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Where a trade commenced before 6 April 1994 there were transitional rules for the tax year 1996-1997 to bring the business on to the current year basis.

General transitional rule for 1996-1997

The general rule was that the transitional basis period for 1996-1997 was the aggregate of two separate periods:

• a ‘notional current year (CY) basis periodâ€� for the year - this was the 12 months to the date to which accounts were made up in 1996-1997 (or the 12 months to 5 April 1997 if no accounting date fell in 1996-1997); and
• the ‘relevant periodâ€� - this was the period beginning immediately after the end of the basis period for 1995-1996 and ending immediately before the beginning of the ‘notional CY basis periodâ€� given above.

The profit assessed for 1996-1997 was the ‘appropriate percentage� of the profits of this transitional basis period. This percentage is derived from the fraction 365/n or 12/n where ‘n� is the total number of days or months respectively in the transitional basis period.

Example

Accounts made up to 30 June for many years. Basis periods were:

1995-1996 (PY) - 12 months to 30 June 1994

1996-1997 (Transitional year) - 24 months to 30 June 1996 (12 months to 30 June 1995 + 12 months to 30 June 1996) - profits assessed were 365/731 or 12/24 (50%) of the profits for this basis period

1997-1998 (CY) - 12 months to 30 June 1997.

This averaging process in the transitional rules for 1996-1997 allowed some profits to escape tax in the transition to the current year basis.

Transitional rules - treatment of losses

Losses were aggregated with profits in computing the profits of either the ‘notional CY basis period� or the ‘relevant period�. But an overall loss in one of these periods was not aggregated with a profit in the other. An overall loss incurred in one of the periods was treated as ‘nil� when aggregating the two periods.

Treating losses as ‘nil� left the loss incurred available for use as loss relief.