65 Cases I and II: basis of assessment

Summary

The general rule is that income tax is charged on the full amount of the profits of a trade or profession arising in the year of assessment. However, where accounts are made up for the trade or profession, the profits of the trade or profession are, in general, charged to income tax on the full amount of the profits arising in the 12 month period of account ending in the year of assessment. Special rules apply to determine the basis of assessment where accounts are made up for periods in excess of 12 months or where there is more than one period of account ending in a year of assessment. Provision is also made to allow, in certain circumstances, the revision of an assessment for the preceding year where there is a change in the date to which accounts are made up. Special arrangements also apply to cater for the changeover from a 6 April to 5 April year of assessment to a calendar year of assessment with effect from 1 January 2002.

Details

Basis of assessment

General Rule

(1) The general rule is that income tax is to be charged under Case I or Case II of Schedule D on the full amount of the profits of the year of assessment – this is referred to as the current year basis of assessment. This rule may be modified as provided for by the subsequent provisions of this Chapter.

Special Rule 1

(2)(a) Where a person makes up accounts for a trade or profession and there is only one account made up to a date in the year of assessment and that account is for a period of one year, the profits of that year are taken to be the profits of the year of assessment.

Special Rule 2

(2)(b) A different rule applies in the case of an account which is for a period greater or lesser than one year ending on a date in the year of assessment or where there is more than one period of account ending on a date in the year of assessment. In such cases the profits for the period of one year up to the date on which the period of account ends or the date on which the last of the periods of account ends, as the case may be, is taken to be the profits of the year of assessment.

Special Rule 3

(2)(c) A different rule also applies where an account is drawn up covering the year of assessment but the accounting period does not end in the year of assessment. In such a case the profits of the year of assessment itself are to be taken as the basis of the assessment (in effect this reapplies the general rule).

Change of basis period and review of preceding year

(3) Where the assessment for a year has been computed by reference to a period of account which is greater or less than one year (subsection (2)(b) – Special Rule 2) or by reference to the profits of the year of assessment itself because no account has been drawn up to a date in the year of assessment (subsection (2)(c) – Special Rule 3), and the profits of the corresponding period in the previous year of assessment exceed the profits assessed for that year, the profits of that corresponding period are to be taken to be the profits of the previous year of assessment and the extra profits are to be charged for that year. This rule takes precedence over the rules contained in section 66(2) which deals with the basis of assessment in the second year in which a trade or profession is carried on.

Deceased persons

(4) Where a person dies, income tax for any year of assessment for which the person has not already been assessed is to be charged and assessed on the person’s executors or administrators. Any such tax is a debt due from the deceased person’s estate.

Changeover to a calendar year of assessment

With effect from 1 January 2002, the year of assessment is changed so as to align with the calendar year. This necessitates the operation of a short “year” of assessment 2001 covering the period from 6 April to 31 December 2001. It also results in a mismatch between the length of the short “year” of assessment 2001 and the previous and subsequent years of assessment. In order to take account of these aspects of the changeover to a calendar year of assessment, special transitional adjustments are made (subsections (3A) to (3F)) to the rules governing the basis of assessment under Case I and Case II of Schedule D.

Short “year” of assessment 2001

(3A) For the short “year” of assessment 2001, persons assessed to tax on the basis of subsection (2)(a) [Special Rule 1] will be assessed on the basis of 74% of the profits of the 12 month period of account ending in that year.

For the short “year” of assessment 2001, persons assessed to tax on the basis of subsection (2)(b) [Special Rule 2] will be assessed on the basis of 74% of the profits of the year ending on —

• the date in the year of assessment to which an account (not being a single 12 month account) is made up, or
• the date in the year of assessment which is the date to which the last of two or more accounts in that year is made up.

What is the position if the 12 months accounts end in the period from 1 January 2002 to 5 April 2002?

(3B) For the purposes of subsection (2)(a) [Special Rule 1], a 12 month account ending in the period 1 January to 5 April 2002 (which now actually ends in the year of assessment 2002) is, in addition to being an account made up to a date in the year of assessment 2002, to be treated as an account made up for a period of one year to a date in the short “year” of assessment 2001, and the corresponding period relating to the year of assessment 2000–2001 for the purposes of subsection (3) will be determined accordingly.

