Worked example of a business that started trading in 2016/17 - Basis Periods (Second year rules)

Second Year Rules

A basis period is the time period that is used to determine taxable profits for a tax year.  In the first years of trade, this may not be the same as the accounting period.  This can often mean that the taxable profits will not be the same as the net business profits for the period and can create ‘overlap profits’ in certain circumstances. 

The following example deals with a business that started trading on 1 November 2016 (2016/17) and prepares its accounts to the 31 October.  The first year rules would have applied in the 2016/17 tax year and profits would have been taxed in that year using a basis period 1 November 2016 to 5 April 2017.  Using £50,000 as a net profit figure, this would equate to taxable profits in the 2016/17 tax year of £21,369 (156/365 x £50,000). For more detailed information regarding First Year Rules, please see our knowledge base article on: Worked example of a business that started trading in 2017/18 - Basis Periods (First year rules)

We will now be looking at the second year rules and how they would apply to the 2017/18 tax year.

Using SimpleStep

1. Browse to Your work > Self Employment

Enter the whole period of account (not the basis period) and the turnover.

2. If the turnover is below the relevant threshold for the year (£85,000 for 2017/18), then TaxCalc will automatically default to the ‘Short Form – Details’ completion.  In this case, go to Annualised turnover and tick the box that confirms that you want to complete the Full Form.  If your profits exceed the threshold, this step can be skipped.

3. Go to Full Form – Details

Enter all relevant details. Please note that the commencement date cannot be entered as this falls outside of the 2017/18 tax year.

4. Click on Next Step and complete all applicable boxes on the following pages.  This will result in the Net business profit for tax purposes, found on the Adjustments page.

5. Click on Next Step (if on the Adjustments page) or Go to Basis Period to identify the basis period and whether there are any overlap profits arising. 

6. Basis Period – In the example we are using, the basis period will be the same as the accounting period; the first twelve months of trade.  This means that no basis period adjustment is necessary.   However, there will be an element of overlap profits as some of these profits have already been taxed in the 2016/17 tax year, as shown above. 

If you know what the overlap profits should be, these can be entered manually together with the number of days over which the overlap profits arose. Alternatively, tick the box and you can use the basis period/overlap calculator to work out the overlap profits for you, as shown at point 7 below.

7. The basis period calculator will use the accounting period information already entered but you will need to enter the commencement date as these does not fall in the tax year and cannot, therefore, be entered as part of the Tax Return information.  Once the commencement date has been entered, the basis period calculator will work out the overlap profits arising during the period.
8. Close the basis period calculator and the overlap profits will be shown for inclusion on the Tax Return.

9. Any Other adjustments, losses and other further information can then be entered in the normal way.