ACCA Taxation (F6) Practice Exam

How long does a taxpayer stay on the Closing Year Basis (CYB)?

1. Until the end of the financial year

2. Until the tax year preceding cessation

3. Until profits decrease significantly

4. Up to five years unless otherwise notified

The correct answer is: Until the tax year preceding cessation

The Closing Year Basis (CYB) pertains to how a taxpayer reports income for tax purposes when a business is in operation. Under this system, a taxpayer will be assessed based on the profits they generated in the period up to the end of the tax year immediately preceding the cessation of their trade, rather than on the financial performance of the financial year in which they cease trading. This method ensures that the profits or losses from the final trading period are accurately included in the taxpayer's assessment for the last active year, providing a clear cutoff for income recognition upon cessation. Thus, it is correct to affirm that a taxpayer remains on the Closing Year Basis until the tax year immediately before they cease their trade—capturing all the relevant income and expenses up to that point. In contrast, the other choices do not accurately reflect the rules governing the Closing Year Basis. The notion of remaining on CYB until the end of the financial year, until profits decrease, or for a specified number of years does not align with the operational mechanics of the basis. The focus is on the specific point at which trading ceases rather than an arbitrary time frame or performance indicator.