The Finance Bill includes provisions to replace the preceding year basis of taxing the self-employed with a current year basis and to establish a framework for self-assessment which will apply from the tax year 1996/97.

The change to the basis of assessment will affect businesses starting after 5 April 1994; existing businesses will move to the new basis from the tax year 1997/98.Transitional provisions will apply to the tax year 1996/97.

Income tax is at present assessed on a partnership as a whole, but from 1997/98 each partner will be separately assessable on his or her share of profits.

The proposals will mean that firms will have to review their partnership agreements in relation to such matters as tax reserves.

They will also have to ensure that accounting systems allow the individual shares of profits of partners to be determined, and that information is given to partners so that returns can be filed within the new time limits.Under the n ew system the sum assessable in a tax year will usually be determined with reference to the profits of an accounting period ending in that tax year.

A trader is free to choose his or her own accounting date and may, subject to certain conditions, change it.

In the year of assessment in which he or she commences trade, the trader will be assessable on the actual profits arising in that year.

If the trader makes up his or her accounts to an accounting date in the second year, and that date is at least 12 months after commencement, the second year assessment will be based on 12 months' trading to that accounting date.

If that period is less than 12 months, then exceptionally the trader is assessed on the profits of the first 12 months' trading.

Thereafter, the trader is assessed, provided he or she does not alter his or her accounting date, in a tax year on the profits realised in the 12-month period ended on the accounting date in that year.Within certain limits traders will be allowed, for taxation purposes, to alter their accounting dates but not more than every five years unless commercial reasons can be shown for doing so.

If there is a permissible change of accounting date and the trader chooses an accounting date later in the tax year, then he or she will be assessed in that tax year on the whole of the profits which arose in the extended accounting period, which will be longer than 12 months.If the trader chooses an earlier accounting date, so that the accounting period is less than 12 months, he or she will be assessed in that tax year on the 12 months' profits to the new accounting date, part of which profits will, of course, have already been assessed in the preceding tax year.On the trader's retirement he or she will be assessed for the tax year of retirement on the whole of the profits earned from the end of the accounting period forming his or her basis of assessment for the preceding year to the date the business ceases.

So, for example, if a trader makes up his or her accounts to 30 June and he retires on 30 June, the he or she will be assessed for the tax year of his or her retirement on a whole year's profits.The current arrangements for the assessment of income tax upon firms will end.

The profits and losses of the partnership will be allocated between partners according to their profit and loss sharing arrangements in the relevant period.

Each partner is then assessable as though his or her share of profit derived from a trade or profession carried on by him or her alone.The commencement rules will apply to new partners, and the retirement rules will apply to retiring partners.

Accordingly, new and retiring partners will in the relevant years be assessed on a different basis from the continuing partners.The effect of the new rules will be that over the lifetime of a business no more than the actual profits made will be taxed.

The same profits may, however, be taxed in two successive years; these are called 'overlap profits'.

Overlap profits are relieved in later years either where there is a change of accounting date and more than 12 months' profits are taxed in one tax year or on cessation of the business.

However, the relief is not indexed for inflation.For existing businesses there will be transitional arrangements in 1996/97.

The assessment will be a 12 months' average of the total profits of the period starting after the end of the basis period for 1995/96 and ending in 1996/97 A solicitor in sole practice, for example, who makes up his or her accounts to 30 June will be assessable in the tax year 1995/96 on the profits of his or her accounting period ended 30 June 1994.

In the next tax year, 1996/97, he or she will be assessable on one half of his or her profits for the two years ended 30 June 1996.

If the solicitor were to change his or her accounting period to 31 March, and make up accounts to 31 March 1997, then he or she would be assessable on the 12 months' average of the 33 months' profits from 1 July 1994 to 31 March 1997.

Accordingly, the solicitor might decide to accelerate or defer expenditure, so as to increase the profits of that transitional period.

However, care is required.

The Inland Revenue has indicated that in order to counteract tax avoidance, related to the transitional arrangements, there will be further legislation in 1995.If a business makes up accounts for a period straddling 5 April 1997, the part of that period falling within 1996/97 will be taken into account for assessment in 1997/98.

That part will be treated as if it were an overlapping profit and will, subject to the possible application of anti-avoidance measures, be relieved upon a change of accounting date or upon retirement from business.There will be a statutory filing date for returns of 31 January following the tax year.

A taxpayer will have to include a self-assessment of the tax payable, but if the tax return is sent back to the inspector by 30 September, then he or she will compute the tax payable.

The tax will have to be paid by 31 January following the year of assessment but in addition payments on account will be due on 31 January in the year of assessment and 31 July immediately following the year of assessment.

These interim payments will normally be based on the preceding year tax liability.If the tax is not paid by 28 February following the end of the year of assessment, there will be a surcharge of 5%.

If the tax is still outstanding at 31 July, then a further 5% will be charged.

There will be a right of appeal on the grounds of reasonable excuse other than inability to pay.