ACCA Taxation (F6) Practice Exam

When can overlap profits be deducted?

1. During the first year of trading

2. Only at the year-end

3. Upon cessation of the business

4. After a tax audit is completed

The correct answer is: Upon cessation of the business

Overlap profits can be deducted upon cessation of the business. This occurs when a business is winding up its operations and can claim relief for profits that have been taxed in excess of what would normally be taxable during the ongoing period of trading. Overlap profits generally arise in the initial years of a business's trading when the accounting profits do not align perfectly with the periods for which tax is assessed, resulting in some profits being taxed more than once. When the business ceases, the taxpayer is allowed to deduct these overlapping profits from their final tax computation, which helps to ensure that they are not taxed unfairly on the same income more than once. This provision aids in providing relief for businesses that might have faced tax on earnings that have already been accounted for in prior periods, thus preventing double taxation. In contrast, overlap profits cannot be deducted just because a business is still in its first year of trading, at a specific year-end, or following a tax audit. Each of these scenarios focuses on different aspects of tax reporting and compliance, without addressing the specific point at which the overlap profits can actually be accounted for in a deduction.