ACCA Taxation (F6) Practice Exam

What are overlap profits?

1. Profits that are only reported once

2. Profits taxed more than once in opening years

3. Profits that are exempt from tax

4. Profits accrued after 12 months of trading

The correct answer is: Profits taxed more than once in opening years

Overlap profits refer to the profits that are taxed more than once during the transition from one accounting period to another, particularly when a business is established. In a typical scenario where trading starts partway through a tax year, the initial profits may be reported for both the start of trading and also included in the profits for subsequent years due to how tax calculations are structured around accounting periods. This double counting occurs because when a business transitions to a new accounting period, the profits for the first period may overlap with the profits calculated in the second period, leading to an instance where the same profits are taxed again. This usually affects newly established businesses or those who change their accounting date. The other options do not accurately define overlap profits. Profits that are only reported once or exempt from tax do not encompass the concept of overlap, while profits accrued after 12 months of trading would typically be clear and not subject to the overlap situation since they belong entirely in a single accounting period.