CURRENT YEAR BASISNo change is made to the way in which taxable profits are calculated.

However, the preceding year basis of assessment for the self-employed -- part of the UK tax system for some 70 years -- is replaced by the current-year basis.

Tax will continue to be calculated and paid for income tax years ending on 5 April, but it will be based upon the profits for the year ending in the actual income tax year, and the taxpayer is free to choose an individual accounting date.

Where accounts are made up annually to 30 June, the liability for 1998/99 will be based on the profits in the accounts for the year to 30 June 1998.TIMINGThe first year in which the current year basis is to apply is 1997/98, with 1996/97 as the trans-itional year with special provisions.CONTINUING BUSINESSESWhere a business was in existence prior to 6 April 1994, tax is payable under the preceding-year basis rules for 1994/95 and 1995/96.

For the transitional year, 1996/97, in the case of an established business with annual accounts made up to the same date, the taxable profits will be 50% of the aggregate profits for the accounting period ending in 1996/97.

The current-year basis will then apply for 1997/98.

There are modifications where the assessment for 1995/96 was on an actual basis, or where there is not a full two years from the end of the 1995/96 basis period.

The objective is to ensure that one full year's profits are charged to tax.COMMENCEMENT RULESThe current year basis applies to any new business commencing on or after 6 April 1994, or which is deemed to commence following a partnership change on or after that date where a continuation election is not made.

For the first year of assessment tax is charged on the profits from commencement to the following 5 April on a time-apportioned basis.

For the second year of assessment it is based on the 12 months' profits.

The position will be the same for the third and subsequent years of assessment.CHANGE OF ACCOUNTING DATEUnder the preceding-year basis, businesses which changed their accounting date were taxed in accordance with Inland Revenue practice as set out in booklet IR 26.

This is replaced by a formal statutory code, essentially designed to prevent taxpayers from achieving a tax saving or deferment by means of a change of accounting date.Changes of accounting date are only permitted if they meet certain statutory requirements, other than in the second and third years where a new business is allowed complete freedom to change its accounting date.

Where a change is permitted, there are extensive rules to provide for the different permutations possible .CESSATION RULESOn cessation, tax is generally based on the profits from the end of the basis period ending in the preceding year of assessment to the actual date of discontinuance.

Overlap relief may also be available.OVERLAP RELIEFAny profits which have been taken into account more than once will be eligible for overlap relief.

An overlap period will invariably arise on the commencement of a business.

Overlap relief will then be available on a change of accounting date to a date later in the fiscal year, resulting in a basis period in excess of 12 months, or on the cessation of the business.On a cessation the overlap relief is the aggregate of any overlap profits.

Where the basis period for 1997/98 begins prior to 6 April 1997 there is an additional overlap profit which is also relievable on cessation or on a change of accounting day resulting in a basis period in excess of 12 months.CESSATION PRE 6 APRIL 1998There are anti-avoidance provisions designed to prevent exploitation of the preceding-year basis of assessment rules avoiding the Revenue adjustments on cessation by delaying cessation until after 5 April 1997.

If the cessation is prior to 6 April 1997, the old rules continue to apply.

If the cessation takes place in 1997/98, the Revenue may direct that the old rules continue to apply.LOSSESSince profits are assessed on the basis of the accounting year ending in the fiscal year, a trading loss may be set against the total income of the preceding fiscal year, or set against total income for the year in which the losses have arisen.

Therefore, the one year carry back is effectively preserved.

Relief cannot be given for the same loss twice, but the taxpayer may choose whether to set the loss against the income of the year of the loss before carrying back any balance to the preceding year, or vice versa.

The relief for losses made in the first four fiscal years of a trade to be carried back against total income of the three preceding years is retained.

Any unrelieved losses may also be carried forward and set against future income from the trade.CAPITAL ALLOWANCESUnder self-assessment there is a fundamental change to the way in which allowances are given and the chargeable period for which they are given.

Under the new system, capital allowances are treated as a trading expense instead of an allowance for which a separate claim is necessary.