Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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Other Bills before Parliament

Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 15 — Basis periods
95

(4)
But the person carrying on the trade may use a different way of measuring the
length of the periods concerned if—
(a)
it is reasonable to do so, and
(b)
the way of measuring the length of periods is used consistently for the
purposes of the trade.
5
Overlap profits and losses
204
Meaning of “overlap period” and “overlap profit”
In this Chapter—
“overlap period” means a period which falls within two basis periods, and
“overlap profit” means profit which arises in an overlap period.
10
205
Deduction for overlap profit in final tax year
(1)
If a person permanently ceases to carry on a trade in a tax year, a deduction is
allowed for overlap profit in calculating the profits of the trade of the tax year.
(2)
The amount of the deduction is calculated as follows.

Step 1
15

Add together the overlap profits arising in all overlap periods.

Step 2

Subtract from that any deductions for overlap profit made under section 220
(deduction for overlap profit on change of accounting date).

The balance is the amount of the deduction allowed under this section.
20
206
Restriction on bringing losses into account twice
If a loss arises in, or is apportioned under section 203 to, two overlapping basis
periods, the amount of the loss—
(a)
is brought into account in calculating the profits of the first basis period,
and
25
(b)
is not brought into account in calculating the profits of the second basis
period.
207
Treatment of business start-up payments received in an overlap period
(1)
This section applies if—
(a)
a person carrying on a trade receives a business start-up payment (see
30
subsection (3)) in a period which falls within two basis periods, and
(b)
the payment is not a lump sum payment.
(2)
The payment—
(a)
is brought into account in calculating the profits of the trade of the first
basis period, and
35
(b)
is not brought into account in calculating the profits of the trade of the
second basis period.
(3)
A “business start-up payment” means a payment under a Business Start-Up
scheme which is of the kind originally known as enterprise allowance and is
made—
40

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 15 — Basis periods
96

(a)
in England and Wales, by a training and enterprise council pursuant to
arrangements under section 2(2)(d) of the Employment and Training
Act 1973 (c. 50),
(b)
in Scotland, by a local enterprise company under section 2(4)(c) of the
Enterprise and New Towns (Scotland) Act 1990 (c. 35) in relation to
5
arrangements under section 2(3) of that Act, or
(c)
in Northern Ireland, by or on behalf of the Department for Employment
and Learning under section 1(1A)(d) of the Employment and Training
Act (Northern Ireland) 1950 (c. 29 (N.I.)).
Rules where first accounting date shortly before end of tax year
10
208
When the late accounting date rules apply
(1)
Sections 209 and 210 contain rules for the purpose of—
(a)
avoiding the need to apportion profits, and
(b)
preventing overlap profit from arising,

in relation to the tax year in which a person (“the trader”) starts to carry on a
15
trade and the following tax year.
(2)
Sections 209 and 210 apply in relation to a tax year if—
(a)
the first accounting date is 31st March or 1st, 2nd, 3rd or 4th April, and
(b)
that date falls in the tax year in which the trader starts to carry on the
trade or in either of the following two tax years,
20

but the trader may elect for those sections not to apply in relation to a tax year.
(3)
In this section and section 210 “the first accounting date” means—
(a)
the first accounting date after the trader starts to carry on the trade, or
(b)
the date that is intended to be that accounting date if, at the time the
trader delivers a return for a tax year, there has been no accounting
25
date.
(4)
An election under this section must be made on or before the first anniversary
of the normal self-assessment filing date for the tax year to which it relates.
209
Rule if there is an accounting date
(1)
This section applies if there is an accounting date in a tax year and that date is
30
31st March or 1st, 2nd, 3rd or 4th April.
(2)
If—
(a)
the basis period for the tax year would otherwise end after the
accounting date, and
(b)
the part of the basis period that would otherwise fall after the
35
accounting date is included in the basis period for the following tax
year,

the basis period for the tax year ends on the accounting date.
210
Rules if there is no accounting date
(1)
This section applies if there is no accounting date in a tax year (“the relevant
40
tax year”).
(2)
If the trader—

