Effectiveness of Accounting Date for the Basis Periods of Taxation after setting up a Business UK and Different Regulations for National Insurance under Income Tax


04 Jan

There are some special rules applicable when choosing the accounting date of taxation or making the changes in it for the basis periods of taxation after setting up a business UK. These regulations will be brought under discussion in the blog along with the national insurance contributions both for the employees and self-employed. The blog will prove as an aid for the readers thinking to start a business or wondering about the finance provision of business with questions like: how much does it cost to register a business UK?

Changing the Date of Accounting 

After business name registration UK special rules are applicable for the fixation of basis periods when the date of accounting is changed.

A trader may change the date to which the preparation of their annual accounts has been done for a number of reasons. For example, they may have an intention to move to the end of a calendar year or to fit in with the seasonal variations of their trade. Normally, special rules are applicable for the fixation of basis periods when a trader makes a change in the date of accounting.

Whenever a change is made in the accounting date, the following possibilities exist:

  • There may be one set of accounts covering a period having more than 12 months, or
  • There may be one set of accounts covering a period having below 12 months, or
  • Two sets of accounts, or
  • No accounts

Ending in a year of tax. In every case, the basis period for the year is related to the new date of accounting.

One Short Accounting Period

When one short period of account terminating in a year of tax is obtained as the result of a change made in the date of accounting, then the basis period for that year will always be the 12 months to the new date of accounting.

Example #1 Change in the Date of Accounting

Consider the example of Sue who is involved in the preparation of accounts to December 31st every year till she makes a change in the date of accounting to June 30th by the preparation of accounts for the six months to June 30th, 2013. Then there is one short period of account that is to end during 2013/14. This leads to the fact that the basis period for the year 2013/14 is the twelve months to June 30th 2013. The basis period for Sue for the year 2012/13 was the twelve months to December 31st 2012. This leads to the fact that the profits of the six months to December 31st 2012 are to be considered as the overlap profits whose taxation has been done twice. The addition of these overlap profits is necessary to any overlap profits that took place at the time business formation UK. The relieving of the total is either done with the cessation of the business or the relieving takes place on a subsequent change in the date of accounting.

One Long Accounting Period

When one long period of account is obtained terminating in a year of tax, as a result of the change in the date of accounting, then the basis period for that year will be ending on the new date of accounting. It is initiated instantly after the basis period for the ends of the preceding year. This leads to the result that the basis period will be extended to a duration above 12 months.

In this scenario, no occurrence of the overlap profits can be noted. However, the taxation of more than 12 months’ worth of profits is done in one year of income tax and in order to provide a compensation for this, there is an availability of relief for the overlap profits that have been brought forward. The number of months’ worth of the taxed profits should be reduced by the overlap profits in the year to less than 12. So, in the case if you have a basis period equal to 14 months, you can provide relief for up to two months’ worth of the overlap profits.

Example #2 Change in the Date of Accounting

Consider the example of Zoe who started to trade on October 1st 2010 and got the accounts prepared to September 30th until she made a change in her date of accounting through the preparation of accounts for the 15 months to December 31st 2013. Her results are mentioned below:

Year to September 30th 2011: £24000

Year to September 30th 2012: £48000

Fifteen months to December 31st 2013: £75,000.

Then the profits for the initial three years of tax are computed as follows:

2010/11 (1.10.10 - 5.4.11)

6/12* £24000 = £12000.

2011/12 (1.10.10 - 30.9.11) = £24,000.

2012/13 (1.10.10 - 30.9.12) = £48,000.

Hence, the overlap profits are equal to £12000. These took place in the six months to 5.4.11.

One long period of account is obtained terminating during 2013/14 by the change in the date of accounting which means that the basis period for the year 2013/14 is the fifteen months to December 31st 2013. The relieving of the brought forward overlap profits that are worth three months, can be done.

The overlap profits of unrelieved nature equal to an amount of £6000 (£12000 - £6000) are carried forward for relief either when the cessation of business formation UK takes place or on a further accounting date's change.

Example #3 Change in the Date of Accounting

Consider the example of Anne who was always involved in the preparation of accounts to March 31st. She then made a change in her date of accounting by the preparation of accounts for the thirteen months to April 30th 2014.

