Stopping self-employment

I had an enquiry from a NASGP member recently about the tax effect of stopping self employment. This principle affects both locum and partners in a similar way – and the problem arises when accounts are not prepared to 31st March or 5th April. 

In times of rising profits (and traditionally until recent years, profits have tended to increase if only by inflation on a year by year basis) having an accounts year end early in the tax year will tend to defer tax. Thus historically many locums would have been advised to have 30th April year ends.

For the older readers among you – prior to 1996 we had the ‘preceding year basis’ so that profits for the year to, say, 30 June 1994 wouldn’t have been taxed until 1995-96. This gave all sorts of advantages so that you could create high profit periods that dropped out of account altogether on a cessation.

This all changed in 1996/97 when the ‘current year basis’ came in – and it had the effect of some profits being taxed more than once, so a concept of transitional overlap was brought in. In simple terms, the profits taxed twice would be allowed as a deduction in the year of cessation.

There is a similar concept for new self employments/ partners starting after these new rules came in, so there are profits in the initial period taxed twice – and these are then available for deduction when you stop.

An example is the best way to explain this. For someone starting 1st May 2008 and stopping 30th April 2014.:

Profits y/e 30th April y/e 31st March
01-05-08 30-04-09

48,000

(12 mths)

44,000

(11 mths)
01-05-09 30-04-10

54,000

53,500

01-05-10 30-04-11

60,000

59,500

01-05-11 30-04-12

84,000

82,000

01-05-12 30-04-13

96,000

95,000

01-04-13 30-04-14

120,000

118,000

10,000

(1 mth)
Total profits

462,000

 

462,000

 
Profits assessable y/e 30th April y/e 31st March
2008-09

44,000

(11 mths)

44,000

(11 mths)
2009-10

48,000

1st 12 months

53,500

y/e 31-03-10
2010-11

54,000

y/e 30-04-10

59,500

y/e 31-03-11
2011-12

60,000

y/e 30-04-11

82,000

y/e 31-03-12
2012-13

84,000

y/e 30-04-12

95,000

y/e 31-03-13
2013-14

96,000

y/e 30-04-13

118,000

y/e 31-04-14
2014-15

76,000

y/e 30-04-14 less first 11 mths

10,000

(last mth)
Total profits

462,000

 

462,000

 

Thus you only get taxed once on everything you earn over the whole period – if your income has been rising you’ve had the advantage of lower tax all the way though, but it all bunches up so you have a ‘tax time bomb’ when you stop.

With lower inflation, it is less beneficial to have ‘non-March’ year ends now, so we normally set most people up with 31st March year ends; unless they expect to have materially increasing profits, current cash flow is paramount – and they fully understand the ‘tax time bomb’ that they are creating.

If you already have a non-March year end with very low overlap relief, you may be able to change your year end less painfully if you have a low profit year (changing your year end triggers the ‘tax time bomb’ in the same way as stopping altogether) - or alternatively, just try to save a bit extra each year to meet the time bomb when it happens. Also, if you have a choice when you stop – look at the assessable profits (including other income) before and after 5th April to see if there is a benefit in one or other date – taking account of changing allowances/tax rates, etc. An accountant will be able to help you with these calculations if you are not confident with the rules yourself.

Sorry for such a heavy topic just before Christmas (for those of you without non-March year ends the article may be a suitable cure for insomnia!). Wishing all members a happy Christmas and a healthy and prosperous New Year. If you have topics you want me to cover in the future, please email me at the address below.

Liz Densley is medical specialist partner with Sussex Chartered Accountants, Honey Barrett, and is secretary of AISMA (the Association of Independent Specialist Medical Accountants). Contact her at liz.densley@honeybarrett.co.uk.

Honey Barrett

Honey Barrett

Liz Densley is medical specialist partner with Sussex Chartered Accountants, Honey Barrett, and is secretary of AISMA (the Association of Independent Specialist Medical Accountants). Contact her at liz.densley@honeybarrett.co.uk.
Honey Barrett

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