ACCA Taxation (F6) Practice Exam

What methodology dictates the second year basis period if accounting periods do not coincide with the tax year?

1. Estimated profits from the previous year

2. Actual basis for profits throughout the tax year

3. Half the average of the prior year's profits

4. A fixed amount based on business size

The correct answer is: Actual basis for profits throughout the tax year

When it comes to determining the basis period for taxation in a situation where the accounting periods do not align with the tax year, the methodology for the second year typically involves using the actual profits generated throughout the tax year. This approach is grounded in the principle that taxpayers should be taxed on their actual income, thus ensuring that the income reported for tax purposes accurately reflects the business’s performance during that period. The use of actual profits allows for more precise measurement and taxation, as it takes into account the genuine economic activity of the business over the specific tax year in question. This contrasts with estimating profits or applying arbitrary figures, which might not accurately represent the financial reality of the business. In contrast, using estimated profits from the previous year can lead to discrepancies if the business's income varies significantly from one year to the next. Additionally, calculating half the average of the prior year's profits or setting a fixed amount based on business size lacks the responsiveness to the actual performance during the tax year, which is critical for fair taxation. Thus, basing the second year’s basis period on actual profits provides a more equitable and accurate reflection of a business’s earnings, aligning taxation with genuine economic performance.