There is no accounting period that ends in the year of 2013/14 so the basis period for this year is the basis period under manufacturing of the twelve months to April 30th 2013.

You might have noticed that an overlap is produced with the preceding basis period. The overlap period is the eleven months from May 1st 2012 to March 31st 2013. The overlap profits that occur in this period are then added to the overlap profits of unrelieved nature and are carried forward for the relief in future.

Two Dates of Accounting Terminating in the year

In the scenario when two accounting periods end in a year of tax, the basis period for the year comes to an end on the new date of accounting. It starts instantly after the preceding basis period. This leads to the result that the basis period will be extended to a duration above 12 months and the overlap relief can be permitted to make sure that only the assessment of 12 months’ worth of profits is done in the year of tax.

Example #4 Change in the Date of Accounting

Consider the example of Elizabeth who was involved in the preparation of accounts to September 30th until 2014 when she made a change in the date of accounting by the preparation of accounts for the six months to March 31st 2014.

The new date of accounting is March 31st 2014. This is the end of the basis period for the year 2013/14. The basis period for the year 2012/13 came to an end on September 30th 2012. Hence, the basis period for 2013/14 is the eighteen-month period from October 1st 2012 to March 31st 2014. The relieving of overlap profits worth six months can be done in this year.

Conditions for Basis Period and Change in Date of Accounting

There is an automatic change in the basis period if the trader makes a change in the date of accounting during the initial three years of tax of their business after business name registration UK. In other scenarios, the conditions mentioned below should be fulfilled prior to the occurrence of change in the basis periods:

  • The trader should give a notification to the HMRC about the change by January 31st after the year of tax in which the change takes place (by January 31st for a change in 2013/14).
  • The period of account obtained from the change should not be more than 18 months.
  • Generally, there must not have been no previous change of date of accounting in the last 5 years of tax. However, a second change can be made within this duration if the later change is for reasons that are genuinely commercial. If there is no response from HMRC to the change in date of accounting within 60 days of acquiring it, the trader can make an assumption that they are satisfied that the reasons for changing the date are genuinely commercial.
  • In case if the mentioned conditions are not fulfilled due to the fact that the new period of account terminating on the new date is more than 18 months or a notification of the change in the date of accounting was not issued in time, but the condition of five years gap or the commercial reasons are fulfilled, then the basis period for that year of change is the 12 months to the old date of accounting in the changing year.
  • If the test of five years gap etc. is not satisfied, the old date of accounting remains in force for the purposes of tax until there have been consecutive 5 years of tax that were not the changing years. Then, the treatment of the sixth changing year is done as the changing year to the new date of accounting, and the above rules are applicable.

Regulations for the National Insurance

Contributions of National Insurance for the Persons Self-Employed (NICs)

The Self-Employed person makes a payment of the class 2 and class 4 NICs. The basis for the class 4 NICs are the level of taxable profits of the individual. The payment of class 2 NICs is made at a flat rate on weekly basis.

The payment of the NICs by the Self-Employed (partners and sole traders) is made using two ways. The payment of class 2 contributions is to be made at the rate of flat. However, there is a possibility of exempting it from payment of contributions of class 2 if the profits from annual accounts are less than £5725 (2013/14). The rate of class 2 for the year of 2013/14 is £2.70 a week. It is recommended by the HMRC that the payment of class 2 contributions is to be made monthly or after six months through direct debit. As an alternate way, the payments can be made in response to the issued notices by the HMRC twice a year. Irrespective of the method being used, the acquisition of the payment for the first six months of class 2 NICs for the year of tax must be done by HMRC before January 31st in the year of tax, and payment for the six months remaining should be made before July 31st after the end of the year of tax. The guarantee of these deadlines being met will be provided by the payment through direct debit.

A registration with the HMRC must be done by the Self-Employed people for the class 2 contributions by January 31st after the year of tax in which they begin self-employment. A late notification penalty may need to be paid by the people who fail to perform the registration. As an addition, the class 4 make the payment of class 4 NICs, dependent on the level of the trade profits of the individual.

Comparison of National Insurance Contributions for the Employees and the Self-Employed

The burden of the NIC on the Self-Employed is less than that on employees, despite the fact that there is a fluctuation in the burdens of relatives, depending on the level of income.


Comments
* The email will not be published on the website.