How do you report opening year trading profits on SA Tax Return?

How do you report opening year trading profits...

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This may seem like a stupid question, but having phoned HMRC & got "advice" from a technical adviser, I'm now a bit confused.

Sole trader business started 01/01/10 (wants year end to be 30th April)

4 months accounts 01/01/10 to 30/04/10 - Loss £4,000

12 months accounts 01/05/10 to 30/04/11 - Profit £12,000

Client submitted tax return herself in 2009/10

I understand the basis periods are as follows:-

1st year 2009/10 - 01/01/10 to 05/04/10 (actual basis)

2nd year 2010/11 - 01/01/10 to 31/12/10 (1st 12 months)

3rd year - 2011/12 - 01/05/10 - 30/04/11 (12 months to accounting date)

I have been told by the HMRC techical adviser, that I must attach accounts that clearly show the accounting date as:-

01/01/10 to 05/04/10 for 2009/10 tax year

06/04/10 to 05/04/11 for 2010/11 tax year

Surely that advice is not correct (does anyone prepare a different set of accounts for the first two years)?

I understood I could make the accounts up to any date (attach these to the return), then apportion these accounts by number of days for the relevant tax year, showing my calculations.   My question is, how do I show this correctly on 2009/10 & 2010/11 SA Tax Return (I'm using the HMRC software, so how does it calculate the tax correctly for the apportioned profits - yes I know I should bite the bullet & buy software, definately next year)?

Thanks.

Replies (8)

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By Helen Crowley
25th Jan 2012 14:50

You are right BUT

You are right, assuming of course that the first accounts were drawn up to 30 April 2010 but if the first set though were drawn up for the period from commencement to 30 April 2011 then HMRC will be right (because there would be no accounting date ending in 2010/11) HS222 is helpful here. It may be that the client completed the 2010 return incorrectly if she not only showed her basis period ending on 5 April 2010 but also her accounting date as 5 April 2010. She should also have made use of the "Adjustment" to profits box but again it's doubtful that this has been done correctly. Hopefully you are able to view the 2010 Return online and also amend it if required ....

 

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Replying to DJKL:
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By irnbru
25th Jan 2012 15:18

Thanks Helen, to clarify ...

The first accounts were drawn up to 30th April 2010 & this date was shown in box 7 "Date your accounts are made up to" of the SA Return Self Employment section.

So my point being, for 2010/11 do I attach accounts made up to year to 30th April 2011, then use the "Adjustments to Profit" box to adjust the accounts for the year so these are apportioned on a time basis using this year & the previous 4 months accounting period.   Do I also detail by note that this has been done?   If so, where is the adjustment to profit box - I can't find this on the return!   Am I overlooking this?

Thanks.

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By Helen Crowley
25th Jan 2012 15:53

Full Self Employment pages required to see the boxes

You will need to complete the Full Self Employement pages to get access to those boxes. If completing online then the adjustment box is just about at the end of the section relating to Self Emplyment. The accounting period is 01/01/2010 to 30/04/2010. Your basis period is 01/01/2010 to 31/12/2010. Overlap arises from 01/01/2010 to 05/04/2010 and this is the figure that was on the 2010 Return. Enter it as Overlap relief carried forward. You will need to enter a figure in box 67 of the Full Self Employment pages to add the adjustment required for the period from 01/05/2010 to 31/12/2010 and that figure will be 245/365 x profit for accounts for the year to 30/04/2011 or an estimate of that if figures are not yet available. In the 2012 Return you will enter details for the year ended 30/4/2011 and the basis period will be the same as the accounting year with further Overlap arising for the period 01/05/2010 to 31/12/2010. That's why it is easier to pick a 5/4 year end but as you say you can pick any....

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Replying to lionofludesch:
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By irnbru
25th Jan 2012 16:36

Thanks for taking the time to explain, very helpful, many thanks to you & all other contributers.

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Replying to lionofludesch:
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By irnbru
25th Jan 2012 16:41

One more question ...

When the next new client comes along, I assume accounts don't need to be to 5th April, i.e. if the year end was 31st March, HMRC wouldn't quibble about apportioning 5 days?

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By Helen Crowley
25th Jan 2012 17:16

re 5th april v 31st March

You can get HMRC to treat them as Co-terminous so no they won't worry about the 5 days. There is a cashflow advantage in picking a 30 April year end as the profits tend to be lower in the first years of trading too. It also gives you longer to prepare accounts but it is a pain in the whatsit to try and explain basis periods etc to a client!!

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Replying to DJKL:
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By irnbru
25th Jan 2012 19:26

Agreed, I had previously advised 30th April cashflow advantage

now I will be thinking again!   Can't be bothered with the hassle!   Or if I do, I will be building an extra something into my fixed fee for the job.

Thanks again for the help, really appreciate it.

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Euan's picture
By Euan MacLennan
25th Jan 2012 18:10

and an even greater pain

... to try to explain overlap profits!

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