Basis periods, commencement and cessation for companies

A company starts trading on 1 March 2020 and closes its books on 31 October. Which year of assessment is its first, and which profits are taxed in it? Another company starts in October 2019 and produces its first accounts for fifteen months. Another stops trading on 31 March 2020 and asks when its last tax is due.

The rules on basis periods answer all of these, and they are tested with dates, so every mark depends on putting the right period in the right year.

This topic covers the preceding year basis, the rules on commencement and cessation, the date on which tax is due after cessation, and the concessions for reorganisation. The previous topic covered the adjusted profit. The next covers a change of accounting date.

Key terms in plain English

Syllabus check

This topic is in syllabus area D, company taxation. It covers:

• the preceding year basis and the commencement and cessation rules
• pro rata of long or short first accounts
• reorganisation concessions

CAMA 2020 and company tax periods

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

A continuing business

The assessable profit for a year of assessment is the adjusted profit for the accounting year that ended in the preceding year of assessment: the preceding year basis. Under the Finance Act 2019, financial statements up to the 2020 assessment year follow the old rules, and returns from 2021 follow the new ones.

Commencement (section 29(3))

1. First year: from the date of commencement in Nigeria to the end of the first accounting period.
2. Second year: from the first day after that to the end of the second accounting period.
3. Third and later years: the profit of the accounting period just ended.

The end of the first accounting period is the key date. If the company prepares its first accounts for a period shorter or longer than the usual, the profit is divided pro rata among the years it covers.

Cessation (section 29(4))

Where a company permanently stops trading in an accounting period, the assessable profit is the profit from the start of that accounting period to the date of cessation. The tax is due within six months of cessation. A company that ceases between 1 January and 30 June files and pays in that year; a company that ceases between 1 July and 31 December files and pays in the next year.

Sums received or paid by a liquidator after cessation that would have been in the profit or deducted if earlier are treated as received or paid on the last day before cessation.

Reorganisation and restructuring

When a company transfers or sells its trade to a Nigerian company in order to reorganise, or to move management to Nigeria, there are concessions:

• the commencement and cessation rules do not apply
• assets are treated as transferred at tax written down value
• no capital gains tax arises
• no VAT is charged on the assets

The conditions are:

• the Service consents in writing
• it is satisfied that one company controls the other, or that both are controlled by another person, or are in a recognised group
• the companies were related for at least 365 days before

The concessions are withdrawn, with tax, penalty and interest, if the assets are disposed of within 365 days.

Why the first and second years are special

A new company has no preceding year to look back to. The law therefore taxes its first accounting period in the first year of assessment, the second accounting period in the second year, and only from the third year does it settle into the preceding year basis, taking the period just ended.

Since the Finance Act 2020 there is no overlap of profits in the early years, so a profit is never taxed twice. The year of assessment that follows an accounting period is the year in which that period ended: a period ending on 31 October 2020 belongs to the 2021 year of assessment under the new rules, which is why the examples place the first period of a company that starts in March 2020 in 2021.

Commencement is not incorporation

A company may be incorporated long before it starts trading. Illustration: Orion Limited was incorporated in December 2018 and began to trade on 1 October 2019. The date that matters for the basis period is the date trading began, not the date of incorporation. A company that registers and then waits eighteen months before its first sale has its first basis period start on the day of the first sale.

The examiner often gives both dates, and a candidate who starts from incorporation loses the marks.

Filing after cessation, in short

• A company that stops trading in the first half of the year files and pays in that same year.
• A company that stops in the second half files and pays in the following year.
• The continuing preceding year charge for the year of cessation is paid on its normal date, usually 30 June, and the final period is paid six months after cessation.

Where there is a liquidator, he stands in the company’s shoes for these duties. The company is chargeable in its own name, or in the name of its receiver or liquidator, and the liquidator gives the particulars the revenue asks for.

The position from 2026

The Nigeria Tax Act 2025 and the Nigeria Tax Administration Act 2025 apply from 1 January 2026. Small companies (turnover up to ₦50 million and fixed assets up to ₦250 million) are exempt, other companies pay 30%, and a 4% development levy applies. Use the rules above for periods ending before 1 January 2026.

Worked examples

1. The first accounting period ends on 31 October 2020.
2. The first year of assessment is 2021, and the profit assessed is that of 1 March 2020 to 31 October 2020.

1. 2019: 1 October to 31 December 2019, 3/15 × ₦3,000,000 = ₦600,000.
2. 2020: nil, so no tax.
3. 2021: 1 January to 31 December 2020, 12/15 × ₦3,000,000 = ₦2,400,000.
4. The first year falls under the old rules, which is why 2019 receives a basis period.

1. 2020: preceding year basis, 1 January to 31 December 2019, tax due 30 June 2020.
2. 2020: final period 1 January to 31 March 2020, tax due 30 September 2020, six months after cessation.

1. 2020: 1 January to 31 December 2019, due 30 June 2020.
2. 2021: 1 January to 31 August 2020, due 28 February 2021.

How to score full marks

• Set out the accounting period dates before you place the years.
• State the rule you apply in a line for each year.
• Pro-rate long first accounts by months.
• Give the due date for the final tax, six months after cessation.

Common mistakes in the exam

• Assessing a continuing company on the current year.
• Forgetting to pro-rate fifteen months of accounts.
• Using three months for the due date after cessation, which is the rule for individuals.
• Giving the reorganisation concession without the 365-day condition.

Quick revision

• Preceding year basis; commencement in three steps.
• Cessation: period start to the date of stopping; six months.
• Reorganisation: consent, control, 365 days.

Practice questions

Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.

Model answers

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