Tax Regulations for First, Second and Later Years of Tax, Overlap Profits and Accounting Date under the Basis Periods of Taxation after set up a new Company UK


04 Jan

The basis periods are implemented to connect the period of account to tax years. The rules for the first, later and final years of tax after set up a new company UK in relation to the accounting date are discussed in the blog along with the overlap profits and accounting date (choice and change of a date of accounting) so that a person who is concern with how to create a limited company UK also be aware of tax regulations on successive years of trade.

First Year of Tax

In order to keep the process of taxation fast and quick at the start of any trade and closing of it, special regulations are implemented. The first year of tax is started on the very first date of the trade and ends at 5th April of next year and if the trade ends before that date then taxation can be done till the date the trades ends.

Second Year of Tax

After open ltd company in UK online if the date of accounting falling in the second year of tax is at least 12 months after starting the trade, the basis period is the 12 months to that date of accounting. In the case if the date of accounting that falls in the second year of tax is less than 12 months after the commencement of trade, the basis period is the first 12 months of trading. Finally, if there is no accounting date that falls in the second year of tax, due to the fact that first period of account is a very long one that does not end until a date in the third year of tax, then the basis period for the second year of tax is the year itself (from April 6 to April 5).

In order to determine the basis period for the second year of tax after founding a company in UK, the following sequence should be observed:

  • Check if there is a period of account that ends in the 2nd year of tax.
  • If no, then the basis period is operational from April 6 to April 5 in the 2nd year. If yes, then check the duration of the period of account.
  • If the period of account is less than 12 months, then the basis period is first 12 trading months and if the period of account is 12 months or more, then the basis period is 12 months to the date of accounting in the second year.

Examples for the Demonstration of First and Second Year of Tax

  • Consider the example of John who starts to trade with a company on January 1st, 2014 and makes up the accounts to December 31st, 2014. For the first tax year of 2013/14, the period for tax profits is from January 1st, 2014 to April 5th, 2014. For the second year of tax which is 2014/15, check if there is an accounting period ending in 2014/15. Then see that how long is the accounting period which, in this case is 12 months or more than that to December 31st, 2014. So in the years of 2014/15, the tax profits are of 12 months to December 31st, 2014.
  • Consider another example of Janet who starts trading on January 1st, 2014 and makes up the accounts as mentioned: 6 months to June 30th, 2014 and 12 months to June 30th, 2015. For the first year of tax (2013/14), the duration of profits of tax is from January 1st, 2014 to April 5th, 2014. For the second year of tax which is 2014/15, check if there is a period of accounting that ends in 2014/15. How long is the period of accounting? It is less than 12 months (which is 6 months long). So, in the years of 2014/15, the profits of tax of first 12 months of trade of duration from January 1st 2014 to December 31st 2014 i.e. p.e. 30.6.14 profits plus 6/12 of p.e 30.6.15 profits.
  • Another example in which Jodie starts trading on March 1st 2014 making up a 14 month set of accounts to April 30th 2015. For the first year of tax which is 2013/14, the duration of tax profits is from March 1st 2014 to April 5, 2014. For the second year of tax which is 2014/15, check if there is an accounting period that ends in 2014/15? No (p.e. 30.4.15 ends in 2015/16). So in the 2014/15 profits of tax of 6.4.14 to 5.4.15.

Third Year of Tax

In case if there is a date of accounting that falls in the second year of tax, the basis period for the third year of tax is the accounting period terminating in the third year of tax. On the other hand, if there is not any accounting date that falls in the second year of tax, then the basis period for the third year of tax is the 12 months to the date of accounting filling in the third year of tax.

Later Years of Tax

For the later years of tax, excluding the year in which the cessation of trade takes place, the basis period is the accounting period terminating in the year of tax. This is referred to as the present year basis of assessment.

