Basis of Assessment

Basis of Assessment: Definition and Explanation

Basis of Assessment refers to the foundation upon which personal income or business profits are assessed for taxation purposes in the UK for each fiscal year. This basis can vary depending on individual income-tax schedules and the nature of the income.

The rules governing the assessment are complex, and often the advice of a tax expert is required to ensure accurate compliance and calculation.

Key Components of Basis of Assessment:

1. Current-Year Basis:

   • For businesses (e.g., partnerships) that have been trading for many years, the profits for the period preceding the fiscal year are assessed. For example, profits for the year ending April 30, 2015, will be the basis for the tax year 2015-16.

2. Actual Basis:

   • Certain types of income, such as building society interest, are assessed on the actual amount received during the tax year itself. For instance, interest received from April 6, 2015, to April 5, 2016, is considered for the 2015-16 tax year.

Examples

1. Example 1: Partnership Profits:

   • A partnership with a year-end of April 30, 2015, calculates profits from May 1, 2014, to April 30, 2015. These profits are used as the basis for assessment for the tax year 2015-16.

2. Example 2: Interest Income:

   • An individual’s interest income from a building society received between April 6, 2015, to April 5, 2016, will be the basis for income assessment for the 2015-16 tax year.

Frequently Asked Questions

1. What is the basis of assessment for an individual?

• The basis of assessment for individuals typically follows the tax year, which in the UK runs from April 6 to April 5 of the following year. Specific types of income, such as bank interest, are assessed based on the actual amounts received within this period.

2. How does the basis of assessment differ for businesses?

• For businesses, particularly partnerships, the basis of assessment may follow the current-year basis, wherein profits from a previous 12-month period ending within the fiscal year are assessed.

3. Why is the advice of a tax expert recommended?

• The rules for determining the basis of assessment are intricate and can vary greatly depending on the nature of income and business structure, making it essential to seek expert advice to avoid miscalculations and ensure compliance.

4. What is a fiscal year?

• A fiscal year is a one-year period that governments use for accounting and budget purposes. In the UK, the fiscal year for tax purposes runs from April 6 to April 5 of the next year.

5. What is the current-year basis of assessment?

• The current-year basis is a method of assessment where the profits of a business for a specific 12-month period ending within the current fiscal year are assessed for taxation.

Related Terms

1. Fiscal Year: The 12-month accounting period used by a government for budgeting and taxation purposes. In the UK, it runs from April 6 to April 5.

2. Income-Tax Schedule: Specific rules and guidelines for categorizing and taxing different types of income.

3. Current-Year Basis: Assessment method where profits for a period ending within the fiscal year are used as the basis for the current tax year.

4. Actual Basis: A method where income is assessed based on the actual amount received within the fiscal year.

Online References

1. GOV.UK - Basis Periods
2. HMRC - Tax and Accounting Periods

Suggested Books for Further Studies

1. “Tolley’s Tax Planning 2023-24” by Rebecca Cave
2. “Principles of Taxation for Business and Investment Planning” by Sally M. Jones and Shelley C. Rhoades-Catanach
3. “UK Tax System: An Introduction” by Malcolm James

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