The existing business
Part 1 of 4
This is the Finance Act 2017 version of this article. It is relevant for candidates sitting the Advanced Taxation – United Kingdom (ATX-UK) (P6) exam in the period 1 June 2018 to 31 March 2019. Candidates sitting ATX-UK (P6) after 31 March 2019 should refer to the Finance Act 2018 version of this article (to be published on the ACCA website in 2019).
From the September 2018 session, a new naming convention is being introduced for all of the exams in the ACCA Qualification, so from that session, the name of the exam will be Advanced Taxation – United Kingdom (ATX-UK). June 2018 is the first session of a new exam year for tax, when the exam name continues to be P6 Advanced Taxation (UK). Since this name change takes place during the validity of this article, ATX-UK (P6) has been used throughout.
This is the second article on the taxation of unincorporated traders. It covers some of the issues relating to extraction of profits, change of accounting date and the final years of a business. The first article (‘The new business’) covers some of the issues relating to a new business including the choice of business vehicle and the first years of trading. These articles only cover a selection of issues: there are other matters that, while not featuring in either of these articles, may still be the subject of a question in the exam.
The taxation of unincorporated traders is an important part of the ATX-UK (P6) syllabus and is examined regularly. Almost all of the relevant technical rules relating to income tax and national insurance contributions are covered in the TX-UK (F6) syllabus such that there is little that is new at ATX-UK (P6). However, these rules continue to be of vital importance to the ATX-UK (P6) exam – a sound knowledge of these rules will enable candidates sitting the advanced taxation paper to identify the relevant issues and taxes from the information provided, and to consider the implications of alternative courses of action.
This is not an introductory article; it is relevant to students coming to the end of their studies and finalising their preparations to sit the exam. It is intended to be read proactively – ie statements made should be confirmed as true by reference to the reader’s understanding of the rules or to a relevant study text. This approach will enable future situations to be analysed from first principles rather than by reference to a rigid set of memorised planning points.
What is required at ATX-UK (P6)?
Questions in the exam are likely to be based around the commercial decisions of the taxpayer. They will require candidates to have a strong knowledge of the technical rules and an ability to apply those rules briskly and accurately. Candidates may be required to identify options that are obviously advantageous, disadvantageous or irrelevant, without preparing detailed calculations – for example by recognising that a particular strategy relating to the use of losses would simply result in a waste of the personal allowance.
The basis of assessment
The taxable profits of an unincorporated business are determined in two stages:
- The profits per the accounts are adjusted for tax purposes – for a partnership, the tax adjusted profits are then divided between the partners in accordance with the profit sharing arrangements of the trading period.
- The basis of assessment rules are then applied to the sole trader or partner’s tax adjusted profits of the trading periods – unrelieved overlap profits are deducted from the taxable profits of the final tax year.
Where there is a tax adjusted trading loss in a basis period, the trader’s taxable income for the related tax year will be zero. There will also be a loss available for offset against income and/or chargeable gains. There are two main issues that candidates need to be sure of in order to be able to calculate the potential tax saving from the offset of the losses.
- The precise income and/or chargeable gains that the losses can be offset against, and
- The periods in which the offset can occur.
Candidates must then take care to consider all of the relevant possibilities in the detail necessary to provide the advice requested.
The rules governing the basis of assessment and the offset of losses are of fundamental importance in the exam. You must ensure that you can apply the rules efficiently and accurately.
Note: The unincorporated trader is also considered in:
- Taxation of the unincorporated business – the new business (for ATX-UK (P6))
Written by a member of the ATX-UK (P6) examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.