ACCA F6 FA09 Study Text 2010
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Chapter 8: The basis of assessment rules for unincorporated businesses
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Step 1
Work out which tax year is the tax year of change.
This is the earlier of the first tax year where:
the accounts are prepared to the new accounting date, or
the accounts are not prepared to the old accounting date.
Usually these two events happen in the same tax year, but they could occur in
different tax years.
Step 2
Work out the trading income assessment of the year before the tax year of change
on a normal CYB basis using the old accounting date.
Step 3
Work out the trading income assessment of the year after the tax year of change on
a normal CYB basis using the new accounting date.
Step 4
Work out the length of the relevant period, often referred to as the gap period.
This is the period that is not assessed in step 2 or step 3.
Step 5
Work out the trading income assessment in the tax year of change as follows:
If the gap period is less than 12 months, some profits will be assessed more than
once. Relief is given for these overlap profits in the last tax year on the cessation of
trade (or possibly earlier if there is another change of accounting date).
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Where the gap period is more than 12 months, overlap relief is available. This is
because the basis of assessment rules only seek to assess 12 months’ profits each tax
year. As the gap profits exceed 12 months, the appropriate number of months of
overlap profits can be deducted so that only 12 months are assessed in the tax year
of the change.
Overlap relief is calculated as follows:
profits overlap of months of Number
months 12 — period gap the ofLength
profits Overlap ×
From these rules there are three main scenarios that could occur. These are
illustrated in the examples that follow.
Example 1
Paul prepared his accounts to 31 December each year until 2009 when he changed
his accounting date by preparing a short set of accounts to 30 September 2009. His
adjusted profits after capital allowances are as follows:
Adjustedprofitaftercapitalallowances
£
Yearended31December2008 42,000
9monthsended30September2009
37,800
Yearended30September2010
63,000
In his opening years, Paul had three months of overlap profits of £12,000.
Required
Calculate the trading income assessments arising from these accounting profits, and
state how much overlap profits are carried forward for relief in the future.
Answer
Step 1. Work out the tax year of change
The tax year of change = 2009/10 = the earlier of the first tax year where the
accounts are:
(1) prepared to the new accounting date (i.e. 2009/10), or
(2) not prepared to the old accounting date (i.e. also 2009/10 in this example)
Step 2. Work out the trading income assessment for the year before the tax year of
change
This is tax year 2008/09.
CYB: Trading income assessed on profits for the year ended 31.12.2008: £42,000.
Chapter 8: The basis of assessment rules for unincorporated businesses
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Step 3. Work out the trading income assessment for the year after the tax year of
change
In this example, the year after the tax year of change is 2010/11
Trading income assessed on profits for the year ended 30.09.2010: = £63,000.
Step 4: Work out the length of the gap period
The period not assessed under steps 2 and 3 = 1 January 2009 to 30 September 2009.
Gap period = 9 months.
Step 5: Work out the trading income assessment in the tax year of change
Gap period is less than 12 months. Therefore assess the 12 months ending on the
new accounting date in the tax year 2009/10.
Taxyear
Basisperiod
Workings(nearestmonth)
Trading
income
assessment
£
2009/10 1.10.2008–30.9.2009 (3/12×£42,000)+£37,800 48,300
Step 6: Calculate the overlap profits
£
Openingyears
12,000
Onchangeofaccountingdate 1.10.2008–31.12.2008 (3/12×£42,000) 10,500
Overlapprofitstocarryforward
22,500
Example 2
Rosemary prepared her accounts to 31 December each year until 2009 when she
changed her accounting date by preparing a long set of accounts to 28 February
2010. Her adjusted profits after capital allowances are as follows:
Adjustedprofitaftercapitalallowances
£
Yearended31December2008 54,600
14monthsended28February2010
63,000
Yearended28February2011
52,500
In her opening years, Rosemary had three months of overlap profits of £12,000.
Required
Calculate the trading income assessments arising from these accounting profits, and
state how much overlap profits are carried forward for relief in the future.
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Answer
The tax year of change = 2009/10.
This is the earlier of the first tax year where the accounts are
(1) prepared to the new accounting date (i.e. 2009/10), or
(2) not prepared to the old accounting date (i.e. also in 2009/10 in this example).
Trading income assessment for the year before the change: 2008/09
CYB: Trading income assessed on profits for the year ended 31.12.2008: £54,600.
Trading income assessment for the year after the change: 2010/11
CYB: Trading income assessed on profits for the year ended 28.02.2011 £52,500.
Period not assessed = 1 January 2009 to 28 February 2010
Gap period = 14 months.
Gap period is more than 12 months
Therefore assess the profits of the gap period and deduct overlap relief
£
Profitsofthegapperiod(1.1.2009–28.2.2010)
63,000
Minusoverlaprelief
3
1214
00012
‐
, ×
(8,000)
Tradingincomeassessmentfor2009/10 55,000
Overlap profits
£
Openingyears
12,000
Onchangeofaccountingdate –amountrelieved
(8,000)
Overlapprofitstocarryforward
4,000
Note
If Rosemary had chosen 31 March 2010 as her new accounting date, she could have
relieved all of her overlap profits.
Example 3
Simon prepared his accounts to 30 September each year until 2010 when he changed
his accounting date by preparing a short set of accounts to 31 March 2010. His
adjusted profits after capital allowances are as follows:
Chapter 8: The basis of assessment rules for unincorporated businesses
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Adjustedprofitaftercapitalallowances
£
Yearended30September2008 15,000
Yearended30September2009
12,000
6monthsended31March2010
8,500
Yearended31March2011
10,000
In his opening years, Simon had six months of overlap profits of £9,000.
Required
Calculate the trading income assessments arising from these accounting profits, and
state how much overlap profits are carried forward for relief in the future.
