Income Tax Commencement Rules

Basis of assessment at commencement of trade or profession 1998/99 et seq.

General

Different rules apply to the Case I and Case II profits to be charged to tax where there is a:

• set of accountsmade up for a period greater or lesser than one year
• change of accounting date
• commencement of a trade or profession
• Cessation of a trade or profession.

This article is confined to the special basis applicable at commencement of a trade or profession. In particular, it reflects the provisions of Section 8 Finance Act 1998, which amended Section 66 TCA 1997 to counter a possible abuse of the basis of assessment for the second year trading.

Commencement Basis - First Year

In the case of the commencement of a trade or profession the assessment for the first year is based on the profits or gains arising from the date of commencement to the following 5 April.

Commencement Basis - Second Year (For years 1998/99 et seq.)

The assessment for the second year depends on the:

• Number of accounting periods ended in the year
  and/or
• The length of the accounting period.

One set of accounts for a period of 12 months ending in second year of assessment

If there is only one set of accounts ended in the second year of assessment and these are for 12 months then the individual is chargeable to income tax on the profits from these accounts.

Example 1

Business commenced

1 November 1997
Profits 12 months ended 31 October 1998 - £12,000
Profits 12 months ended 31 October 1999 - £24,000

First Year - 1997/98
Assessable on profits from 1/11/97 to 5/4/98 £12,000 × 5/12 = £5,000

Second Year - 1998/99
As there is only one set of accounts ended in the second year (1998/99) and these accounts are for a period of 12 months then the taxpayer is assessable on accounts for 12 months ended 31/10/98 i.e. £12,000.

One set of accounts for a period in excess of 12 months

If there is only one set of accounts for the accounting period ending in the second year of assessment and the period to which the accounts relate is in excess of 12 months then the individual is taxable on the profits for 12 months ended on the date up to which the accounts are made up.

Example 2

Business commenced
1 November 1997
Profits 16 months ended 28 February 1999 - £32,000

First Year - 1997/98
Assessable on profits from 1/11/97 to 5/4/98 £32,000 × 5/16 = £10,000

Second Year - 1998/99
Assessable on £32,000 × 12/16 = £24,000

More than one set of accounts for periods ending in second year of assessment

If there is more than one set of accounts for periods ended in the second year of assessment then the taxpayer is assessable on the profits for 12 months ended on the later accounting date providing it is 12 months after commencement.

Example 3

Business commenced
1 November 1997. Taxpayer makes up accounts as follows:
Profits 6 months ended 30 April 1998 - £21,000 Profits 10 months ended 28 February 1999 - £40,000

First Year - 1997/98
Assessable on profits from 1/11/97 to 5/4/98 £21,000 × 5/6 = £17,500

Second Year - 1998/99
Taxpayer is assessable on £47,000 i.e.

Other Cases

In all other cases the assessment for the second year of assessment is based on the full amount of the profits or gain in the year of assessment i.e. on an actual basis 6 April to 5 April. This method of assessment will arise where there is no accounting period ended in the second year of assessment or where one accounting period ends in the second year of assessment and this accounting period ends less than 12 months after the date of commencement.

Third Year Assessment

The assessment for the third year is based on the 12 month accounting period ending in that year (Section 65 TCA 1997). Where the amount of the assessment for the second year exceeds the actual profits of the second year the taxpayer may elect in writing to the Inspector when submitting the return of income for the third year of assessment to have the assessment for the third year reduced by the excess.