ACCA Taxation (F6) Practice Exam

For the second tax year, what is the basis period if the accounting period ends in the second year?

1. Actual basis for the whole tax year

2. Tax only the first 6 months of trading

3. If less than 12 months, tax the first 12 months of trading

4. Only profits from the last quarter

The correct answer is: If less than 12 months, tax the first 12 months of trading

The basis period for tax purposes is essential for determining the profits that are assessable for income tax in a given tax year. In the context of a business trading for less than 12 months within a tax period, the rules dictate that the basis period combines both actual trading profits and potential periods where the business wasn't operating. When the accounting period ends in the second tax year, if that period is less than 12 months, the profits for the entire first 12 months must be considered for taxation. This means that even if the trading period does not extend the full year, you will still account for the overall profits from the business for that first year of operation. Thus, you "tax the first 12 months of trading," ensuring inclusivity in the taxation process. This approach helps to maintain fairness and recognizes all profits generated during that significant initial phase of the business, contributing to the accurate assessment of income tax liabilities for that second tax year, regardless of any shorter trading period. The focus is on ensuring that all relevant trading activities are reflected in the tax assessment for the given period.