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8 Example: no accounting date in the second year

8 Example: no accounting date in the second year

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2.10 The final year
FAST FORWARD

On a cessation the basis period runs from the end of the basis period for the previous tax year.
(a)

If a trade starts and ceases in the same tax year, the basis period for that year is the whole lifespan
of the trade.

(b)

If the final year is the second year, the basis period runs from 6 April at the start of the second year
to the date of cessation. This rule overrides the rules that normally apply for the second year.

(c)

If the final year is the third year or a later year, the basis period runs from the end of the basis
period for the previous year to the date of cessation. This rule overrides the rules that normally
apply in the third and later years.

Question

Ceasing to trade

Harriet, who has been trading since 2000, ceases her trade on 31 March 2016.
Her results for recent years were:
Year ended 31 December
2013
2014
2015
Period ended 31 March 2016

£
10,000
14,000
21,000
4,000

Show the taxable trade profits for the last three tax years of trading.

Answer
Trade ceases in 2015/16.
Year
2013/14
2014/15
2015/16

Basis period
Y/e 31.12.13
Y/e 31.12.14
1.1.15 – 31.3.16

Working

Y/e 31.12.15 plus p/e 31.3.16

Assessment
£
10,000
14,000
25,000

2.11 Overlap profits
Key term

Profits which have been taxed more than once are called overlap profits.
When a business starts, some profits may be taxed twice because the basis period for the second year
includes some or all of the period of trading in the first year or because the basis period for the third year
overlaps with that for the second year, or both.
Overlap profits are relieved when the trade ceases by being deducted from the final year's taxable
profits. Any deduction of overlap profits may create or increase a loss. The usual loss reliefs (covered
later in this Text) are then available.

Exam focus
point

140

A business with a 31 March year end will have no overlap profits as its accounting year coincides with the
tax year. A business with a 31 December year end, for example, will have three months of overlap profit as
its accounting year ends three months before the end of the tax year. Use this rule of thumb to check your
calculation of overlap profits.

9: Assessable trading income  Part B Income tax and national insurance contributions

2.12 Examples: overlap profits
(a)

John starts to trade on 1 January 2016 making up accounts to 31 December 2016. Show the
overlap period.
Tax year
2015/16
2016/17
2017/18

Basis period
1.1.16 – 5.4.16
1.1.16 – 31.12.16
1.1.17 – 31.12.17

Overlap period: 1.1.16 – 5.4.16 (three months)
(b)

Janet starts to trade on 1 January 2016 making up accounts as follows:
6m to 30 June 2016
12m to 30 June 2017
Show the overlap period.
Tax year
2015/16
2016/17
2017/18

Basis period
1.1.16 – 5.4.16
1.1.16 – 31.12.16
1.7.16 – 30.6.17

Overlap period: 1.1.16 – 5.4.16 plus 1.7.16 – 31.12.16 (nine months)
(c)

Jodie starts to trade on 1 March 2016 making up a 14 month set of accounts to 30 April 2017.
Show the overlap period.
Tax year
2015/16
2016/17
2017/18

Basis period
1.3.16 – 5.4.16
6.4.16 – 5.4.17
1.5.16 – 30.4.17

Overlap period: 1.5.16 – 5.4.17 (11 months)

Question

Ceasing to trade and overlap profits

Jenny trades from 1 July 2010 to 31 December 2015, with the following results.
Period
1.7.10 – 31.8.11
1.9.11 – 31.8.12
1.9.12 – 31.8.13
1.9.13 – 31.8.14
1.9.14 – 31.8.15
1.9.15 – 31.12.15

Profit
£
7,000
12,000
15,000
21,000
18,000
5,600
78,600

Calculate the taxable trade profits to be taxed from 2010/11 to 2015/16, the overlap profits and state when
these overlap profits can be relieved.

