ACCA Taxation (F6) Practice Exam

What happens to overlap profits in the year of cessation?

1. They are added to the remaining profits

2. They are deducted from profits in the year of cessation

3. They cannot be accounted for

4. They are taxed at a higher rate

The correct answer is: They are deducted from profits in the year of cessation

In the year of cessation, overlap profits arise when a business that has been trading is required to make an adjustment to its taxable profits due to the cessation of its trading activities. This occurs because overlap profits represent profits that have been taxed in a previous accounting period but which relate to future periods. When a business ceases trading, it is important to ensure that these overlap profits are not taxed again. In this case, the correct answer highlights that overlap profits are deducted from the profits in the year of cessation. This is because they have already been taxed in past years, and including them again in the cessation year would lead to double taxation. By allowing a deduction for these overlap profits, the taxation system aims to provide fairness and prevent redundancy in tax liabilities. Other options suggest different treatments for overlap profits that do not align with the regulations governing taxation during the cessation of a business. For instance, adding them to remaining profits would lead to double taxation, while stating that they cannot be accounted for ignores the fact that tax law provides specific mechanisms for their treatment. Thus, the deduction approach ensures that the cessation process reflects the actual economic situation of the business without penalizing it for previously taxed income.