Hope everyone has had a great Christmas, and may I wish all users of this forum a very happy new year!
Possibly the wrong time to be posting questions but hopefully one of you guru's will still be sober enough to be able to offer advice?
One of my clients for whom I do bookkeeping and annual accounts has ceased trading, he did so on January 3rd 2008 when he started a full-time employed position, his normal year-end was 5th April. I have never before had to compile a final set of accounts for a sole trader who has ceased trading, there are a few things that I am unsure about;
1) Should his basis period for the tax year 2007-08 be 6th April 2007 to 2nd January 2008?
2) At 2nd January 2008, the balance sheet will still show Debtors and Creditors, Stock and an overdrawn bank account. Is that ok or should I therefore actually complete accounts to such a date when all Debtors and Creditors have been paid, and make that the date when he has ceased trading?
3) I am familiar with Capital Allowance rules when a business ceases trading so I don't have a problem there, but are there any general rules and/or tax implications as far as the accounts are concerned when a business ceases?
Hope someone may be able to guide me or offer advice.
1. The normal rules are the final year of assessment is based on profits from the preceeding 1st January to the date of cessation, now in this case because he ceased on 3rd January by following the rules you would have to do the accounts for 1st to 3rd Janaury for the final year and April 2007 to 1st January 2008 for penultimate year.
However as the final year of assessment is so short - effectively 2 days - i have a feeling that HMRC may allow a bit of flexibility and roll this into the April 2007 to 1st January 2008 period. I personally would contact HMRC to enquire about this.
2. It is ok to complete the balance sheet as at 2nd January however you will have to create an account caled the realisation account in which the realisation of the profit and loss on assets is calculated. You must ask your client how how the assets are to be distributed, creditors paid etc... and make the adjustments to the books. This is a difficult matter to explain so i would seek advice from your friendly neighbourhood accountant.
3. Not sure about this however i would imagine that tax returns would be due and have to be paid as normal.
On the basis of a ceasation date of 3rd January 2008, a tax return would need to be prepared for the tax year to 5th April 2008. This would have to be submitted by the latest of 31st January 2009.
If your client has a taxable loss it may be possible to offset this against other tax previously paid by your client in earlier tax years.
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"People who are exceptionally good in business arent so because of what they know but because of their insatiable need to know more"
1. The normal rules are the final year of assessment is based on profits from the preceeding 1st January to the date of cessation, now in this case because he ceased on 3rd January by following the rules you would have to do the accounts for 1st to 3rd Janaury for the final year and April 2007 to 1st January 2008 for penultimate year.
However as the final year of assessment is so short - effectively 2 days - i have a feeling that HMRC may allow a bit of flexibility and roll this into the April 2007 to 1st January 2008 period. I personally would contact HMRC to enquire about this.
Hi Nimac,
Thanks for the reply, in my limited experience I have not heard reference before to final year of assessment being based on period commencing 1st January, my question is regarding a sole trader not a limited company, have you mis-interpreted?
Thanks too Dustin57, I'm ok as far as tax return submission date is concerned, it's really just the finalisation of the cessation accounts that is bothering me. The assets of the business only comprise of 1 motor vehicle and a few items of tools & equipment. These items will be transferred to the proprietor for his own personal use going forward from his business cessation. It's those actual adjustments to the period-end accounts that I'm concerned about, to create a balancing allowance/charge they need to be written down to 'nil' value by way of disposals at market value, but it's where to post those disposals in the accounts that's confusing me.
As you say the assets need to be disposed of at market value and you normally take these to the capital account with the relevant profit/loss on disposal included in the P&L. Obviously in the tax comp you would use the same disposal proceed figure to calculate any balancing allowance/charge.
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"People who are exceptionally good in business arent so because of what they know but because of their insatiable need to know more"
Dustin57, thank you! Yes, I'd thought that it should somehow be posted to the capital account but I just wasn't sure exactly how to do that, I was thinking maybe it should be posted to drawings or Capital Introduced, as it would be a debit posting I will post to drawings which I suppose in effect it actually is, the proprietor is taking assets for personal use instead of cash.
Other than that, is it acceptable to leave Current Assets and Current Liabilities on the Balance Sheet as they stand at cessation date, or do I have to somehow reconcile those to the Capital Account to? I presume not as there are no tax implications here, there's no stock so that isn't an issue, I presume if there was I would have to treat that the same as fixed assets, disposal at market value?
As you can tell I've not done Cessation Accounts before but I'm trying to treat it as part of my ongoing learning curve! This subject was not covered in my AAT sylabus. Thanks for your help.
Yes, taking the balances to either drawings or funds introduced is the correct approach. Stock would be treated in the same way. It is normal to have some current liabilities such as accruals for accountancy fees, and any current assets such as cash balances are normally transferred to drawings (although as you state there's no effect on the P&L so I don't think HMRC would mind too much).
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"People who are exceptionally good in business arent so because of what they know but because of their insatiable need to know more"