Part B Income tax and national insurance contributions  9: Assessable trading income

141

Answer
The profits to be taxed in each tax year from 2010/11 to 2015/16 and the total of these taxable profits are
calculated as follows.
Year

Basis period

2010/11
2011/12
2012/13
2013/14
2014/15
2015/16

1.7.10 – 5.4.11
1.9.10 – 31.8.11
1.9.11 – 31.8.12
1.9.12 – 31.8.13
1.9.13 – 31.8.14
1.9.14 – 31.12.15

Working
£7,000 × 9/14
£7,000 × 12/14

£(18,000 + 5,600  3,500)

Taxable profit
£
4,500
6,000
12,000
15,000
21,000
20,100
78,600

The overlap profits are those in the period 1 September 2010 to 5 April 2011, a period of seven months.
They are £7,000 × 7/14 = £3,500. Overlap profits are deducted from the final year's taxable profit when the
business ceases.

Exam focus
point

Over the life of the business, the total taxable profits equal the total actual profits.

3 The choice of an accounting date
FAST FORWARD

The choice of an accounting date may affect when tax is payable on trading profits. It may also create
overlap profits and help or hinder tax planning.
A new trader should consider which accounting date would be best. There are a number of factors to
consider from the point of view of taxation.

142



If profits are expected to rise, a date early in the tax year (such as 30 April) will delay the time
when rising accounts profits feed through into rising taxable profits, whereas a date late in the tax
year (such as 31 March) will accelerate the taxation of rising profits. This is because with an
accounting date of 30 April, the taxable profits for each tax year are mainly the profits earned in the
previous tax year. With an accounting date of 31 March the taxable profits are almost entirely
profits earned in the current year.



If the accounting date in the second tax year is less than 12 months after the start of trading, the
taxable profits for that year will be the profits earned in the first 12 months. If the accounting date
is at least 12 months from the start of trading, they will be the profits earned in the 12 months to
that date. Different profits may thus be taxed twice, and if profits are fluctuating this can make a
considerable difference to the taxable profits in the first few years.



The choice of an accounting date affects the profits shown in each set of accounts, and this may
affect the taxable profits.



An accounting date of 30 April gives the maximum interval between earning profits and paying
the related tax liability. For example if a trader prepares accounts to 30 April 2016, this falls into
the tax year 2016/17 with payments on account being due on 31 January 2017 and 31 July 2017,
and a balancing payment due on 31 January 2018 (details of payment of income tax are dealt with
later in this Text). If the trader prepares accounts to 31 March 2016, this falls in the tax year
2015/16 and the payments will be due one year earlier (ie on 31 January 2016, 31 July 2016 and
31 January 2017).

9: Assessable trading income  Part B Income tax and national insurance contributions







Knowing profits well in advance of the end of the tax year makes tax planning much easier. For
example, if a trader wants to make personal pension contributions and prepares accounts to 30
April 2016 (2016/17), he can make contributions up to 5 April 2017 based on those relevant
earnings. If he prepares accounts to 31 March 2016, he will probably not know the amount of his
relevant earnings until after the end of the tax year 2015/16, too late to adjust his pension
contributions for 2015/16.
However, a 31 March or 5 April accounting date means that the application of the basis period
rules is more straightforward and there will be no overlap profits. This may be appropriate for
small traders.
With an accounting date of 30 April, the assessment for the year of cessation could be based on
up to 23 months of profits. For example, if a trader who has prepared accounts to 30 April ceases
trading on 31 March 2016 (2015/16), the basis period for 2015/16 will run from 1 May 2014 to 31
March 2016. This could lead to larger than normal trading profits being assessable in the year of
cessation. However, this could be avoided by carrying on the trade for another month so that a
cessation arises on 30 April 2016 so that the profits from 1 May 2014 to 30 April 2015 are taxable
in 2015/16 and those from 1 May 2015 to 30 April 2016 are taxable in 2016/17. Each case must be
looked at in relation to all relevant factors, such as other income which the taxpayer may have and
loss relief – there is no one rule which applies in all cases.

