Shorten Sole Trader basis period

Hi, I have a question re shorten sole trade accounts basis period.

Didn't find your answer?

I have a client who started trading in April 2015, the first year we used tax year as basis period; 

1st Year: 15/16 tax year - 06/04/2015 - 05/04/2016

2rd Year: 16/17 tax year - we have done the tax return using basis period 06/04/2016 - 05/04/2017, but now the client wants to amend the tax return and shorten the year end to 31/12/2016. 

Am I understanding right that; 

the 3rd year: 17/18 tax year - basis period will be 01/01/2017 - 31/12/2017

4th year: 18/19 tax year - basis period is 01/01/2018 - 30/11/2018 (Client stopped trading at 30/11/2018)

I believe it does not cause any overlap profits because there is no overlap period?

Is there anything else I need to consider?

Thank you in advance.

Replies (10)

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RLI
By lionofludesch
11th Dec 2018 12:24

I think you're struggling to change the 2016/17 year end at this stage but, if you are successful, the profits for the year ended 31 Dec 2016 will be assessable in 2016/17.

As the profits for 1 Jan to 5 April 2016 were already assessed in 2015/16, it is that period of some three months which is the overlap period.

You need to read the change of accounting date rules more carefully.

And maybe you should look at the motives for this retrospective change of year end. If the client thinks he'll be getting nine months profits assessed in 2016/17, I'm afraid he has another think coming.

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Replying to lionofludesch:
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By chloe D
11th Dec 2018 12:35

My concern will be whether retrospective change of 16/17 year end will attract HMRC investigation?

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Replying to chloe D:
By Duggimon
11th Dec 2018 12:43

Is it likely to change the tax bill much?

The taxpayer is entitled to change their basis period and to amend their 2017 return so those in themselves shouldn't cause additional HMRC scrutiny and, assuming there's nothing untoward in the figures, there'd be no reason for concern.

If the change in basis period results in a huge decrease in 2017 tax though I would be surprised if HMRC didn't at least raise an eyebrow and perhaps ask a question or two, so I would be making sure the returns were all correct before making any sort of changes.

As lionofludesch says, you need to look at the reason for this retrospective change, that will give you an idea of HMRC's likely reaction.

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Replying to Duggimon:
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By chloe D
11th Dec 2018 12:59

It won't change the tax bill much.

Most of the income was generated up to 31/12/2016, bare minimal income from 01/01/2017 to 05/04/2017.

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Replying to chloe D:
RLI
By lionofludesch
11th Dec 2018 13:15

Then you need to look hard at why you're making this rod for your own back.

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Replying to chloe D:
RLI
By lionofludesch
11th Dec 2018 12:46

Probably not. There aren't many enquiries these days.

You'll need to prepare proper accounts though. Apportioning the April 2017 accounts won't do. Is the tax saving more than the cost of doing that ?

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Replying to lionofludesch:
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By chloe D
11th Dec 2018 13:04

Thank you!

It's client's preference, I have no say about the change.

Talking about enquiries, I also have another client who 'forgot' to declare his business income of around £30k on the 16/17 tax return and now he wants us to amend the return and include it on the return, provided his action is to promptly disclose the income, he is asking whether HMRC will make enquiries to his return because of the change and charge him huge penalties for that?
Obviously late payment interest is unavoidable as I understood.

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Replying to chloe D:
RLI
By lionofludesch
11th Dec 2018 13:20

chloe D wrote:

Thank you!

It's client's preference, I have no say about the change.

Well, there'll be your charges for re-preparing the accounts. That might make him think a little.

You've got all the numbers but you say there's little or no tax saving, it might (or might not) increase the risk of an enquiry - it'll certainly extend the enquiry period - there are additional costs and the business has already ceased trading.

On the positive side - nothing.

Forgive me if I say it's a crazy idea.

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Replying to chloe D:
RLI
By lionofludesch
11th Dec 2018 13:28

chloe D wrote:

Talking about enquiries, I also have another client who 'forgot' to declare his business income of around £30k on the 16/17 tax return and now he wants us to amend the return and include it on the return, provided his action is to promptly disclose the income, he is asking whether HMRC will make enquiries to his return because of the change and charge him huge penalties for that?

£30,000 ? So around £12,000 in tax ? He'll get credit for making the first move but it's a bit careless, isn't it ? I think he has to be prepared to learn the lesson the hard way.

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By Duggimon
11th Dec 2018 14:08

I have to confess I missed the part where the business had already stopped trading. I agree it's a pointless waste of time and you'd be as well explaining that to your client. If they're adamant then I suppose as long as you need the work the extra fees will be nice.

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