does the accounting date fall in Tax Y2?

• YES

How long is this accounting period?

• < 12 months long

Calculate profits for the first 12 months of trading

• ≥ 12 months long

Calculate profits for the 12 months to the accounting date ending in Y2

• NO

• Assess the actual profits in tax year 2

i.e 6 April to 5 April

For example if trade commenced on  01/01/2020 and accounts were prepared to 31/07/2021, the first tax year is 19/20 and the second tax year is 20/21 - but there is no accounting date ending in the second tax year.

Therefore, profits from 06/04/2020-05/04/2021 will be taxed in the second tax year (20/21).

So, let's go back to our original example:

Assuming that the accounting date is 31 May 2020.

The second tax year (TY2) - 2021/22

• Does the accounting date (31 May 2021) fall in Tax Y2 (2021/22)?

YES

• How long is this accounting period?

1 June 2020 - 31 May 2021

≥ 12 months long

Therefore, calculate profits for the 12 months to the accounting date ending in TY2:

1 June 2020 - 31 May 2021

Step 3: The third tax year (TY3)

• Use a current 12 months accounting period

So, let's go back to our example (assuming they continue to make accounts up to 31 May each year):

• The third tax year (TY3) - 2022/23:

1 June 2021 - 31 May 2022

Step 4: Comment on Overlap profits

If the same profits have been taxed two times, at the end of the question, mention how much profit has been taxed 2 times.

For example if a business commenced trading on 01/01/2020, prepared accounts to 31/12/2020 and made a trading profit of £12,000 during the 12 months.

The first tax year would be 19/20 (01/01/2020-05/04/2020) and 3 months of profit would be of £3,000 (3/12*£12,000) would be taxed.

The second tax year would be 20/21 and as the accounting period is 12 months long, the full £12,000 would be taxed.

Therefore, the £3,000 of 19/20 has been taxed 2 times, this is the overlap profit.

Illustration 1 - ≥ 12 months long

Peter starts to trade on 1 January 2020 making up accounts to 31 March 2021.

He made profit of £15,000 for the year ended 31/3/2021
He made profit of £24,000 for the year ended 31/3/2022

1. The first tax year (TY1 = 2019/20)

1/1/2020 - 5/4/2020

Profit = £15,000 x 3/15 = £3,000

2. The second tax year TY2 =  2020/21 (06/04/2020 – 05/04/2021)

Does the accounting date (31/3/2021) end in TY2?

YES
How long is this accounting period?

≥ 12 months long 1/1/2020 - 31/3/2021

Calculate profits for the 12 months to the accounting date ending in Y2 1/4/2020 - 31/3/2021.

Profit = £15,000 x 12/15 = £12,000

3. The third tax year (TY3 = 2021/22)

Use the current 12 months accounting period
1/4/2021 - 31/3/2022

Profit = £24,000

4. Comment on Overlap profits

Trading profits £15,000 + £24,000 = £39,000

Less profits assessed (£3,000 + £12,000 + £24,000) = (£39,000)

Overlap profits £Nil

Illustration 2 - < 12 months long

He prepares his accounts to 31/07

• Below are the trading profits for the accounting periods:

£10,500 for the 7 months to 31/07/2020

£33,600 for the year ended 31/07/2021

• What trading profits will be assessed for  19/20, 20/21 and 21/22?

Solution:

1. The first tax year (TY1 = 2019/20)

1/1/2020 - 5/4/2020

Profits 3/7 * £10,500 = £4,500

2. The second tax year TY2 =  2020/21 (06/04/2020 – 05/04/2021)

Does the accounting date (31/7/2020) end in TY2?

YES

How long is this accounting period? (1/1/2020 - 31/7/2020)

< 12 months long

Calculate profits for the first 12 months of trading - 01/01/2020 - 31/12/2020

Profits £10,500 + (5/12 * £33,600) = £24,500

3. The third tax year (TY3 = 2021/22)

Use the current 12 months accounting period:
01/08/2020 - 31/07/2021

Profits £33,600

4. Overlap profits

Trading profits £10,500 + £33,600 =  £44,100

Less profits assessed (£4,500 + £24,500 + £33,600) = (£62,600)

Overlap profits £18,500

Illustration 3 - when the accounting date doesn't fall in Tax Y2

Lachmi commenced self employment on 01/01/2019.

She had a profit of £10,000 for the period ending 30/04/2020.

Solution

1. The first tax year (TY1 = 2018/19)

Assessed period 01/01/19 - 05/04/19 = 3/16 * £10,000 = £1,875

2. The second tax year TY2 = 2019/20 (06/04/2019 – 05/04/2020)

Does the accounting date (30/4/2020) end in TY2?

NO

Therefore, profit will be calculated as follows:

Assessed period  06/04/19 - 05/04/20 = £10,000 * 12/16 = £7,500

3. The third tax year (TY3 = 2020/21)

Does the accounting date (30/4/2020) end in TY3?
YES

How long is this accounting period? (1/1/2019 - 30/4/2020)

> 12 months long therefore tax the last 12 months of the long period

01/05/19 - 30/04/20 = £10,000  * 12/16 = £7,500

4. Overlap profits

Overlap profits created: £1,875 + £7,500 + £7,500 - £10,000 = £6,875