Question

The choice of an accounting date

Christine starts to trade on 1 December 2013. Her monthly profits are £1,000 for the first seven months,
and £2,000 thereafter. Show the taxable profits for the first three tax years with each of the following
accounting dates (in all cases starting with a period of account of less than 12 months).
(a)
(b)
(c)

31 March
30 April
31 December

Answer
(a)

(b)

31 March
Period of account

Working

1.12.13 – 31.3.14
1.4.14 – 31.3.15
1.4.15 – 31.3.16

£1,000  4
£1,000  3 + £2,000  9
£2,000  12

Year

Basis period

2013/14
2014/15
2015/16

1.12.13 – 5.4.14
1.4.14 – 31.3.15
1.4.15 – 31.3.16

Profits
£
4,000
21,000
24,000
Taxable profits
£
4,000
21,000
24,000

30 April
Period of account

Working

1.12.13 – 30.4.14
1.5.14 – 30.4.15

£1,000  5
£1,000  2 + £2,000 10

Year

Basis period

Working

2013/14
2014/15
2015/16

1.12.13 – 5.4.14
1.12.13 – 30.11.14
1.5.14 – 30.4.15

£5,000  4/5
£5,000 + £22,000  7/12

Profits
£
5,000
22,000
Taxable profits
£
4,000
17,833
22,000

Part B Income tax and national insurance contributions  9: Assessable trading income

143

(c)

144

31 December
Period of account

Working

1.12.13 – 31.12.13
1.1.14 – 31.12.14
1.1.15 – 31.12.15

£1,000 × 1
£1,000 × 6 + £2,000  6
£2,000 × 12

Year

Basis period

2013/14
2014/15
2015/16

1.12.13 – 5.4.14
1.1.14 – 31.12.14
1.1.15 – 31.12.15

Working
£1,000 + £18,000 × 3/12

9: Assessable trading income  Part B Income tax and national insurance contributions

Profits
£
1,000
18,000
24,000
Taxable profits
£
5,500
18,000
24,000

Chapter Roundup


Basis periods are used to link periods of account to tax years. Broadly, the profits of a 12 month period of
account ending in a tax year are taxed in that year (current year basis).



In the first tax year of trade actual profits of the tax year are taxed. In the second tax year, the basis period
is either the first 12 months, the 12 months to the accounting date ending in year two or the actual profits
from April to April. Profits of the 12 months to the accounting date are taxed in year three.



On a cessation the basis period runs from the end of the basis period for the previous tax year.



The choice of an accounting date may affect when tax is payable on trading profits. It may also create
overlap profits and help or hinder tax planning.

Quick Quiz
1

What is the normal basis of assessment?

2

Isabella started trading on 1 September 2015. She prepares her first set of accounts to 31 December
2016. The basis period for the year of commencement is:
A
B
C
D

3

1 September 2015 to 31 December 2015
1 September 2015 to 5 April 2016
1 September 2015 to 31 August 2016
1 September 2015 to 31 December 2016

Ernie started trading on 1 January 2015. He decided to prepare accounts to 31 October each year. His
taxable trading profits is as follows:
p/e 31.10.15
y/e 31.10.16

£3,000
£23,760

What are Ernie's overlap profits?
A
B
C
D
4

£900
£2,880
£3,960
£4,860

Gita ceased trading on 31 March 2016. Her taxable trading profits were:
y/e 31.12.15
p/e 31.3.16

£5,600
£4,500

Gita had £2,300 of unused overlap profits.
What is her taxable trading profit for 2015/16?
A
B
C
D
5

£10,100
£7,800
£6,400
£2,200

How are overlap profits relieved?

Part B Income tax and national insurance contributions  9: Assessable trading income

145

Answers to Quick Quiz
1

The normal basis of assessment is that the profits for a tax year are those of the 12 month accounting
period ending in the tax year.

