A frequently asked question by sole traders and partnerships is about basis period (the dates their self assessment returns should cover). They are clear laid down rules on this area under tax law. This is best explained by an example:Pauline starts to trade on 1/08/2009 making up the accounts to 31 July 2010.
First tax year
The basis period for first tax year runs from the date trade starts to the next 5/4. So in Pauline’s example, the first basis period will be from 1/08/2009 to 31/03/2010 or 5/4/2010. This would be for the tax year 2009/10.
Second tax year – You need to ask a series of questions
Here I am responding to these questions by using Pauline’s example.
Is there a period of accounting ending in tax year 2010/11?
Yes – The accounting year end is 31/07/2010.
How long is this period of account?
12 months or more? In Pauline case it is 12 months exactly to 1/08/2009 to 31/07/2010.
So in tax year 2010/11 Pauline will be tax on the profits of 12 months to 31/07/2010.
The third tax year (2011/12)
This will be the period of account ending in the third tax year. In Pauline’s case this would be 1/08/2010 to 31/07/2011.
Later tax years
The basis period would be the period of account ending in the tax year. This is known as current year basis of assessment. In Pauline’s case the fourth tax year would be 2012/13. This would cover her accounting period 1/08/2011 to 31/07/2012 and so on.