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Where Taxpayers and Advisers Meet

change basis period due to covid ?

billyg
Posts:118
Joined:Wed Aug 06, 2008 3:47 pm
Re: change basis period due to covid ?

Postby billyg » Tue Jan 12, 2021 4:27 am

thanks for your help, i think i can change my year end from 5 april 20 to 5 october 20 hence 18 months ?

so i would work out the profits for the 18 months and then apportion by dividing the no of days from 6 april 20 to 5 oct 20 by the number of days from 5 april 19 to 5 october 20 and multiplying the profit by that fraction.

the difference would be called overlap relief.

is that correct please ?
thanks

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: change basis period due to covid ?

Postby robbob » Tue Jan 12, 2021 10:08 am

billyg
thanks for your help, i think i can change my year end from 5 april 20 to 5 october 20 hence 18 months ?
so i would work out the profits for the 18 months and then apportion by dividing the no of days from 6 april 20 to 5 oct 20 by the number of days from 5 april 19 to 5 october 20 and multiplying the profit by that fraction.
the difference would be called overlap relief.
is that correct please ?
thanks
No - the calcs are completley not what you would expect unfortuantely they should be exactly as laid out by bd6759 (i am presuming havent checked full chapter and verse)

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim81035
Identifying the year in which the accounting date changes
The tax year in which a change of accounting date occurs is the earlier of:
the first tax year in which accounts are drawn up to the new date
the first tax year in which accounts are not drawn up to the old accounting date.
Handily we have a slight similar example - example 3
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim81060


A new business starts on 1 July 2007 and prepares accounts to 5 April each year until 5 April 2015. In 2015-2016 accounts are prepared for a period of 15 months from 6 April 2015 to 30 June 2016.
The basis periods are:
2014-2015 Year 7 12 months to 5 April 2015
2015-2016 Year 8 12 months to 30 June 2015
2016-2017 Year 9 12 months to 30 June 2016
The change of accounting date occurs in 2015-2016. This is the first year in which accounts are not made up to the old date of 5 April, see BIM81035.
As 30 June 2015 is less than 12 months after the basis period for the previous year, the basis period for 2015-2016 is the 12 months ending on the new accounting date (30 June) in that year, see BIM81045.
The 9 month period from 1 July 2014 to 5 April 2015 is an overlap period. The profits for this overlap period will qualify for overlap relief in a later year, see BIM81075.
We can see here that the relevant basis period in the first tax year after after change change is to a date spanning the previous tax year and the first 3 months of the current tax year - even though there is no accounts made up to that date!


the basis period for 2015-2016 is the 12 months ending on the new accounting date (30 June) in that year, see BIM81045.
this is the important bit so your basis period would be as bd6759 confirmed
For 2019-20: 12 months to 30 September 2019

Note practicably speaking presumably hmrc want to minimise your options to bring future income back into a prior tax year.
Now what happens if you do a six year accounting period - hmmmmmmmm (legend has it that a six year accounting period may have been used in a distant galaxy far far away by one company - im sure i saw it in the business income manual once but i think it was a ct case no sa)

bd6759
Posts:4256
Joined:Sat Feb 01, 2014 3:26 pm

Re: change basis period due to covid ?

Postby bd6759 » Tue Jan 12, 2021 3:16 pm

thanks for your help, i think i can change my year end from 5 april 20 to 5 october 20 hence 18 months ?

so i would work out the profits for the 18 months and then apportion by dividing the no of days from 6 april 20 to 5 oct 20 by the number of days from 5 april 19 to 5 october 20 and multiplying the profit by that fraction.

the difference would be called overlap relief.

is that correct please ?
thanks
No. It’s not correct. I said what your basis periods will be if you change your accounting date.

bd6759
Posts:4256
Joined:Sat Feb 01, 2014 3:26 pm

Re: change basis period due to covid ?

Postby bd6759 » Tue Jan 12, 2021 3:21 pm

Now what happens if you do a six year accounting period - hmmmmmmmm (legend has it that a six year accounting period may have been used in a distant galaxy far far away by one company - im sure i saw it in the business income manual once but i think it was a ct case no sa)
Company Tax. An accounting period must end no more than 12 months after the end of the previous one. The period of account does not matter.

Income Tax. A period of account cannot exceed 18 months.

billyg
Posts:118
Joined:Wed Aug 06, 2008 3:47 pm

Re: change basis period due to covid ?

Postby billyg » Tue Jan 12, 2021 5:30 pm

Thanks for your help, I have read through several times but have add so am struggling to work out how some of that info is relevant to me.

so “if your usual date is 31 March 2020, and you change the date to 30 September 2020, your basis periods will be:
For 2019-20: 12 months to 30 September 2019
For 2020-21: 12 months to 30 September 2020”

then I will actually be including the period from 1 oct 18 to 31 march 19 which was already included in the previous years accounts.

but I dont have to make any adjustments for that ?

thank you for your patience

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: change basis period due to covid ?

Postby robbob » Tue Jan 12, 2021 6:00 pm

then I will actually be including the period from 1 oct 18 to 31 march 19 which was already included in the previous years accounts.
Thats exactly what happens when you generate "overlap profit" some of your pfofits have been taxed twice - hmrc are happy with this arrangement as you remove this overlap profit later and on the last period you always include the numbers not previously acounted for up until cessation.

Note if your profits are increasing going down this route can end up with a very nasty sting in the tail.

billyg
Posts:118
Joined:Wed Aug 06, 2008 3:47 pm

Re: change basis period due to covid ?

Postby billyg » Tue Jan 12, 2021 6:05 pm

thank you for that :)
how do i remove the overlap profit later ?

My profit is going to be much less in the period from 5 april to september

thanks

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: change basis period due to covid ?

Postby robbob » Tue Jan 12, 2021 8:55 pm

how do i remove the overlap profit later ?
Normally the overlap stays there till you cease trading so it is adjusted out on the last tax return , note on this return you will have a longer than you may expect period of trading to enter - so its really a bonus as such

Say you cease trading 30/6/2021 - you will only have been trading 3 months in the tax year 21/22 but you will need to include profits from 1/10/2019-30/6/2020 on that return - which is 9 months ! in theory the overlap may get you down something approaching a correct solution but thats only if te profits are broadly suimilar for last period pro rata when compared to overlap period.

The overlap can also be adjusted if you ever chnage your year end again - if your year end is ever re-aligned to 5th april all overlap will be used with again a longer period of trading being included.


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