How are payments on account calculated ?

mynewusername25

Hi, I registered SE as a sole trader this year in 20 march this year. I made around 1K profit between then and end of tax year. I had no other income in that tax year, so there should be no tax to pay for that tax year. Someone suggested that the payments on account will be calculated by the profit made / number of days between 20 th march and 5 th of april - tax allowance. That will give me a big bill to pay, is that right ? Or are the payments on account based on the profit for the entire year 1K ? Thanks for any help

nomunnofun

mynewusername25 wrote: »

Hi, I registered SE as a sole trader this year in 20 march this year. I made around 1K profit between then and end of tax year. I had no other income in that tax year, so there should be no tax to pay for that tax year. Someone suggested that the payments on account will be calculated by the profit made / number of days between 20 th march and 5 th of april - tax allowance. That will give me a big bill to pay, is that right ? Or are the payments on account based on the profit for the entire year 1K ? Thanks for any help

'Someone' is getting confused with 'overlap relief' - not something that you have to worry about if you have a 5th April year end.

Based on what you have said you have:

no balance to pay on 31st January 2014
no payment on account to pay on 31st January 2014
no payment on account to pay on 31st July 2014.

On 31st January 2015, you will pay the full tax owed in respect of your tax return for 2013/14 plus 50% of that amount ON THE SAME DAY as a payment on account for 2014/15.

A further payment on account will become due on 31st July 2015.

zygurat789

mynewusername25 wrote: »

Hi, I registered SE as a sole trader this year in 20 march this year. I made around 1K profit between then and end of tax year. I had no other income in that tax year, so there should be no tax to pay for that tax year. Someone suggested that the payments on account will be calculated by the profit made / number of days between 20 th march and 5 th of april - tax allowance. That will give me a big bill to pay, is that right ? Or are the payments on account based on the profit for the entire year 1K ? Thanks for any help

The taxable profit will be calculated, pro rata, when you submit your first set of accounts with your 2013/14 tax return. This pro rata amount will effectively be taxed twice:-
2012/13 20 March - 5 April
2013/14 Year from 20 March
These doubly-taxed profits are overlap profits and will be deducted when this income source closes.
This is grossly unfair because there is no indexation. The way to avoid this is to make your year end 31 March (or 5 April) which is just what HMRC want as accountants used to avoid large amounts of tax under the old previous year basis and to a lesser extent under the present current year basis

nomunnofun

zygurat789 wrote: »

The taxable profit will be calculated, pro rata, when you submit your first set of accounts with your 2013/14 tax return. This pro rata amount will effectively be taxed twice:-
2012/13 20 March - 5 April
2013/14 Year from 20 March
These doubly-taxed profits are overlap profits and will be deducted when this income source closes.
This is grossly unfair because there is no indexation. The way to avoid this is to make your year end 31 March (or 5 April) which is just what HMRC want as accountants used to avoid large amounts of tax under the old previous year basis and to a lesser extent under the present current year basis

Sorry zygurat789 - that is not correct. Because the op has, presumably already chosen a 5th April year end , there is no overlap profits.
If he has not, I concur.
The basis periods are:

2012/13 20th March 2013-5th April 2013

2o13/14 - accounts year ending in that tax year which, for the op, is 6th April to 5th April 2014. Under the old basis, prior to self-assessment, the second year would indeed have been the first twelve months as you have indicated.

See year 2 - second option applies to op:

http://webarchive.nationalarchives.gov.uk/+/http://www.hmrc.gov.uk/manuals/bimmanual/bim71010.htm

mynewusername25

Hmm now I'm even more confused My year end was going to be 5th april. So in year 2 why can't my year end be 5th april too, that's what I was planning on using. The link suggests December, but where did that come from, I was just going to use 5 - 6 th for my accounting periods.

nomunnofun

mynewusername25 wrote: »

Hmm now I'm even more confused My year end was going to be 5th april. So in year 2 why can't my year end be 5th april too, that's what I was planning on using. The link suggests December, but where did that come from, I was just going to use 5 - 6 th for my accounting periods.

If your year end is 5th April, the basis of assessment is exactly as outlined in my previous post (the example was to clarify the basis period in the second year _ I did not even see the December example which you can ignore)

For you - 2012/13 based on profits 20th March 2013-5th April 2013

2013/14 based on profits 6th April 2013-5th April 2014.

And the tax payments are as outlined in post 2

zygurat789

nomunnofun wrote: »

Sorry zygurat789 - that is not correct. Because the op has, presumably already chosen a 5th April year end , there is no overlap profits.
If he has not, I concur.
The basis periods are:

2012/13 20th March 2013-5th April 2013

2o13/14 - accounts year ending in that tax year which, for the op, is 6th April to 5th April 2014. Under the old basis, prior to self-assessment, the second year would indeed have been the first twelve months as you have indicated.

See year 2 - second option applies to op:

http://webarchive.nationalarchives.gov.uk/+/http://www.hmrc.gov.uk/manuals/bimmanual/bim71010.htm

1. Never presume anything
2. If something is wrong because of a "presumeably" then it may lso be right.

There are many reasons tax, business and personal to consider when choosing a year end. HMRC treat 31 March as 5 April and it is usually more convenient to have a month end as a year end.

nomunnofun

zygurat789 wrote: »

1. Never presume anything
2. If something is wrong because of a "presumeably" then it may lso be right.

There are many reasons tax, business and personal to consider when choosing a year end. HMRC treat 31 March as 5 April and it is usually more convenient to have a month end as a year end.

Fair enough! The opening post did point in that direction though.:D

zygurat789

nomunnofun wrote: »

Fair enough! The opening post did point in that direction though.:D

always 5 April whatever the chosen year end date is.