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 15 — Basis periods
97

(a)
starts to carry on the trade in the relevant tax year, and
(b)
does so before 1st April,

the basis period ends on the date in the relevant tax year that corresponds to
the first accounting date.
(3)
If the trader started to carry on the trade in the previous tax year and there was
5
no accounting date in the previous tax year, the basis period for the relevant
tax year—
(a)
begins immediately after the end of the basis period for the previous tax
year, and
(b)
ends on the date in the relevant tax year that corresponds to the first
10
accounting date.
(4)
If the trader—
(a)
starts to carry on the trade in the relevant tax year, and
(b)
does so after 31st March,

the profits or losses of the trade of the relevant tax year are treated as nil.
15
(5)
In that case, the actual profits or losses of the trade of the relevant tax year are
treated as arising in the basis period for the following tax year, so far as they
do not already do so.
Slight variations in accounting date
211
Treating middle date as accounting date
20
(1)
This section applies for the purpose of preventing the rules in sections 215 to
220 from applying if—
(a)
accounts of a trade are drawn up to a particular day (rather than to a
particular date), and
(b)
that day is capable of falling on one of only 7 consecutive dates (or, if
25
that day is in February, on one of only 8 consecutive dates).
(2)
The person carrying on the trade may elect in relation to a tax year for the
fourth of those dates (“the middle date”) to be treated as the accounting date in
the tax year.
(3)
The election has effect for the purposes of this Chapter, but not for any other
30
purposes.
(4)
An election under this section—
(a)
must specify the day to which the accounts are drawn up and the
middle date, and
(b)
must be made on or before the first anniversary of the normal self-
35
assessment filing date for the tax year to which it relates.
212
Consequence of treating middle date as accounting date
(1)
If—
(a)
a date (“the middle date”) is treated under section 211 as the accounting
date in a tax year (“the current tax year”),
40
(b)
the basis period for the current tax year would otherwise be that given
by the general rule in section 198, and
(c)
subsection (2) or (3) applies,

Income Tax (Trading and Other Income) Bill
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Chapter 15 — Basis periods
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the basis period for the current tax year begins immediately after the end of the
basis period for the previous tax year and ends with the middle date.
(2)
This subsection applies if—
(a)
the accounting date in the previous tax year was not determined under
section 211, and
5
(b)
that accounting date was one of the 7 (or 8) dates on which the day in
the current tax year to which accounts are drawn up is capable of
falling.
(3)
This subsection applies if—
(a)
the accounting date in the previous tax year was determined under
10
section 211, and
(b)
the accounting date in the current tax year is the same as the accounting
date in the previous tax year.
213
Circumstances in which middle date not treated as accounting date
(1)
If—
15
(a)
a date (“the middle date”) is treated under section 211 as the accounting
date in a tax year (“the earlier tax year”),
(b)
the basis period for the earlier tax year ends on the middle date, and
(c)
the basis period for the following tax year (“the later tax year”) is that
given by one of the provisions listed in subsection (2),
20

the basis period for the later tax year is determined as if the basis period for the
earlier tax year had ended on the date to which accounts were actually drawn
up in the earlier tax year.
(2)
The provisions are—
(a)
section 201(1) (tax year in which there is no accounting date),
25
(b)
section 202(1) (tax year in which person permanently ceases to carry on
a trade),
(c)
section 215(2) (change of accounting date in third tax year), and
(d)
section 216(3) (change of accounting date in later tax year).
Special rules if accounting date changes
30
214
When a change of accounting date occurs
(1)
If there is a change from one accounting date (“the old accounting date”) to
another accounting date (“the new accounting date”), the change of accounting
date occurs—
(a)
in the first tax year in which accounts are drawn up to the new
35
accounting date, or
(b)
if earlier, in the first tax year in which accounts are not drawn up to the
old accounting date.
(2)
A change from a date determined under section 211 to an actual accounting
date is taken to be a change from one accounting date to another, even if the
40
two dates are the same.
(3)
If, because of subsection (1)(b), a change of accounting date occurs in a tax year
in which there is no actual accounting date, the date corresponding to the new

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 15 — Basis periods
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accounting date is treated as the accounting date in that tax year for the
purpose of determining—
(a)
the basis period for that tax year, and
(b)
if section 219 applies, the basis period for the following tax year.
215
Change of accounting date in third tax year
5
(1)
This section applies if—
(a)
a change of accounting date occurs in the third tax year in which a
person carries on a trade,
(b)
the person does not permanently cease to carry on the trade in that tax
year, and
10
(c)
the accounting date in that tax year falls more than 12 months after the
end of the basis period for the second tax year in which the person
carries on the trade.
(2)
The basis period—
(a)
begins immediately after the end of the basis period for the second tax
15
year in which the person carries on the trade, and
(b)
ends with the accounting date in the third tax year in which the person
carries on the trade.
216
Change of accounting date in later tax year
(1)
This section applies if—
20
(a)
a change of accounting date occurs in a tax year in which a person
carries on a trade,
(b)
the tax year is later than the third tax year in which the person carries
on the trade, and
(c)
the person does not permanently cease to carry on the trade in the tax
25
year.
(2)
If—
(a)
the conditions in section 217 are met (conditions for basis period to end
with new accounting date), and
(b)
the new accounting date falls less than 12 months after the end of the
30
basis period for the previous tax year,

the basis period is that given by the general rule in section 198.
(3)
If—
(a)
the conditions in section 217 are met, and
(b)
the new accounting date falls more than 12 months after the end of the
35
basis period for the previous tax year,

the basis period begins immediately after the end of the basis period for the
previous tax year and ends with the accounting date.
(4)
If the conditions in section 217 are not met, the basis period for the tax year is
the period of 12 months ending with the old accounting date.
40
217
Conditions for basis period to end with new accounting date
(1)
The conditions in this section are met if—

