Basis periods

By Tolley
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The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Basis periods
  • Sole traders
  • Partners in partnership
  • Current year basis
  • Opening years
  • Overlap profits
  • Change of accounting date
  • Closing years
  • Future of the basis period rules?

Sole traders

When a self-employed individual starts to trade, he is required to prepare a set of accounts which show profits or losses made during a particular period. This period is usually referred to as the period of account but may also be referred to as the accounting period. Once a trader has chosen his accounting date, he will normally draw up accounts annually to a date known as his year end. For example, if a trader has a year end of 31 December, it means that he draws up accounts for the year ended 31 December each year.

The tax year runs from the 6 April until the next 5 April each year, but traders are allowed to draw up accounts for whatever period they want to. They do not have to use the tax year as their period of account.

The term ‘basis period’ means the period of trading profits which are assessed to income tax in a particular tax year. The basis period depends on the period of account and whether the trade is in the first few years of existence, is a continuing trade or has ceased. The start and end dates of the basis period are entered in boxes 66 and 67 on page SEF4 of the Self Employment (full) supplementary pages . Note that any trader whose accounting period is not the same as his basis period must complete full pages.

For more information on the calculation of the trading profits assessable to income tax, see the Trading income and expenses guidance note.

The rules relating to basis periods for sole traders apply equally to professions and vocations as they do to trades.

The choice of the initial accounting date is an important decision. There are several factors a trader should consider:

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