How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask TonyTax Your Own Question

TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15755
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
13905389
Type Your Tax Question Here...
TonyTax is online now

Given that accounting periods allowances purposes

Customer Question

Given that accounting periods for capital allowances purposes on cessation cannot exceed 18 months so for example a 19 month period must be broken down into a 12 month and 7 month period, what is the point if doing this and then adding the combined allowances together produces the same answer as not going through this exercise? Everything I have read says that this is how it is done!
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi.
In a final accounting period of no more than 18 months, you would not claim writing down allowances, just balancing allowances and balancing charges and possible annual investment allowance after taking account of additions and disposals.
Where you have to split the final period into one of 12 months and one 7 months, you can claim writing down allowances etc for the 12 month period as if the trade was continuing. For the seven month period, you don't claim writing down allowances and you use the process I outlined in the first paragraph of this answer.
Some sole traders extend their accounting period with no intention of ceasing their business which is what the 18 month period limit for CA purposes is really aimed at. Some allowances are increased in accordance with the increased length of the basis period.
Take a look at HS252 here for more information on capital allowances and extended basis periods:
https://www.gov.uk/government/publications/capital-allowances-and-balancing-charges-hs252-self-assessment-helpsheet
I hope this helps but let me know if you have any further questions.
Customer: replied 1 year ago.
Thank you but I am aware of the above two comments in your response. No examples on any website appear to address the issue. I can understand the reason for the 18 month rule on commencement and on a change of accounting date as without this rule, a larger capital allowance claim could be made but why on cessation? If the wdv is say £10.000 at the beginning of the accounting period then in the first twelve month period, the wda at 18% would be £1800 then the wdv for the beginning of the second period is £8200. Market value/disposal proceeds of £5000 would give a balancing allowance of £3200. Therefore allowances of ££1800 +£3200 = £5000 which mean that there is a total allowance of £5000 deducted from trading profits which is then apportioned 12/19 and 7/12 respectively. This is no different from the opening wdv being £10000 and disposal proceeds of £5000 which still gives £5000 to be offset against the total profits. It would only make sense if the capital allowances were offset as to £1800 in the first period and £3200 in the second period. In the case I am working on, the balancing allowance is a much bigger figure and severely affects the outcome due to a capital allowance election having been signed on cessation of the business. I have a WDA for the first twelve months then a large balancing allowance for the final seven months which skews the assessable profits between the chargeable periods. I am at a loss to understand it but I am sure I am doing it correctly by adding the capital allowances together and offsetting them against the total profits for the 19month period.
Expert:  TonyTax replied 1 year ago.
The profits for the final 19 month period are all taxable in the tax year in which the date of cessation falls so the fact that one period is skewed may make things look odd but you are doing it correctly.
The WDA claim doesn't have to be made at all or it can be adjusted to whatever level you like all the way down to £0. There is no obligation to make capital allowances claims in an year especially if they will be ineffective but there will be a follow though to the next period.
Customer: replied 1 year ago.
The original accounting date was 31.3 so there is no basis period falling in 2014/15 tax year. Under these circumstances, are you saying that there will be no income for 2014/15 and the whole of the profits (and capital allowances) will be assessable in 2015/16? This certainly makes more sense of the capital allowances position if so!
Customer: replied 1 year ago.
I was working on the basis that I would have to apportion the total profits between the two tax years in view of there being no accounting period falling in 2014/15.
Expert:  TonyTax replied 1 year ago.
Whilst you split the capital allowances into a 12 month period and a 7 month period, you don't split the profits that way. Your final basis period for income tax purposes runs from the start date of the final accounting period to the cessation date and the cessation date dictates in which tax year the profits are assessed.
You may have had overlap relief to claim but not if your first accounts ran to 31 March and to that date thereafter.
Take a look under "Cessations" of HS222 here:
https://www.gov.uk/government/publications/how-to-calculate-your-taxable-profits-hs222-self-assessment-helpsheet/hs222-how-to-calculate-your-taxable-profits-2015#cessations
Customer: replied 1 year ago.
I fully understand the principle when there is an end of a basis period in the previous tax year. "Cessations" in HS222 of course confirms the principle but for a 31 May year end and so there is a basis period which ends in the previous tax year. However ITTO1A05/S201 states that "where no accounts are drawn up to a date in the tax year, the general rule is that the basis period for the tax year is the period of 12 months beginning immediately after the basis period for the previous tax year. With an accounting period of 31 March with cessation on 31 October and accounts drawn up for the whole nineteen months, it seems that we do have to split the profits between tax years. So, although the result for this particular client is that the balancing allowances create a loss, this can be apportioned 12/19 and 7/19 which enables him to offset the loss against other trading income of 2014/15 as well as against general income for 2015/16 instead of it all having to be offset against 2015/16.
Expert:  TonyTax replied 1 year ago.
Can you tell me the start and end dates of your final accounting period please.
Customer: replied 1 year ago.
Start date 1 April 2014. End date 31 October 2015.
Expert:  TonyTax replied 1 year ago.
OK.
Given your historic accounting date of 31 March and the fact that you cannot skip a tax year, you will need to split the profits between income tax basis periods of 1 April 2014 and 31 March 2015 and 1 April 2015 to 31 October 2015. If the capital allowances produce losses you will have choices as to how best to use them and in the final tax year, 2015/16, there may be a terminal loss which is dealt with in HS222. The capital allowances basis periods cannot go beyond the end date for each income tax basis period.
If I were in your situation and I realise it may be too late, I'd draw up two sets of accounts, the first for the 12 months to the regular accounting date and the second for the 7 months to the cessation date.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15755
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
TonyTax and other Tax Specialists are ready to help you
Customer: replied 1 year ago.
Thanks. That is a new perspective! I couldn't believe the difference that the balancing allowance made in the first scenario but as has come out in this exchange, under normal circumstances it would not have made a substantial difference to the assessable profits during a single tax year. It is only because of the 31 March year end that the results are skewed. However, by splitting the accounting period, it is possible that we may have a better alternative if the accounts have not already been prepared. Many thanks for your help.
Expert:  TonyTax replied 1 year ago.
Thanks and good luck.

