Basis of periods is most complex examinable area in ACCA F6 paper. Students often get confused and in exams make serious blunders in calculating incomes for tax purposes under basis of assessment rules. I also often personally faced very difficulty in calculating profits under basis of periods rules. But after a lot of practice of this topic , with examples i was able to manage any question on this topic.
So considering the exam importance and complexity of this topic , i am going to explain every thing here in this post for paper f6 students with examples.I am able to write this article after considering my old study notes and my knowledge built during ACCA studies .I will try my best to get you fully understand this topic very easily.
Why we need to prepare basis periods ?
Trading income of sole traders is assess able according to tax year . But the problem is that the tax year and period of account don,t match mostly unless the trader chooses 5th April as an accounting date. So to solve this problem we have to prepare basis periods.The main objective of preparing basis periods is to match the period of account with the tax year.
Terminologies Related to this Topic :
Basis period: This is the time period for which a sole trader / partnership pays tax each year.Your basis period ma be your accounting year
Overlap period: This is a period which falls in two tax years
Overlap profits: These are profits which are charged ( twice ) in two tax year.
Accounting period: This is a time period of 12 months ,which reflects all the financial activity that occured during this time. Basis period and accounting period may be the same periods sometime.
Opening year rules of basis periods
Rule 1. 2 tax years in the first period of account and period is longer than 12 months.
Example: Suppose a trader starts trading on 1st July 2008 and prepares his first accounts to 31st December 2009.His trading results are given below :
£
1st July 2008 ------ 31st December 2009 18,000
January 2010 ----- 31st December 2010 12,000
Prepare basis periods and calculate the amount of overlap profits ?
Solution:
-First use current year basis rule (CYB)
-Then move back twelve months from the end month of first period of account
-Then write a complete year on wards
-Calculate profits which are taxed two times - These are your overlap profits
Tax Year Basis Periods Profit
£
2008/09 1st July 08 _ 5th April 09 9,000
2009/10 1st Jan. 9 _ 31st Dec.09 12,000
2010/11 1st Jan. 10 _ 31st Dec. 10 12,000
Overlap profits: £3,000
Rule 2. 2 tax years in the first period of account and period is shorter than 12 months.
Example: Suppose a trader starts trading on 1st October 2008 and prepares his first accounts to 30th June 2009.His trading results are given below :
£
1st Oct. 2008 ------ 30th June 2009 18,000
1st July 2009 ----- 30th June 2010 12,000
1st July 2010 ----- 30th June 2011 24,000
Prepare basis periods and calculate the amount of overlap profits ?
Solution:
-First use current year basis rule (CYB)
-Then move forward twelve months from date of start of business
-Then write a complete year on wards.
-Calculate profits which are taxed two times - These are your overlap profits.
Tax Year Basis Periods Profit
£
2008/09 1st Oct. 08 _ 5th April 09 12,000
2009/10 1st Oct. 08 _ 30th Sep.09 21,000
2010/11 1st July 09 _ 30th June 10 12,000
2011/12 1st July 10_ 30th June 11 24,000
Overlap profits: £15,000
Rule 3. 2 tax years in the first period of account and period is equal to 12 months.
Example: Suppose a trader starts trading on 1st January 2008 and prepares his first accounts to December 2008.His trading results are given below :
£
1st January 2008 ------ 31st December 2008 24000
1st January 2009 ----- 31st December 2009 12,000
Prepare basis periods and calculate the amount of overlap profits ?
Solution:
-First use current year basis rule (CYB)
-Then write a complete year on wards (Same ).
-Calculate profits which are taxed two times - These are your overlap profits.
Tax Year Basis Periods Profit
£
2008/09 1st Jan. 09 _ 5th April 09 6,000
2009/10 1st Jan. 08 _ 31st Dec.08 24,000
2010/11 1st Jan. 09 _ 31st Dec. 09 12,000
Overlap profits: £6,000
Rule 4. Single tax year in the first period of account.
Example: Suppose a trader starts trading on 1st July 2008 and prepares his first accounts to 31st December 2008.His trading results are given below :
£
1st July 2008 ------ 31st December 2008 6,000
1st January 2009 ----- 31st December 2009 12,000
Prepare basis periods and calculate the amount of overlap profits ?
Solution:
-First use current year basis rule (CYB)
-Then write a complete year on wards ( Same ).
-Calculate profits which are taxed two times - These are your overlap profits.
Tax Year Basis Periods Profit
£
2008/09 1st July 08 _ 5th April 09 9,000
2009/10 1st Jan. 09 _ 31st Dec.09 12,000
Overlap profits: £3,000
Rule 5. 3 tax years in the first period of account.
Example: Suppose a trader starts trading on 1 January 2008 and prepares his first accounts to 30th June 2009.His trading results are given below :
£
1st January 2008 ------ 30th June 2009 18,000
1st July 2009 ----- 30th June 2010 20,000
Prepare basis periods and calculate the amount of overlap profits ?
Solution:
-First use current year basis rule (CYB)
-Then write a full tax year e.g 6.4.15-5.4.16 .
-Then move back 12 months from ending date of first period of account.
-Calculate profits which are taxed two times - These are your overlap profits.
Tax Year Basis Periods Profit
£
2008/09 1st Jan. 08 _ 5th April 08 3,000
2009/10 6th April 08 _ 5th April 09 12,000
2010/11 1st July 08_ 30th June 09 12,000
2011/12 1st July 09 _ 30th June 10 20,000
Overlap profits: £9,000
Closing year rules of basis periods
Rule 1. The closing dates of last and second last period fall in same tax year.
Example: Suppose a trader ceased trading on 31st December 2011.His trading results are given below :
£
1st July 2010 ------ 30th June 2011 18,000
1st July 2011 ----- 31st December 2011 20,000
Overlap profits were £5,000.
Prepare basis periods.
Solution:
When closing dates of last and second last periods fall in the same tax year then basis periods for the final tax year are prepared by combining the both periods.
Tax Year Basis Periods Profit
£
2011/12 1st July 10 _ 31st December 11 38,000
Rule 2. The closing dates of last and second last period fall in different tax year.
Example: Suppose a trader ceased trading on 30th June 2011.His trading results are given below :
£
1st January 2010 ------ 31st December 2010 18,000
1st January 2011 ----- 30th June 2011 20,000
Prepare basis periods.
Solution:
When closing dates of last and second last periods fall in the different tax year then basis periods for the final 2 tax years are similar to the period of account.
Tax Year Basis Periods Profit
£
2010/11 1st Jan. 2010_31st Dec. 10 18,000
2011/12 1st Jan. 11 _ 30th June 11 20,000
It is really very helping and easy to understand . You made my concepts clear by sharing this article here . But my request is please also post an article about " Change in accounting date " . Thanks in advance.
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ReplyDeleteplease check the rule number 3 Business started on 1 January 2008 and you wrongly type the first year tax year 2008 2009 but correct is 2007 to 2009
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Thanks for guidelines. I regularly basis follow your blog, can you please share the latest updated of ACCA.
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