The consequence of this treatment is that the same 12 month period of account forms the basis for the assessment for the short “year” of assessment 2001 and also the year of assessment 2002. The assessment for the short “year” of assessment 2001 is on the basis of 74% of the profits of the period of account, while the assessment for the year of assessment 2002 is on the basis of the full (100%) profits of that period.

What is the position if there are changes in the basis period requiring a review of the preceding year?

The provisions of subsection (3) provide that where the basis period for a year of assessment is determined in accordance with subsection (2)(b) [Special Rule 2] or subsection (2)(c) [Special Rule 3] and the basis period as so determined does not correspond to the basis period for the preceding year of assessment, the preceding year of assessment must be reviewed. Where the profits of the corresponding period relating to the previous year of assessment exceed the profits assessed for that year, the profits of that corresponding period are taken to be the profits of that previous year.

Normally the corresponding period to a basis period for a year of assessment is a period of 12 months ending on the same date in the preceding year of assessment. The move to a calendar tax year creates a mismatch between the length of the short “year” of assessment 2001 and the length of the previous and subsequent years of assessment. This results in problems of matching the basis period for a year of assessment with a corresponding period in the preceding year. The legislation (subsections (3C) to (3F)) sets out how to deal with this as follows:

Year of assessment 2001 and revision of year of assessment 2000–2001

(3C) Where the profits of the short “year” of assessment 2001 have been taken to be the full amount of the profits of that “year” in accordance with subsection (2)(c) [Special Rule 3] and the full amount of the profits of the year of assessment 2000–2001 exceed the profits charged to income tax for that year, then, the profits of the year of assessment 2000–2001 are to be taken to be the full amount of the profits of that year, and the assessment for that year is to be amended accordingly. In other words, where the basis period for the short “year” of assessment 2001 is the period from 6 April 2001 to 31 December 2001 [Special Rule 3], the corresponding period for the year of assessment 2000–2001 is the year ended 5 April 2001.

Year of assessment 2002 and revision of short “year” of assessment 2001

(3D) Where the profits of a period of one year ending in the year of assessment 2002 have been taken to be the profits of that year of assessment in accordance with subsection (2)(b) [Special Rule 2] and the profits charged to income tax for the short “year” of assessment 2001 are less than 74% of the profits of the corresponding period relating to the short “year” of assessment 2001, then, the profits of the short “year” of assessment 2001 are to be taken as 74% of the profits of that corresponding period, and the assessment for that “year” is to be amended accordingly.

(3E) It could happen that the corresponding period relating to the short “year” of assessment 2001 might not actually end in that “year” of assessment. This will be the case where the corresponding period is a 12 month period ending in the period 1 January 2001 to 5 April 2001 and that period does not actually end in the short “year” of assessment 2001 (which commences on 6 April 2001). To overcome such difficulty, it is provided that, for the purposes of subsection (3D), a period (the “relevant period”) which, by virtue of the fact that it ends on a date falling in the period from 1 January to 5 April 2001, would not otherwise be treated as the corresponding period relating to the short “year” of assessment 2001 is nonetheless be treated as the corresponding period relating to that “year” of assessment. In essence, therefore, where the basis period for the year of assessment 2002 is, on the basis of Special Rule 2, a period of 12 months ending in the year 2002, the corresponding period for the short “year” of assessment 2001 is the period of 12 months ending in the calendar year 2001.

(3F) Finally, where the profits of the year of assessment 2002 have been taken to be the full amount of the profits of that year of assessment in accordance with subsection (2)(c) [Special Rule 3], that is, the assessment is based on the profits of the actual year of assessment 2002 (1 January to 31 December 2002), and the full amount of the profits of the short “year” of assessment 2001 exceed the profits charged to income tax for that “year”, then, the profits of the short “year” of assessment 2001 (6 April to 31 December 2001) are to be taken as the full amount of the profits of that “year”, and the assessment for that “year” is to be amended accordingly. In essence, therefore, where, on the basis of Special Rule 3, the basis period for the year of assessment 2002 is the profits of the year of assessment itself, the corresponding period for the short “year” of assessment 2001 is the short “year” of assessment 2001.

Relevant Date: Finance Act 2021