Answer
The tax year of change = 2009/10 = the earlier of the first tax year where the
accounts are:
(1) prepared to the new accounting date (i.e. 2009/10), or
(2) not prepared to the old accounting date (i.e. 2010/11 in this example).
Trading income assessment for the year before the change: 2008/09
CYB: Trading income assessed on profits for the year ended 30.09.2008: £15,000.
Trading income assessment for the year after the change: 2010/11
CYB: Trading income assessed on profits for the year ended 31.03.2011: £10,000.
Period not assessed = 1 October 2008 to 31 March 2010. Gap period = 18 months.
Gap period is more than 12 months therefore assess the profits of the gap period
and deduct overlap relief.
£
Profitsofthegapperiod(1.10.2008–31.3.2010)
Yearended30September2009 12,000
6monthsended31March2010 8,500
Minusoverlaprelief
6
1218
0009
‐
, ×
(9,000)
––––––––––––––––––––––––––––––
–
–
Tradingincomeassessmentfor2009/10 11,500
––––––––––––––––––––––––––––––
–
–
Overlap profits
£
Openingyears
9,000
Onchangeofaccountingdate –amountrelieved
(9,000)
–––––––––––––––––––––––––––
–
–
Overlapprofitstocarryforward Nil
––––––––––––––––––––
–
––––––
–
–
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Paper F6 (UK)
Taxation FA2009
CHAPTER
9
Trading losses of an
unincorporated business
Contents
1 Overview of trading losses
2 The carry forward of trading losses
3 Relief against total income
4 Loss relief in the opening years
5 Loss relief in the closing years
6 Tax planning
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Overview of trading losses
The calculation of trading losses
The loss relief available
1 Overview of trading losses
1.1 The calculation of trading losses
A trading loss occurs when a sole trader or a partnership has:
an adjusted trading loss before capital allowances that is increased by the
addition of capital allowances, or
an adjusted trading profit before capital allowances that becomes a loss when
capital allowances are deducted.
If a trading loss occurs, the trading income assessment for the appropriate tax year
is £Nil.
1.2 The loss relief available
A range of loss reliefs is available to individuals who incur a trading loss.
The reliefs available depend on whether or not the business is:
in its opening years,
in its closing years, or
neither starting to trade nor closing down (an ongoing business).
An individual will choose to make use of his trading loss in the best way, by
applying the tax planning principles described at the end of this chapter.
Ongoing business
The following reliefs for trading losses are available to an ongoing unincorporated
business.
(1) Carry forward the trading loss and set it off against the first available profits
from the trade that produced the loss.
(2) Make a claim to set off the trading loss against the total income of the
individual:
− in the tax year of the loss, and/or
− in the preceding tax year.
(3) Make a claim as in 2 above and then claim additional relief against trading
profits of the three preceding tax years. (This additional form of loss relief
only applies to losses incurred in 2009/10.)
Chapter 9: Trading losses of an unincorporated business
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(4) Make a claim to extend the relief in 2 above to set off the trading loss against
the net gains of the individual:
− in the tax year of the loss, and/or
− in the preceding tax year.
Business in its opening years
In addition to the options for an ongoing business, an individual whose business is
in its opening years can claim the following relief.
(5) Make a claim to set off the trading loss against the total income of the three tax
years preceding the tax year of the loss.
Business in its closing years
The following reliefs for trading losses are available to an individual whose business
is in its closing years:
(1) Make a claim to set off the trading loss against the total income of the
individual:
− in the tax year of the loss, and/or
− in the preceding tax year.
(2) Make a claim to extend the relief in 2 above, to set off the trading loss against
the net gains of the individual:
− in the tax year of the loss, and/or
− in the preceding tax year.
(3) Make a claim to set off the trading loss against the trading income of the
individual:
− in the tax year of the loss and
− in the preceding three tax years.
(4) If the cessation of trade is due to the transfer of the business to a company (i.e.
the incorporation of the business), unrelieved losses can be carried forward
against future income derived by the individual from the new company.
These rules are explained in the rest of this chapter, except for relief against net
gains which is explained in a later chapter.
Note: section numbers and the Income Tax Act 2007
The rules on reliefs for trading losses are now contained in the Income Tax Act 2007.
Knowledge of section numbers is not required for the examination. However, using
section numbers can useful in an income tax loss computation, and so they are used
in this text. You will not be penalised if you quote section numbers incorrectly in an
answer to an examination question.
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The carry forward of trading losses
The rules of s83 ITA 2007
2 The carry forward of trading losses
2.1 The rules of s83 ITA 2007
The rules for the carry forward of trading losses for an unincorporated business are
contained in section 83 of the ITA 2007.
Income tax trading losses can be carried forward indefinitely, but the following
rules apply.
The trading loss must
be set off against:
Explanation:
The first available They must be set off in the next tax year if possible.
An individual cannot choose to miss out a tax year,
for example to obtain a higher rate of tax relief.
Trading profits Set-off is against trading income only.
Trading losses carried forward cannot be set off
against other income or gains.
Of the trade which
produced the loss
If an individual operates more than one type of
trading activity, trading losses carried forward can
only be set off against future profits from the activity
that produced the loss. They cannot be set off against
profits of a different trading activity.
Using as much as
possible of the trading
loss
In each future tax year, the maximum amount of
trading loss must be set off until relief has been given
for the total trading loss.
The effect of this is that the loss to be relieved in any
tax year is the lower of:
- the loss available, and
- the trading profit of the tax year.
Trading losses will be carried forward automatically and relieved in this way,
unless the individual claims another type of loss relief.
The amount of trading loss available to carry forward under s83 must be agreed
with HMRC within four years of the end of the tax year in which the loss was
incurred.