Year of commencement

With knowledge of the current year basis period, you will find that if a business
commences trade in June 2018 and prepares accounts to 31 May 2019, its first year
of assessment will have to be 2019/20, which is the tax year the end of the 12 months
falls into, despite the fact that it started to trade in 2018/19 tax year.

For tax purposes,
– all income must be subjected to tax, and
– the individual must have an assessment for each tax year of trade the business operates in

In order to make sure there is an assessment in every tax year the business operates
in, there are special opening year rules that will have to be applied. These are as
follows:

i. First tax year
This is the tax year in which the business started operating and the basis period for
this will be:
– From the date of commencement to the next 5 April

ii. Second tax year
This is the next tax year. It is the tax year following the tax year the business started
operating and the basis period will be dependent on whether a set of accounts ends
anytime in that tax year.

If there is a set of accounts prepared and it ends at any time in the next tax year, then
the length of the accounts will need to be identified and the following will then apply:

*Accounts are prepared for 12 months or longer from the date the business started,
then, the basis period for the second year will be:
– 12 months to the end of that accounting period

*Accounts are prepared for less than 12 months from the date the business started,
then, the basis period for the second year will be:
– 12 months from the date of commencement of the business

If there is no accounts prepared which ends at any time in the next tax year, then the
basis period for the second year will be:
– The government tax year for the second year i.e. any profits made between 6
April to 5 April of the business’ second year of operations

iii. Third tax year
The basis period for this will be:
– The 12 months accounting period which ends in the third tax year, applying the
current year basis

Overlap profits

You would have noticed that in the second tax year, there is the possibility of
subjecting an individual’s taxable profit to tax twice, where there is an overlap of basis
period. This happens where accounts are filed for 12 months from the start date and
this period straddles across two tax years.

Where this happens, relief for the overlap of profits is given by deducting any overlap
from the final assessment when the individual ceases to trade.

Apportioning of profits

Having set up the basis periods which may be applicable to the individual, the taxable
profits will most likely also need to be apportioned for each of the basis periods.

This time apportionment is done on monthly bases as opposed to daily apportioning,
so the few days between 1 April to 5 April are always ignored for the purposes of your
assessment.

You will be required to use monthly time apportioning, so for example, a first year
basis period of 1 November to 5 April will be apportioned for 5 months of the profit for
the year.