Last Year of Tax

If the initiation and cessation of trade takes place in the same year of tax, the basis period for that year is the entire lifespan of the trade.  In case if the last or final year is the second year, then the duration of the basis period is from April 6 at the beginning of the second year to the cessation date. The rules that are normally applicable for the second year are overridden by this rule. Finally, if the last year is the third year or a later year, then the basis period is operational from the termination of the basis period for the preceding year to the cessation date. The rules that are normally applicable for the third year and later years are overridden by this rule.

Overlap Profits

Overlap Profits are the profits whose taxation has been done more than once. Upon the start of a business, the taxation of some of the profits may be done twice due to thr fact that the basis period for the second year involves some or all of the trading period in the first year or because of the fact that the basis period for the third period results in the overlapping with that for the second year.

The subtraction of the overlap profits may be done on a change of date of accounting. Any unrelieved profits (overlap profits) when the cessation of trade takes place are subtracted from the taxable profits of the final year. Any subtraction of overlap profits may result in the creation or increment of a loss. Then the usual loss reliefs are available.

Choosing a Date of Accounting

It should be under the consideration of a new trader founding a company in UK that which date of accounting will be the most suitable. From the taxation viewpoint, there are various factors to take under consideration:

  • If an increment in the profits is expected, then a date early in the year of tax (for example April 30th) will result in a delay in the time when the rising profits of account feed through into rising profits liable to trade, while a date late in the year of tax (for example March 31st) will fasten the taxation of rising profits. This is due to the fact that with a date of accounting of April 30th, the taxable profits for each year of tax are mainly the earned profits in the previous year of tax. With a date of accounting of March 31st, the profits liable to tax are almost wholly the earned profits in the present year.
  • If the date of accounting in the second year of tax is less than 12 months after the beginning of trade, the profits liable to tax for that year will be the earned profits in first 12 months. If the date of accounting is at least 12 months from the beginning of trade, they will be the earned profits in the 12 months till that date. Hence, the taxation of different profits may be done twice, and of there is a fluctuation in the profits, this can result in a considerable to the profits liable to tax in the first few years.
  • The profits shown in each accounts set are affected by the choice of a date of accounting, and this may result in affecting the profits liable to tax.
  • A date of accounting of April 30th gives the maximum interval between earning the profits and making the payment of related liability of tax. For example, consider that a trader involves in making up accounts to April 30th 2014, this falls into the year of tax 2014/15 with payments on account being due on January 31st 2015 and July 31st 2015, and a due balancing payment on January 31st 2016. In case if the trader makes up the accounts to March 31st 2014, this falls in the year of tax 2013/14 and the due date for the payments will be one year earlier (i.e. on January 31st 2014, July 31st 2014 and January 31st 2015).
  • The planning of tax is made much easier if one knows the profits well in advance of the end of the year of tax. For example, consider that a trader intends to make personal contributions of pension and makes up accounts to April 30th 2014 (2014/15), he can make contributions up to April 5th 2015 depending on the related earnings. If accounts are made up by him up to March 31st 2014, there is a probability that he wouldn’t know the amount of his related earnings until after the end of the year of tax 2013/14, quite late for the adjustment of his contributions of pension for the year 2013/14.
  • However, a date of accounting of March 31st or April 5th means that the application of the basis period regulations is more straightforward and there will not be any overlap profits. They may be suitable in the case of small traders.
  • With a date of accounting of April 30th, the assessment for the cessation year could be dependent upon up to 23 months of profits. For example, if a trader involved in the making up of accounts to April 30th ceases to trade on March 31st 2014 (2013/14), the basis period for the year of 2013/14 will be operational from May 1st 2012 to March 31st 2014. This could result in larger than normal profits of trade being assessable in the cessation year. However, the avoidance of this could be done by running the trade for another month in order for a cessation to arise on April 30th 2014 so that the profits from May 1st 2012 to April 30th 2013 are liable to tax in 2013/14 and those from May 1st 2013 to April 30th 2014 are liable to tax in 2014/15. The consideration of each case should be done in relation to all the relevant factors, for example, the other income that the taxpayer may have and loss relief. There is no single rule that remains applicable for all the classes.

Changing the Date of Accounting 

After open ltd company in UK online 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.

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