The new business
Part 3 of 4
This is the Finance Act 2022 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2023 to 31 March 2024. Candidates sitting ATX-UK after 31 March 2024 should refer to the Finance Act 2023 version of this article (to be published on the ACCA website in 2024).
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. We are now going to look at the choice of year end for an unincorporated business.
The choice of year end affects when the profits of the business will be subject to income tax. For example, where a 31 March year end is chosen, the profits earned in a tax year are taxed in that same tax year (the profits earned in the year ended 31 March 2022 are taxed in the tax year 2021/22). Alternatively, where a 30 April year end is chosen, the majority of the profits earned in a tax year are not subject to income tax until the following tax year (the profits earned in the year ended 30 April 2022 are taxed in the tax year 2022/23).
When a new business begins to trade, the profits assessed to tax in the first two tax years will vary, perhaps considerably, depending on the choice of year end.
Illustration 1
Mizuki began trading on 1 January 2023. Her tax adjusted profits per month are set out below.
| £ | |
|---|---|
| January to March 2023 (three months) | 3,000 |
| April to September 2023 (six months) | 4,000 |
| October to December 2023 (three months) | 8,000 |
| January 2024 onwards | 12,000 |
If Mizuki adopts a 31 March year end, her taxable trading income for the first three tax years of trading would be calculated as follows:
1. Profit for each trading period
| £ | |
|---|---|
| Three months ending 31 March 2023 (£3,000 x 3) | 9,000 |
| Year ending 31 March 2024 ((£4,000 x 6) + (£8,000 x 3) + (£12,000 x 3)) | 84,000 |
| Year ending 31 March 2025 (£12,000 x 12) | 144,000 |
2. Taxable profit for each tax year
| £ | |
|---|---|
| 2022/23 (1 January 2023 to 5 April 2023) | 9,000 |
| 2023/24 (Year ending 31 March 2024) | 84,000 |
| 2024/25 (Year ending 31 March 2025) | 144,000 |
| Total taxable profits for the first three tax years | 237,000 |
If Mizuki adopts a 30 April year end, her taxable trading income for the first three tax years of trading would be calculated as follows:
1. Profit for each trading period
| £ | |
|---|---|
| Four months ending 30 April 2023 ((£3,000 x 3) + £4,000) | 13,000 |
| Year ending 30 April 2024 (£4,000 x 5) + (£8,000 x 3) + (£12,000 x 4) | 92,000 |
| Year ending 30 April 2025 (£12,000 x 12) | 144,000 |
2. Taxable profit for each tax year
| £ | |
|---|---|
| 2022/23 (1 January 2023 to 5 April 2023) 3/4 x £13,000 | 9,750 |
| 2023/24 (1 January 2023 to 31 December 2023) £13,000 + (8/12 x £92,000) | 74,333 |
| 2024/25 (Year ending 30 April 2024) | 92,000 |
| Total taxable profits for the first three tax years | 176,083 |
With a 30 April year end the taxable profits in the first three tax years are £60,917 (£237,000 – £176,083) less. This is because the profits are increasing and early profits are being taxed twice (giving rise to overlap profits) in place of later, higher profits.
This is a timing difference as opposed to an absolute saving. The profits earned in the period 1 May 2024 to 31 March 2025 of £132,000 (£12,000 x 11) are not taxed in the first three tax years if a 30 April year end is chosen. These profits, as reduced by the overlap profits of £71,083 (£9,750 + £61,333 (8/12 x £92,000)), represent the difference between the total profits taxed.
When considering the choice of year end, it may be necessary to work with monthly profit figures. In these circumstances you must first calculate the profits for the trading periods by reference to the monthly profits and then apply the basis of assessment rules in order to determine the taxable profits for the tax years.
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.