What about any complications?
In the first tax year of your business, the tax payable is based on the profit arising between the starting date and the following 5 April. This is taken as the appropriate fraction of the profit shown in your first set of accounts. Say you start on 1 June 2017 and your first accounts run to 30 June 2018 with a profit of £13,000, then tax will be worked out (to the nearest month) on the profits of the following periods:
2017/18 1 June 2017 to 5 April 2018 – 10/13 x £13,000 i.e. £10,000
2018/19 1 July 2017 to 30 June 2018 – 12/13 x £13,000 i.e. £12,000
You can see that the profit from 1 July 2017 to 5 April 2018 (9 months) has been taxed twice. The ‘overlap’ profit of £9,000 will be available for deduction when the business comes to an end, or (at least in part) if you change your accounting date to one nearer 5 April.
Change of accounting date
If you decide to change your accounting date from 30 June 2018 to 31 December 2018 and the accounts for the 18 months ending 31 December 2018 show a profit of £27,000, the taxable profit for 2018/19 will be worked out as follows:
|Profit based on accounts (18 months)
|Less overlap relief
|Profit for 2017/18
If you then cease trading on 31 August 2019, and your final accounts for the 8 months ending on that date show a profit of £11,000, the taxable profit for 2019/20 will be:
|Profit since accounting date in previous tax year
|Less balance of overlap relief not already used
|Profit for 2019/20