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The Self-Employed (sole trader)

If your accounting date falls on any date between 31 March and 5 April in a year, although, at a time when profits might be low, you might be paying tax based upon a year of good profits, taxation may be very unpleasant but it is on a normal basis.  (That is apart from: if  a business has to be treated as ceased, if not sold, consideration would need to be given to market values of fixed assets, at which they would be deemed to exit the business.)   

Otherwise, in the event of a cessation of business, the final profits to be brought into charge to tax will be those for the whole period (since last included on a Tax Return) to actual cessation of business. 

More fully:  If a normal accounting date is not between 31 March and 5 April, it will be the case that full profits to 5 April each year will not have been fully brought into charge to tax, until the Income Tax Return covering the cessation date.  When such business ceases, the final profits to be brought into charge will be all that have so far not been so treated.  So, the final profits to be taxed may relate to more than one year.  Against that, there may be available, for deduction, an  amount of “Overlap” profit.  The Overlap would have been calculated in the past on previous profits, so it might bear little relation to the current level.

 (Overall, the system is fair, application of the rules does mean that the total of all taxable profit earned over the lifetime of a business will be the total brought into charge to tax.  This is irrespective of whatever accounting dates have been in effect.)

Individual circumstances vary enormously, it is the case that each requires separate study.  Actual cessation dates to adopt can be given consideration.  In some cases, there may be no need to invoke a cessation of business at all.   In others, to mitigate tax, judging the best timing of transfers of the business to a partnership, or limited company may provide the answer, or there may be cessation and re-commencement, perhaps even within the same tax year.

The Construction Industry Scheme (CIS)

Those normally accustomed to having credit for CIS tax deductions are particularly liable to an anomalous charge to taxation arising.  This is because credit for the deductions is given strictly in accordance with the tax year in which they arise.  On the other hand, the profits which gave effect to the deductions will be normally brought into charge to tax with timing based upon the individual’s own financial year-end.  The worst-case scenario is one in which relatively high historic profit is brought into charge on a Tax Return, but there is little, or no, CIS tax credit available.  

A new employment

Regard should be had to the PAYE code that is applied to remuneration, during a year in which self-employment continues, or cessation of self-employment occurs.  Unless the code recognizes the other income, you could be under-paying tax.

It must be remembered that there is no option under PAYE to have income taxed in any way other than in accordance with the normal tax year.  It is the case that the full profits for a self-employment business with a financial year ending on (say) 30 June 2008, would normally be brought into charge to tax in the 2008/09 tax year.  If there is also employment income occurring between 6 April 2008 and 5 April 2009, this too would be taxable for the 2008/09 year.  The two sources of income would be reportable on the Tax Return for that year.  With credit for tax deducted at source, or paid on account, liability is calculated on the two income sources.

Tax Losses

Tax losses generally are capable of being set off against other income for the tax year of assessment. Or they may be carried back to the preceding year, or carried forward.  Upon termination of a business, if applicable, losses are increased by the “overlap” relief and the carry-back option is extended regarding  previous years.  The rules are to be temporarily extended to allow carry-back of up to £ 50,000 loss to up to 3 preceding years.

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