2

B. 1 September 2015 to 5 April 2016 ie the actual tax year.

3

D £4,860
First tax year (2014/15)
Actual basis
Basis period 1.1.15 to 5.4.15
Second tax year (2015/16)
Period of account in 2nd year less than 12 months
Basis period 1.1.15 to 31.12.15
Third tax year (2016/17)
Current year basis
Basis period 1.11.15 to 31.10.16
Overlap profits
Period of overlap 1.1.15 to 5.4.15 and 1.11.15 to 31.12.15
Overlap profits

£
900
3,960
4,860

3/10 × £3,000
2/12 × £23,760

4

B £7,800
Last tax year (2015/16) Basis period 1.1.15 to 31.3.16

£
5,600
4,500
10,100
(2,300)
7,800

y/e 31.12.15
p/e 31.3.16
Less overlap profits
5

On the cessation of a business by deduction from the final year's taxable profits.
Now try the questions below from the Practice Question Bank

146

Number

Type

Marks

Time

Q21

Section A

6

12 mins

Q22

Section C

15

29 mins

Q23

Section C

15

29 mins

9: Assessable trading income  Part B Income tax and national insurance contributions

Trading losses

Topic list
1 Losses
2 Carry forward trade loss relief
3 Trade loss relief against general income

Syllabus reference
B3(i)
B3(i)(i)
B3(i)(ii), (i)(v)

4 Losses in the early years of a trade

B3(i)(iii)

5 Terminal trade loss relief

B3(i)(iv)

Introduction
We have seen how to calculate taxable trading profits and how to allocate them
to tax years so that they can be slotted into the income tax computation.
Traders sometimes make losses rather than profits. In this chapter we consider
the reliefs available for losses. A loss does not in itself lead to getting tax back
from HMRC. Relief is obtained by setting a loss against trading profits, against
general income or against capital gains (which are covered later in this Text),
so that tax need not be paid on them. There are restrictions on how much loss
relief can be claimed in a tax year.
An important consideration is the choice between different reliefs. The aim is to
use a loss to save as much tax as possible, as quickly as possible.
In the next chapter we will see how the rules on trading profits and losses for
sole traders are extended to those trading in partnership.

147

Study guide
Intellectual
level
B3

Income from self-employment

(i)

Relief for trading losses

(i)(i)

Understand how trading losses can be carried forward.

2

(i)(ii)

Understand how trading losses can be claimed against total income and
chargeable gains, and the restriction that can apply.

2

(i)(iii)

Explain and compute the relief for trading losses in the early years of a
trade.

1

(i)(iv)

Explain and compute terminal loss relief.

1

(i)(v)

Recognise the factors that will influence the choice of loss relief claim.

2

Exam guide
Section A questions on loss relief may deal with a specific aspect such as the cap on loss relief against
general income. You may also have to deal with a number of aspects of loss relief in a Section B question.
Section C could have a detailed computational question involving the carry back and carry forward of
losses for a sole trader. Ensure you know the rules for ongoing trades and the additional relief in the early
years of trading. On cessation, terminal loss relief may be used. Once you have established the reliefs
available look to see which is most beneficial.
One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the
PER is to mitigate and/or defer tax liabilities through the use of standard reliefs, exemptions and
incentives. You can apply the knowledge you obtain from this chapter of the text to help to demonstrate
this competence.

1 Losses
FAST FORWARD

Trading losses may be relieved against future profits of the same trade, against general income and
against capital gains.

1.1 Introduction
When computing taxable trade profits, profits may turn out to be negative, meaning a loss has been made
in the basis period. A loss is computed in exactly the same way as a profit, making the same
adjustments to the accounts profit or loss.
If there is a loss in a basis period, the taxable trade profits for the tax year based on that basis period
are nil.
This chapter considers how losses are calculated and how a loss-suffering taxpayer can use a loss to
reduce his tax liability.
The rules in this chapter apply only to individuals, trading alone or in partnership. They do not apply to a
business using the cash basis. Loss reliefs for companies are completely different and are covered later in
this Text.

