Gerald Charles & Co Accountants

BASIS OF ASSESSMENT

What income will be included in my assessment?

Your assessment to tax for any year is normally based on your actual income earned in the tax year i.e. from 6 April to the following 5 April.

If your income consists of profits from a trade, professional or vocation, and your annual accounts are normally made up to a date other than 5 April, your assessment will be based on the profits of your accounting year which ends in the tax year.

Example – If your accounts are prepared for the twelve months ending on 31 December, the profits for the period to 31 December 2020 will be taken as your profits for the tax year 2021/2022. However the HMRC are currently in consultation to amend this.

The amount assessed in respect of any other income, e.g. investment income, rental income etc. is based on the actual income earned in the tax year, i.e. from 6 April to 5 April.

What accounting date should I use?

It is up to you to decide the date to which you prepare your accounts. You can prepare your accounts from the date your business started to any date you choose. Once chosen you usually prepare all future accounts to the same date each year and this becomes your accounting year end.

What happens if I need to change my accounting year end date?

As your business changes you may find that your year end date is inconvenient, for example it may coincide with a time when it is your most busiest. In such circumstances you will be allowed to change your year end. There are special rules relating to change of accounting date and the revenue will ensure no profits have been left out as a result of the change.

What happens if I am in business with someone else in partnership?

If your business is a partnership, there are special rules to calculate taxable profits. The taxable profits of the partnership is calculated and then divided between the partners in accordance with the profit sharing agreement they have made. Each individual partners tax liability will then be calculated using the same rules that apply to self employed persons working on their own.

How am I taxed in my start-up years?

There are special rules for taxation of profits in commencement years,

First year

You are taxed on the profits of the business from the date you started to the following 5 April.

Second Year

You are taxed on the profits of the twelve month period,ending in the second tax year. If there is more than one accounting date end in the second year special rules apply. You will be taxed on the profits of the twelve months to the latest accounting date ending in the year or on the profits of the tax year. Where no accounts are made up to a date in the second year you will be taxed on the profits of the tax year.

Third and subsequent years

You are taxed on the profits of your accounting year ending in that tax year.

What about my final years?

There are special rules relating to your final years of trading, basically however all the profits assessed for tax for all years of your self employment will equal the sum of all your profits earned during this time.