Annex 1: Minor changes in the law made by the Act: Change 55: Basis periods: to allow accounts prepared to a date near the end of the tax year to be treated as if prepared to 5 April: sections 208, 209, 210 and 220
This change allows accounts regularly prepared to 31 March or 1, 2, 3 or 4 April to be treated as if prepared to 5 April and a change of accounting date to 31 March (or 1, 2, 3 or 4 April) to be treated, for overlap relief purposes, as a change to 5 April.
The source legislation in sections 61 to 63A of ICTA distinguishes between the case where accounts are regularly prepared to 5 April and the case where they are prepared to a different date. In the latter case the rules are more complex and involve periods of overlap of basis periods (and, as a consequence, the creation of overlap profit that must subsequently be relieved) during the first years of trading.
Many taxpayers prepare accounts regularly to 31 March. In practical terms there is little difference between these cases and the 5 April cases but strictly under the source legislation, they nevertheless fall within the more complex “accounting date other than 5 April” rules.
Change 55 allows, for the purposes of the basis period rules, accounts prepared to 31 March to be treated as prepared to 5 April. That simplifies the operation of the basis period rules by avoiding the creation of very short overlaps of basis periods - and therefore of small amounts of overlap profit - during the first years of trading.
But it would be illogical to exclude from this simplification cases where the chosen accounting date would result in overlaps even shorter than those arising from an accounting date of 31 March. So accounts prepared to dates 1 to 4 April are also included.
This change gives statutory effect to the non-statutory practice described in paragraph 71170 of the Business Income Manual and prevents overlaps of less than six days.
A similar problem can arise where there is a change of accounting date. The effect of the source legislation in section 63A of ICTA is that where there is a change of accounting date that is effective for tax purposes and that change is to an accounting date of 5 April, all previous overlap profit is deductible without restriction. But taxpayers who change to a date very close to 5 April would normally be potentially subject to a minor restriction of their overlap relief.
Section 220 provides statutory authority for the non-statutory practice referred to in paragraph 71170 of the Business Income Manual. That practice allows a change of accounting date to 31 March to be treated as though it were a change to 5 April. And that allows all previous overlap profit to be deducted in the year in which such a change takes effect for tax purposes.
Again, it would be illogical to exclude change of accounting date cases where the chosen accounting date fell between 31 March and 5 April. So a change of accounting date to 1, 2, 3 or 4 April is also treated as though it were a change to 5 April.
This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.