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The definitions of trades (schedule D case I), professions and vocations (schedule D case II) are not relevant to the computation of tax.
The classification that matters is the type of business.
Type of business
Accounts
Basis of taxation
Overlap profit and overlap relief
Losses
Transition to current year basis
Sole trade
Partnership
A sole trade will require a lot of accounts information to complete the tax return whereas the only data needed for the individual return is the partner's share of the profits or losses.
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Income from businesses is derived from the accounts. Accounting periods are usually 12 months long. IRIS requires the entry of the account period end date. The start of the account period is taken to be one day after the end of the preceding account period end date or the trading start date (if no preceding account date has been entered).
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Since 6/4/96 all trade income has been taxed under the current year basis rules. This replaced the archaic prior year basis rules which are now irrelevant, but see transition to current year basis, below. In essence the current year rules are quite simple. The taxable income is the profit for the 12 month period ending in the fiscal year.
What happens when there the account period is not twelve months long or in the first year of trading?
There are special rules for the opening and closing years and for change of accounting date to arrive at the basis period. In the first and last year's of trading the basis period is not usually 12 months long. Unless there is a change of accounting date, a 12 month period will be used in all other years of trading. If there is a change of accounting period, the basis period will either be a 12 month period constructed from two account periods or it will be a long accounting basis period made up of one or two accounting periods.
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Overlap profit arises when the profits from an accounting period are taxed twice. This always happens in the second year of trading unless an accounting period end date of 31/3 or 5/4 has been chosen. An overlap may also occur when there is a change of accounting period that results in the construction of a 12 month basis period from 2 accounting periods.
Overlap profits are stored until they can be used. There are two factors: the number of days from an accounting period that have been taxed twice and the amount of profits taxed twice.
Overlap relief is given when the trade ceases or when there is a change in the accounting date that results in the basis period being longer than 12 months. All the profits that have accrued are deducted on cessation. On the change of an accounting date, the relief given is in proportion to the number of extra days in the basis period (the number over 365).
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The basis period is computed in the same way when there is a loss but where there is an overlap (the basis period overlaps an account period that formed part of the previous year's basis period), the loss in the overlap period is ignored. This is to prevent a loss being claimed twice. Overlap profits are not affected and do not apply when the overlap covers a loss making account period. However, overlap relief may be given (if available) and will augment the loss.
Losses will be rolled forward to use against future profits from the same trade (TA88 s385). It is possible to claim to use the loss against other income (TA88 s380). To make this claim an entry is required in the data entry field Loss offset against other income.
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In 1996-97 businesses that had been taxed under the old prior year basis of taxation, switched to the current year basis. Special transitional rules covered the calculation of the basis period and the taxable income for the 1996-97 year. Trades that commenced on or after 6/4/94 were automatically under the current year basis rules.
In 1997-98 a special transitional overlap profit was computed for trades that had gone through the transition to the current year basis. This applied to all trades except those with a 5/4 account period end date.
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