What Customers are Saying:

 
 
 
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C.
< Previous | Next >
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C.
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP
  • I couldn't be more satisfied! This is the site I will always come to when I need a second opinion. Justin
  • Just let me say that this encounter has been entirely professional and most helpful. I liked that I could ask additional questions and get answered in a very short turn around. Esther
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C.
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex
 
 
 

Meet The Experts:

 
 
 
  • Sam

    Sam

    Accountant

    Satisfied Customers:

    7088
    26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
< Previous | Next >
  • http://ww2.justanswer.com/uploads/TA/Tax Expert/2013-8-21_231010_sam.64x64.jpg Sam's Avatar

    Sam

    Accountant

    Satisfied Customers:

    7088
    26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
  • http://ww2.justanswer.com/uploads/BI/bigduckontax/2013-8-12_222058_1.64x64.jpg bigduckontax's Avatar

    bigduckontax

    Accountant

    Satisfied Customers:

    2333
    FCCA FCMA CGMA ACIS
  • http://ww2.justanswer.com/uploads/TA/TaxRobin/2013-8-28_16186_femalebusinessprofessionalbinderhand11038485.64x64.jpg TaxRobin's Avatar

    TaxRobin

    Tax Consultant

    Satisfied Customers:

    524
    International tax
  • /img/opt/shirt.png taxadvisor.uk's Avatar

    taxadvisor.uk

    Chartered Certified Accountant

    Satisfied Customers:

    2845
    FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
  • http://ww2.justanswer.com/uploads/MS/MsAM/2012-6-9_16426_anna.64x64.jpeg Anna's Avatar

    Anna

    Teacher, writer, biologist

    Satisfied Customers:

    270
    Great research skills, variety of work experiences, teaching experience.
  • http://ww2.justanswer.com/uploads/PD/pdheslin/2012-6-6_232056_pambig.64x64.jpg pdheslin's Avatar

    pdheslin

    Consultant

    Satisfied Customers:

    51
    20+ years of internet site creation and search engine optimization. Dozens of search tools at my disposal.
 
 
 

Related Tax Questions