1.2 The computation of the loss
The trade loss for a tax year is the trade loss in the basis period for that tax year.

148

10: Trading losses  Part B Income tax and national insurance contributions

1.3 Example: computation of trade loss
Here is an example of a trader with a 31 December year end who has been trading for many years.
Period of account

Loss
£
9,000
24,000

Y/e 31.12.15
Y/e 31.12.16
Tax year

Basis period

2015/16
2016/17

Y/e 31.12.15
Y/e 31.12.16

Trade loss for
the tax year
£
9,000
24,000

1.4 How loss relief is given
Loss relief is given by deducting the loss from total income to calculate net income. Carry forward loss
relief and terminal loss relief can only be set against the trading profits of the same trade. Other loss
reliefs may be set against general income (ie any component of total income).

2 Carry forward trade loss relief
FAST FORWARD

Trading losses may be relieved against future profits of the same trade. The relief is against the first
available profits of the same trade.

2.1 The relief
A trade loss not relieved in any other way will be carried forward to set against the first available trade
profits of the same trade in the calculation of net trading income. Losses may be carried forward for any
number of years unless they have been entirely used up.
Carry forward trade loss relief is the only trade loss relief which applies to furnished holiday lettings
(see earlier in this Text).

2.2 Example: carrying forward losses
Brian has the following results.
Year ending
31 December 2013
31 December 2014
31 December 2015

£
(6,000)
5,000
11,000

Brian's net trading income, assuming that he claims carry forward loss relief only are:
2013/14
£
0
(0)
0

Trade profits
Less carry forward loss relief
Net trading income
Loss memorandum
Trading loss, y/e 31.12.13
Less: claim in y/e 31.12.14 (14/15)
claim in y/e 31.12.15 (balance of loss) (15/16)

(i)

2014/15
£
5,000
(5,000)
0

(ii)

(i)
(ii)

2015/16
£
11,000
(1,000)
10,000
£
6,000
(5,000)
(1,000)
0

Part B Income tax and national insurance contributions  10: Trading losses

149

3 Trade loss relief against general income
FAST FORWARD

A trading loss may be set against general income in the year of the loss and/or the preceding year.
Personal allowances may be lost as a result of a claim. Once a claim has been made in any year, the
remaining loss can be set against net chargeable gains.

3.1 The relief
Instead of carrying a trade loss forward against future trade profits, a claim may be made to relieve it
against general income.

3.2 Relieving the loss
Relief is against the income of the tax year in which the loss arose. In addition or instead, relief may
be claimed against the income of the preceding year.
If there are losses in two successive years, and relief is claimed against the first year's income both for the
first year's loss and for the second year's loss, relief is given for the first year's loss before the second
year's loss.
A claim for a loss must be made by the 31 January which is 22 months after the end of the tax year of the
loss: thus by 31 January 2018 for a loss in 2015/16.
The taxpayer cannot choose the amount of loss to relieve: thus the loss may have to be set against
income part of which would have been covered by the personal allowance. However, the taxpayer can
choose whether to claim full relief in the current year and then relief in the preceding year for any
remaining loss, or the other way round.

Question

Loss relief against general income

Janet has a loss in her period of account ending 31 December 2015 of £27,000. Her other income is
£20,000 part time employment income a year, and she wishes to claim loss relief against general income
for the year of loss and then for the preceding year. Her trading income in the previous year was £nil.
Show her taxable income for each year, and comment on the effectiveness of the loss relief. Assume that
tax rates and allowances for 2015/16 have always applied.

Answer
The loss-making period ends in 2015/16, so the year of the loss is 2015/16.

Total income
Less loss relief against general income
Net income
Less personal allowance
Taxable income

2014/15
£
20,000
(7,000)
13,000
(10,600)
2,400

2015/16
£
20,000
(20,000)
0
(10,600)
0

In 2015/16, £10,600 of the loss has been wasted because that amount of income would have been
covered by the personal allowance. If Janet just claims loss relief against general income, there is nothing
she can do about this waste of loss relief.

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10: Trading losses  Part B Income tax and national insurance contributions