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Self Assessment cessation rules

Self Assessment cessation rules

If Accounts are normally made up until 31/05 and then a business ceases on 28/02, does the final basis period have to be treated as 21 months?

I realise that Overlap relief can be deducted.

Is the tax calculated on the full 21 months or is it apportioned to 12/21? If it is on the full 21, might it be better to prolong the final trading period until after 5th April?

Thank you


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23rd Feb 2016 11:33

No apportionment

With a normal accounting date of 31st May the overlap relief brought forward will represent 10 months profit.  This will be the first 10 months of trading which would have formed the basis of the first year's return and also included in the second as well.

If the cessation is at the end of February then the business has traded for 11 months in the final tax year.  So the assessment needs to be based on (effectively) 11 months profit.

The profits from the whole 21 months need to be returned but then the overlap relief is deducted.  So the final assessment is 21 months minus 10 months leaving the required 11 months being assessed.

The problem is that the average monthly profit for the final period is likely to be quite different from the average monthly profit of the overlap.

Thanks (1)
23rd Feb 2016 12:03

Basis period

If the trade ceases at the end of February then the proprietor is due to be taxed on the year to May 2015 and the nine months to Feb 2016 in the tax year to April 2016.

As far as accounts preparation goes, it doesn't matter if you treat that as two periods or as one long one, for a sole trade it's all the same anyway.

It would make no sense to artificially extend the trade past 5 April unless the overlap relief available is significantly less than the profit for those nine months from 1 June 15 to 28 Feb 16, if that's the case then it may be better from a cash flow point of view to extend past the end of the tax year but ultimately by the time it's all said and done the net tax position will remain unchanged, it's just the dates it will have to be paid that will move.

If the client is moving on to do something else it may prove advantageous to be assessed in full in the tax year to April 16, if there's a chance that income previously taxed at BR might push them into HR next year. It all depends on what the amounts are.

Thanks (1)
23rd Feb 2016 16:29

As my client is looking retire with just a small pension might it be worth looking at extending the cessation date thereby breaking up the final period??

Thanks (0)
23rd Feb 2016 16:34

The best option

will ultimately depend on how much overlap relief is available and what profits the business has made in the 21 months up to cessation, it could be better declaring it all now, delaying cessation or it may make no difference at all, without the figures we can't really advise any further.

Thanks (1)
23rd Feb 2016 16:56

In theory ....

In theory, no period can be longer than 18 months.  So you should really do a 12 and a 9.

In practice, for a cessation, it'll amount to the same thing anyway.

Alternatively, you can do a 10 and an 11, changing the accounting date in the previous tax year. It's just an option - might be better, might be worse, might make no difference but it's something you can consider.

Thanks (1)
23rd Feb 2016 17:07

Any state pension deferred?

If there is and there is a lump sum to come post 5th April extending the period may change their marginal rate next year which could prove expensive.

Unlikely but without detail to the contrary should be considered.

Depending on overlap available may actually prove beneficial though in this scenario?

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