Mr Jones made up his accounts each year to 31 July. He changed the accounting date to 31 December in 2000-01, so that a 17-month accounting period (to 31 December 2000) was returned with the 2000-01 return. The profit assessed for 2000-01 was that of the 17-month period less five months' worth of overlap relief based on the transitional overlap profit.
Mr Jones made up his accounts each year to 31 July. He changed the accounting date to 31 December in 2000-01, so that a 17-month accounting period (to 31 December 2000) was returned with the 2000-01 return. The profit assessed for 2000-01 was that of the 17-month period less five months' worth of overlap relief based on the transitional overlap profit.
He admitted his wife as a partner in the business on 1 June 2001, and wished to submit accounts for the five-month period to 31 May 2001, and annually thereafter. This being so, Mr Jones' basis period for 2001-02 would be the 12 months to 31 May 2001, creating seven months' worth of overlap profit to carry forward.
(1) Would the seven-month period (1 June 2000 to 31 December 2000) comprised within the 12 months to 31 May 2001 be calculated as 7/17 x period 1 August 1999 to 31 December 2000 before or after overlap relief? Likewise, would the overlap profit to carry forward be before or after overlap relief?
(2) Would the Revenue agree to a proposed second change of accounting date so soon after the first change, on the basis simply that there has been a partnership change?
(3) If the Revenue did not agree to a second change of accounting date, and accounts were prepared for the year to 31 December 2001 et seq, what would be the basis periods for 2001-02 and 2002-03 for both Mr and Mrs Jones?
(Query T15,999) - Casey.
'Casey' raises a number of questions. Instead of answering those, it is worth reviewing the situation after the accounts to 31 July 1999 and the accounts for the 17 months to 31 December 2000 were prepared. As 'Casey' says, this means that the 2000-2001 assessment is based upon the profits of those 17 months, less five months' worth of overlap relief. It is irrelevant that such overlap profit originally arose as transitional overlap profit, on the move from the 'old rules' to the 'new rules' of assessment.
No doubt box 3.12 of the 2000-2001 self-assessment return was ticked to indicate that the change of accounting date was 'a permanent change'.
But now we are told that might not actually be the case because it is possible that the next set of accounts might be made up to 31 May 2001, and annually to 31 May thereafter. Unless the 2000-2001 return was submitted very speedily, it was no doubt sent in after the new proposed accounting date and that calls into question the accuracy of the tick in box 3.12 on that return.
The system is of course self assessment and it is open to Mr Jones to revise his self assessment, by submitting a new 2000-2001 form, with the same 17 month accounts being reported but with no tick in box 3.12. In that case the basis period dates in boxes 3.74 and 3.75 would be the year to the old accounting date falling in the year, that is, from 1 August 1999 to 31 July 2000. Box 3.76 would contain the profit for the 17-month period, with box 3.77 showing 5/17ths of that amount (shown as a negative), with box 3.79 blank.
If that action is taken, accounts for the five months to 31 May 2001 can be prepared, box 3.12 happily ticked on the 2001-2002 return, the basis period for that year being from 1 June 2000 to 31 May 2001. That will create more overlap profit because the period from 1 June 2000 to 31 July 2000 will have been taxed in two years of assessment.
Alternatively, if it is desired to leave the 2000-2001 return unchanged, it is feared that admission of a new partner will be insufficient reason to get the Inland Revenue to agree to a second change being effective for tax purposes so soon after the previous change. Accordingly, in that circumstance, basis periods for tax purposes will remain as ending each 31 December, irrespective of the date to which the accounts are drawn. If the accounts are made up to 31 May each year, time apportionment will be needed to arrive at the assessable figures. - JRL.
I think the query under point (2) should have been made before those in point (1), as with there already having been a change of accounting date less than five years before the second proposed change, then the conditions under section 62A(5), Taxes Act 1988 come into play insofar as the Revenue must be satisfied '… that the change is made for bona fide commercial reasons …'. Therefore from the information provided there does not seem to be much chance, if any, of persuading the Revenue accordingly, although Mr Jones does have the right to make an appeal to the Commissioners.
Please note that although paragraph 1382 of the Revenue's Inspector's Manual suggests that if there are two or more changes of accounting date within two years, then the first can be ignored, it appears, because of where it is situated in the manual, that it can be ignored and only refers to pre self assessment situations.
Nevertheless, if Mr Jones were allowed to make the second change, then in order to answer point (1) logically, we need to look at why overlap relief/profit was introduced. The reason given by the Revenue in booklet SAT1 under paragraph 1.82 is: 'In order to ensure that the total profits assessed exactly equal the total profits made, a credit ['overlap relief'] will be given in a subsequent year equal to the profit in the overlap period'. This is followed by the definition in 1.84 of overlap profit: '… the amount of the profit or gains which … is included in the computations for two successive years of assessment …'. Therefore as we are dealing with the same accounting period (to 31 December 2000), then, in order to keep like with like, the seven-month period from 1 June to 31 December 2000, combined within the 12 months to 31 May 2001, would be calculated before overlap relief, and similarly with the overlap profit carried forward. To put it more simply, in 2000-01 the profit for the period ended 31 December 2000 will have already been assessed in full - forget the use of five months transitional overlap relief brought forward. Then in 2001-02 seven months of that period is assessed again and therefore has to be included in full in the unused overlap relief carried forward, so that the 'total profits assessed and made' rule is kept.
If, as expected, the Revenue does not agree to the second change, then for Mr Jones the basis periods for 2001-02 and 2002-03 would be the years ended 31 December 2001 and 2002. For Mrs Jones in respect of 2001-02, under section 61(1) the actual (tax year) basis applies, i.e. 1 June 2001 to 5 April 2002 and for 2002-03, as there is a 12 months accounting period ending in that tax year, under section 60(3) the year ended 31 December 2002 is taken, with the overlap profit carried forward relating to her share for the period 1 January to 5 April 2002. - Goldstone.
