Revenue Note for Guidance
306 Meaning of basis period
Summary
For income tax purposes, allowances and charges under Part 9 are made by reference to events occurring in what is termed a “basis period” or by reference to conditions pertaining at the end of a “basis period”. The expression “basis period” is defined as the period the profits of which form the basis for the final computation of income tax for a year of assessment. Specific rules apply to determine the basis period where such periods overlap or are not continuous.
Details
Application
(1) For the purposes of Part 9 as it applies for income tax, “basis period” is to have the meaning assigned to it by this section.
General rule
(2)(a) The basis period for a year of assessment is the period on the profits of which income tax for that year is finally computed under Case I of Schedule D in respect of a trade or, as the case may be, under Case V of that Schedule in respect of income arising from rents or receipts in respect of land, premises or easements.
(2)(b) The following provisions which deal with overlapping basis periods and intervals between basis periods are designed to ensure that any day during the life of a trade on which an event can happen that is of significance in relation to allowances or charges will be included in one, but not more than one, basis period. Thus, any loss on a sale, etc for which a balancing allowance can be given qualifies for the allowance once, but not more than once, and any surplus liable to a balancing charge is charged once and once only.
Overlapping basis periods
(2)(b)(i) A period may be part of the basis period for more than one year of assessment, for example, on the commencement of a business (see section 66). For the purposes of capital allowances and charges under Part 9, however, where the basis periods for 2 years of assessment overlap, the period common to both is deemed to be part of the first basis period only.
Example
Accounts are regularly made up to 30 November each year until 30 November, 2002. The accounting date is then changed to 30 September and accounts are made up for the 10 month period to 30 September, 2003. An industrial building or structure is sold in October, 2002, that is, during the accounting year to 30 November, 2002, at a price in excess of the written-down value. A balancing charge will be made for the tax year 2002 for which the accounting year to 30 November, 2002 forms the basis period.
Under section 65(2)(b) the year ending on 30 September, 2003 is fixed as the basis period for the assessment for the tax year 2003. Were it not for section 306(2)(b)(i), a balancing charge in respect of the building sold in October 2002 would again be required for the tax year 2003. Section 306(2)(b)(i) prevents this by providing, in effect, that the sale which took place in the period common to the 2 basis years (namely, the 2 months October to November 2002) will be deemed to have taken place only in the first basis period, that is, in the year to 30 November, 2002.
Interval between basis periods
(2)(b)(ii) Where there is an interval between the basis periods for 2 successive years of assessment and the later year is not the year of the permanent discontinuance of the trade, then, for the purposes of capital allowances and charges under Part 9, the interval is treated as part of the second basis period only.
Example
Accounts are regularly made up to 30 June in each year until 30 June, 2002. The accounting date is then changed to 31 October and the first accounts on the new basis are for the 16 months to 31 October, 2003. The basis period for the 2002 assessment is the year to 30 June, 2002, and a sale in that year of machinery or plant at a price below the written down value will qualify for a balancing allowance for the year 2002. The basis period for the year 2003 as determined under section 65(2)(b) is the year to 31 October, 2003, and a similar sale of machinery or plant in that year will qualify for a balancing allowance for year 2003.
Were it not for section 306(2)(b)(ii), such a sale of machinery or plant in the interval between the 2 basis periods (July 2002 to October 2002) would not entitle the trader to a balancing allowance for any year. Section 306(2)(b)(ii) prevents this, however, by providing that any sale during that interval will, in effect, be deemed to be a sale in the second basis period (namely, the year to 31 October, 2003), thus qualifying for a balancing allowance (or, as the case may be, giving rise to a balancing charge) for the year 2003.
(2)(b)(iii) Where there is an interval between the basis periods for 2 successive years of assessment and the later year is the year of the permanent discontinuance of the trade, then, for the purposes of capital allowances and charges under Part 9, the interval is treated as part of the first basis period only.
Example
Accounts are made up regularly to 30 June each year until 30 June, 2002. Trading ceases on 30 September, 2003 and accounts for the 15 months period from July 2002 to September 2003 are made up. The 12 months’ account to 30 June, 2002 is the normal basis for the 2002 assessment. The assessment for 2003 (the last year of the trade) is on the actual profits from 1 January, 2003 to 30 September, 2003.
The period from 1 July, 2002 to 31 December, 2002 does not fall into any basis period, and an event occurring during that period would not, but for section 306(2)(b)(iii), entitle the trader to a balancing allowance or make him liable to a balancing charge. Section 306(2)(b)(iii) prevents this, however, by providing that an event occurring in that period will, in effect, be deemed to have occurred in the basis period to the 30 June, 2002, thus giving rise to a balancing allowance or a balancing charge for the year 2002.
Construction of certain references
(3)(a) The reference in subsection (2)(b) to the overlapping of 2 periods is to be taken as covering cases where 2 periods coincide or where one of 2 basis periods is wholly included in the other.
(3)(b) The references in subsection (2)(b) to the permanent discontinuance of a trade include, by virtue of section 320(5), references to changes of ownership which are treated as equivalent to the permanent discontinuance of a trade.
Professions, employments and offices
(4) The above rules (as expressed in relation to trades) apply also in the case of claimants for capital allowances under Part 9 who are assessable to income tax under Case II of Schedule D (professions) or Schedule E (employments and office holders).
Other cases
(5) In any other case, for example, a person leasing machinery or plant other than in the course of a trade, the basis period is to be year of assessment itself.
Relevant Date: Finance Act 2019