Accounting Periods And Basis Periods For Self Employed Business
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Self employed business in the UK is required to produce a set of financial
accounts for a 12 month trading period. The format of the accounts is the
personal decision of the proprietor and can be a full set of annual accounts
including profit and loss account and balance sheet including using control
accounts and cash and bank records and the self assessment tax return.
An appropriate accounting system for many self employed business would not be
to prepare a full set of annual accounts but instead to prepare a simple income
and expenditure account. Preparing an income and expenditure account allows a
much simpler accounting or bookkeeping system where simple accounting software
can be used.
The objective of any bookkeeping software being to maintain accurate
financial records and produce the accounting records and totals required to
complete the inland revenue self assessment tax return each year. Financial
control is very important and the bookkeeping software should also produce
regular financial statements showing the profit and loss of the business
throughout the accounting trading periods.
The financial tax year varies depending upon which country business is
conducted. In the US accounts are prepared during an accounting period from 1
January to 31 December each year. In the UK the standard financial year adopted
by the inland revenue is from 6 April each year to the 5 April the following
In the UK tax rules are set for each financial year and by adopting the
standard tax year a small business can benefit by preparing the financial
accounts under a single set of tax rules and preparing the self assessment tax
return accordingly. Adopting a different financial period involves straddling
the official tax year and more than one set of tax rules might be applicable to
the tax calculation resulting from the net profit being declared.
After choosing the April to April financial tax year accounts are required to
be submitted by the submission deadline of 31 January the following year.
Earlier submission is recommended as by submitting the final accounts and tax
returns online by 31 October each year the inland revenue will calculate the
income tax and national insurance payable.
When a self employed business has been in business for two or three years and
has chosen a different 12 month accounting period to the financial tax year the
12 month tax is calculated according to a basis period. Up until that point the
accounts may be subject to apportionment to calculate the tax due.
The basis period under which the business tax is calculated is the 12 month
accounting period ending in the specific tax year. A business which has a 12
month trading period ending 31 December 2007 would be taxed under the basis
period 2007 to 2008 being the basis period 6 April 2007 to 5 April 2008. The
same rules apply if the accounting periods are shorter or longer than the
standard 12 month period.
If the accounting date is changed by a sole trader the inland revenue are
informed of the change on the self assessment tax return and the re3asons for
the change. If as a result the self assessment tax return arrives late the tax
will be assessed on the previous basis period.
Changing an accounting date that overlaps two basis years results in the
business being taxed twice for the same accounting profit as the business would
be taxed under both basis years. The extra tax paid can be highly unwelcome but
can be reclaimed at a later date through the self assessment tax return.
The penalty for late submission of the self assessment tax return in the UK
is 100 pounds and interest is also charged on any outstanding income tax and
national insurance from the first day after submission was due.
About the Author
Terry Cartwright is a qualified accountant designing
on excel spreadsheets providing complete Small Business Accounting Software
solutions for small to medium sized business with simple
Bookkeeping to assist financial control through automated tax returns.
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Article Published/Sorted/Amended on Scopulus 2008-04-03 12:43:02 in Tax Articles