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 15 — Basis periods
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(a)
the person carrying on the trade gives appropriate notice of the change
of accounting date to the Inland Revenue (see subsection (2)),
(b)
the 18 month test is met (see subsection (3)), and
(c)
either condition A or B is met (see subsections (4) to (6)).
(2)
Appropriate notice of the change of accounting date is given to the Inland
5
Revenue if (and only if) the notice is given—
(a)
in a return under the provision of TMA 1970 that applies to the person
carrying on a trade (see section 8, 8A or 12AA of that Act), and
(b)
on or before the day on which the return is required to be made and
delivered under that provision.
10
(3)
The 18 month test is met if the period of account ending—
(a)
with the new accounting date in the tax year in which the change of
accounting date occurs, or
(b)
if there is no new accounting date in that tax year, with the new
accounting date in the first tax year in which accounts are drawn up to
15
the new accounting date,

is not longer than 18 months.
(4)
Condition A is that, in the 5 tax years immediately before the tax year in which
the change of accounting date occurs, there has been no change of accounting
date that counts for the purposes of this condition.
20
(5)
A change of accounting date counts for the purposes of condition A if it results
in the basis period for the tax year in which the change occurs ending with the
accounting date in that tax year.
(6)
Condition B is that—
(a)
the change of accounting date is made for commercial reasons (see
25
section 218), and
(b)
the notice under subsection (2) sets out the reasons for the change.
218
Commercial reasons for change of accounting date
(1)
If the Inland Revenue do not give notice under this section to the person
carrying on the trade, a change of accounting date is treated for the purposes
30
of condition B in section 217 as made for commercial reasons.
(2)
If the Inland Revenue do give notice under this section to the person carrying
on the trade, a change of accounting date is treated for the purposes of
condition B in section 217 as made for reasons which are not commercial.
(3)
The notice must—
35
(a)
state that the Inland Revenue are not satisfied that the change of
accounting date is made for commercial reasons, and
(b)
be given within the period of 60 days beginning with the date on which
the notice under section 217(2) is received.
(4)
A person to whom notice is given under this section may appeal against it
40
within the period of 30 days beginning with the date on which it is given.
(5)
On an appeal—
(a)
if the Commissioners are satisfied that the change is made for
commercial reasons, they may set aside the notice, and

Income Tax (Trading and Other Income) Bill
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(b)
if they are not satisfied that the change is made for commercial reasons,
they may confirm the notice.
(6)
For the purposes of this section obtaining a tax advantage is not a commercial
reason.
(7)
Part 5 of TMA 1970 (appeals against assessments to tax), apart from section 50,
5
applies in relation to an appeal under this section as it applies in relation to an
appeal against an assessment to tax.
219
The year after an ineffective change of accounting date
(1)
This section applies to a tax year in which a person carries on a trade if—
(a)
the tax year falls immediately after a tax year in which a change of
10
accounting date occurs, and
(b)
the basis period for the tax year in which the change occurs ends with
the old accounting date.
(2)
If the accounting date in the tax year is the new accounting date, a change of
accounting date is treated as occurring in that tax year for the purposes of
15
sections 216 to 220 (including this section).
(3)
If the accounting date in the tax year reverts to the old accounting date, that
change of accounting date is ignored for the purposes of—
(a)
section 214, and
(b)
sections 216 to 220 (including this section).
20
220
Deduction for overlap profit on change of accounting date
(1)
This section applies for the purpose of calculating the profits of a trade of a tax
year if—
(a)
a change of accounting date occurs in the tax year, and
(b)
the basis period for the tax year is longer than 12 months.
25
(2)
A deduction must be made for overlap profit.
(3)
The amount of the deduction is calculated as follows.

Step 1

Add together the overlap profit arising in all overlap periods ending before the
end of the tax year.
30

Step 2

Subtract from that any deductions made under this section for previous tax
years.

The balance is “the remaining overlap profit”.

Step 3
35

Add together the number of days in all overlap periods ending before the end
of the tax year.

Subtract from that the total number of days given by Step 5 on any previous
occasions on which a deduction was made under this section.

The balance is “the number of days on which the remaining overlap profit
40
arises”.

Step 4

Divide the remaining overlap profit by the number of days on which the
remaining overlap profit arises.