AIA in 20 Month Final Basis Period

Sole trader business with 20 month final basis period, consisting of two periods of account

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We are preparing a self assessment tax return for an individual whose sole trader business was transferred to a limited company on 01 Feb 2023.  The sole trader business had a 31 May year end, therefore the basis period for the TY22-23 tax return runs from 01 June 2021 to 31 January 2023, covering two sets of accounts (the year ended 31 May 2022 and the 8 month period ended 31 January 2023).

I am aware that AIA is not available on expenditure "incurred in the chargeable period in which the qualifying activity is permanently discontinued" (per CAA01 section 38B), however I am uncertain whether this restriction applies to the full 20 month basis period in this case or just to final 8 month period of account?

CAA01 section 6 states that a chargeable period for income tax purposes is a period of account, which is a period for which accounts are drawn up for the purposes of the trade.  This would suggest that AIA could be claimed for the first 12 month period of account but I wasn't sure if it would raise queries if AIAs were claimed in the same tax return that the business ceased trading?

The limited company is controlled by the children of the sole trader, so it is intended to make a joint s266 election to transfer the assets at TWDV, therefore it would be beneficial to be able to maximise the AIA claimed before the transfer.

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By Ardeninian
19th Jan 2024 13:55

You are entitled to claim the AIA for expenditure in the first period of account in these circumstances. There are two chargeable periods which exactly match the two periods of account, so the expenditure is not in the chargeable period where the trade ceases.

Incidentally, if you prepared one 20-month set of accounts you would also be entitled to the AIA, as there would still be two chargeable periods of 12 months and 8 months. This is because a chargeable period cannot exceed 18 months (s6(6) CAA01).

In fact, as the last period of account would be the period detailed on the tax return the AIA would not appear on the face of the return (the details of the penultimate period of account would be included as an attachment only).

If queries were raised it would be pretty easy to satisfy the inspector that all is as it should be based on the legislation.

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Replying to Ardeninian:
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By carmichael
29th Jan 2024 11:53

Thanks so much for your response - it is very helpful.

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