Or is it an express train with its lights on coming straight towards you! Much has been written about self assessment (SA) in the popular press, a great part of which has concentrated on the negative aspects. There are however many tax planning opportunities arising from SA and the purpose of this article is to illustrate one of them.

TAX DEFERAL

Historically, many unincorporated traders and partnerships have taken 30th April as their accounting date. One of the chief reasons for this was that it gave the greatest gap in time between generating profits and havingto pay income tax on those profits. This remains true under the SA regime.

A fundamental part of SA is the change of basis under which business profits are taxed, from the old preceding year basis to the new current year basis (CYB). For businesses that commence trading after 6th April1994 (a new business), the CYB applies immediately, whereas for businesses in existence before 6th April 1994, CYB applies from 6th April 1997.

DOUBLE TAXATION

In the case of a new business, the Inland Revenue recognise that profits generated in the opening years of business can be taxed twice, leaving an amount known as overlap profit.

The following example helps to illustrate overlap profit for a new business:

Jane commences in business on 1st May 1994 and draws up her accounts to 30th April 1995. Her profits for the year are £80,000 and the assessable profits are calculated as follows:

Tax year: 1994/95
Basis period: 1st May 1994 - 5th April 1995
Assessable profit: £73,333

Tax year: 1995/96
Basis period: 1st May 1995 - 30th April 1996
Assessable profit: £80,000

The overlap period is 1st May 1994 - 5th April 1995 and the overlap profit is £73,333.

A type of overlap profit will also almost certainly arise for a business in existence before 6th April 1994 and therefore the following planning pointis of equal relevance to new and old businesses alike.

THE OPPORTUNITY

Overlap profit is available as a credit against future taxable profits and it is most commonly given in two different circumstances:

1. where there is a change of accounting date or 2. a cessation of trade.

Whilst there are complex rules governing the change in accounting date, suffice to say that it can be done at least once in order to unlock the overlap profit. Although a cessation of trade may seem a bit drastic(!) this can be achieved by transferring the business to your own limited company.

So why might you wish to unlock the overlap profit? Well, firstly the longer the credit is not used, the less it is worth in real terms. Secondly and perhaps more importantly, consider the effect that a change inhigher tax rates may have.

Following on with the above example, the tax due in 1994/95 on the overlap profit of £73,333 (assuming Jane is only entitled to a single person's allowance) would have been £24,250. If for tax year 1998/99, the highest rate of tax is increased to 60% and all other rates and allowances stay the same, the tax value of the overlap profit credit would be £32,404, meaninga potential tax saving of £8,154.

CONCLUSION

Whether you are a new or existing business you should be giving careful consideration to your accounting reference date, paying particular attention to changing tax and inflation rates. PLAN NOW for Self Assessment.

Tim Shaw is tax partner at Sanders & Shaw - a West end firm of chartered accountants. He can be contacted on 020 7569 7160 or by e-mail at info@sandersandshaw.co.uk

SELF ASSESSMENT

WHAT DOES IT MEAN? WILL IT AFFECT ME?

If you are concerned about these questions, why not do something about it and call Sanders & Shaw today! Ask for Simon or Tim, either of whom would pleased to consider whether the self assessment rules may affect you.