The new business
Part 4 of 4
This is the Finance Act 2021 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2022 to 31 March 2023. Candidates sitting ATX-UK after 31 March 2023 should refer to the Finance Act 2022 version of this article (to be published on the ACCA website in 2023).
So far in this article we have compared trading as an unincorporated business with trading through a company by reference to the various relevant taxes and we have reviewed the choice of year end for an unincorporated business.
In this final part we will look at pre-trading expenditure and capital allowances.
Pre-trading expenditure
Expenditure incurred in the seven years prior to the commencement of trade is treated as having been incurred on the first day of trading. Where the first period of trading is the basis period for more than one tax year (as in Illustration 1 in Part 3 of this article), such expenditure, together with other costs (and capital allowances) of the first period will be counted more than once when calculating taxable profits – see Illustration 2 below.
Capital allowances
For the purposes of capital allowances, assets purchased for use in the business prior to the commencement of trading are treated as having been purchased on the first day of trading. Assets owned by the trader and brought into the business are treated as having been acquired for their market value at the time they are brought into the business.
The annual investment allowance is increased/reduced for trading periods of more/less than 12 months. Accordingly, the length of the trading period in which significant capital expenditure is incurred can have an effect on the speed with which a business obtains relief for its capital expenditure.
Illustration 2
Irina began trading on 1 January 2022. In December 2021 Irina spent £385,000 on equipment for use in her business.
The capital allowances claimed by Irina will depend on the date to which she prepares her first set of accounts. It should be noted that the AIA limit to be used when sitting the ATX-UK exam in the period 1 June 2022 to 31 March 2023 is £1,000,000.
Accounts prepared to 31 March
| Main pool £ | Allowances £ |
|
|---|---|---|
| Period ended 31 March 2022 | ||
| Additions qualifying for AIA | 385,000 | |
| AIA (maximum £1,000,000 x 3/12) | (250,000) | 250,000 |
135,000 | ||
WDA (18% x 3/12) | (6.075) | 6,075 |
128,925 | 256,075 |
|
Period ending | ||
WDA at 18% | (23,207) | 23,207 |
Tax written down value carried forward | 105,718 | |
Total allowances for the first two trading periods | 279,282 |
Accounts prepared to 30 September
Main pool | Allowances |
|
|---|---|---|
Period ended 30 September 2022 | ||
Additions qualifying for AIA | 385,000 | |
AIA (maximum £750,000 | (385,000) | 385,000 |
Tax written down value carried forward | –– | |
Period ending 30 September 2023 | ||
No tax written down value brought forward | –– | –– |
| _______ | ||
Total allowances for the first two trading periods | 385,000 |
The effect of the accelerated capital allowances becomes more marked when the basis of assessment rules are applied to the tax adjusted profits of the business as, with a 30 September year end, the profits of the first nine months (as reduced by the capital allowances) form part of the calculations of the taxable profits for the first two tax years.
Illustration 3
Continuing from Illustration 2, Irina’s business has tax adjusted trading profits, before deduction of capital allowances, of £100,000 per month.
If Irina adopts a 31 March year end, her taxable trading income for the first two tax years of trading would be calculated as follows.
| £ | |
|---|---|
| 1. Profit for each trading period Three months ended 31 March 2022 ((£100,000 x 3) – £256,075) | 43,925 |
| Year ending 31 March 2023 ((£100,000 x 12) – £23,207) | 1,176,793 |
| 2. Taxable profit for each tax year | |
| 2021/22 (1 January 2022 to 5 April 2022) | 43,925 |
| 2022/23 (Year ending 31 March 2023) | 1,176,793 |
| Total taxable profits for the first two tax years | 1,220,718 |
If Irina adopts a 30 September year end, her taxable trading income for the first two tax years of trading would be calculated as follows.
| £ | ||
|---|---|---|
| 1. Profit for each trading period Nine months ended 30 September 2022 ((£100,000 x 9) – £385,000) | 515,000 | |
| Year ending 30 September 2023 (£100,000 x 12)) | 1,200,000 | |
| 2. Taxable profit for each tax year 2021/22 (1 January 2022 to 5 April 2022) 3/9 x £515,000 | 171,667 | |
| 2022/23 (1 January 2022 to 31 December 2022) £515,000 + (3/12 x £1,200,000) | 815,000 | |
| Total taxable profits for the first two tax years | 986,667 |
The difference between the total taxable profits for the first two tax years of £234,051 (£1,220,718 – £986,667) consists of additional capital allowances as follows:
| £ | ||
|---|---|---|
| 2021/22 ((3/9 x £385,000) – £256,075) | (127,742) | |
| 2022/23 (£385,000 – £23,207) | 361,793 | |
| 234,051 |
The speed with which the capital allowances are claimed and the effect of the opening years basis of assessment rules are both timing differences, as opposed to absolute savings. However, the difference can be significant as the timing difference may be considerable.
In order to be able to handle questions concerning an unincorporated business:
Note: The unincorporated trader is considered further in:
Written by a member of the ATX (UK) examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.