BIM81065 | Computation of liability: basis periods - apportioning profits to basis periods

S203 Income Tax (Trading and Other Income) Act 2005

In some circumstances, particularly in the opening and closing years of a trade, the basis period for a particular tax year will not coincide with the accounting period for which the person carrying on the trade has chosen to prepare their accounts. In these cases it may be necessary to add or apportion the profits or losses of one or more accounting periods to work out the profits or losses for the basis period.

Any apportionment that is necessary should generally be made in proportion to the number of days in the relevant periods.

An alternative time-apportionment basis suggested by the taxpayer can be accepted provided that it is reasonable and is applied consistently. An example might be time-apportionment by reference to the number of weeks or months in the relevant periods.

More unusually, there may be circumstances in which an apportionment is not necessary because a more accurate measure of the profit or loss arising in any period can be obtained by reference to the actual transactions which took place during that period - see Marshall Hus & Partners Ltd v Bolton [1980] 55 TC 539. Normally this will only be the case where there are relatively few identifiable transactions.

Example 1 - commencement

A business commences on 1 October 2012. The first accounts are made up for 12 months to 30 September 2013 and show a profit of £45,000.

The basis periods for the first three tax years are:

If the profits for 2012-2013 are computed by an apportionment using the number of days in the relevant periods, the taxable profit for 2012-2013 is £45,000 x 187/365 = £23,054.

Example 2 - change of accounting date

A trader makes accounts up to 5 April each year until 2012-2013 when a 6 month short account is prepared for the period 6 April 2012 to 30 September 2012. Accounts are made up to 30 September in each year after that.

Assume that the relevant conditions are met in respect of changing the accounting date in 2012-2013, see BIM81045.

The accounts show:

The basis periods are:

If the profits for 2012-2013 are computed by an apportionment using the number of days in the relevant periods, the taxable profit for 2012-2013 is £20,546 (£40,000 x 188/366) + £10,000 = £30,546.

The 6 month period from 1 October 2011 to 5 April 2012 is an overlap period. The profit for this period (£40,000 x 188/366 = £20,546) is an ‘overlap profit’ for which overlap relief can be given in a later year, see BIM81075.

Example 3 - cessation

The trade in Example 2 ceases on 31 January 2015.

The accounts show:

The basis periods are:

The profits for 2014-2015 are computed by adding together £25,000 + £10,000 = £35,000 and then deducting any overlap relief due, see BIM81075.