4.3.

[4.3.3] Trade or Profession - Commencement Rules Basis of assessment at commencement of trade or profession 1998/99 et seq.
Extract from Tax Briefing Issue 35 (March 1999) 1 General Different rules apply to the Case I and Case II profits to be charged to tax where there is a: set of accounts made 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. 2 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. 3 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 4 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.

4.3.3 Example 1 Business commenced 1 November 1997 Profits 12 months ended 31 October 1998 Profits 12 months ended 31 October 1999 First Year - 1997/98 Assessable on profits from 1/11/97 to 5/4/98 12,000 x 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. 5 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 x 5/16 = 10,000 Second Year - 1998/99 Assessable on 32,000 x 12/16 = 24,000 6 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. - 12,000 - 24,000

4.3.3 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 x 5/6 = 17,500 Second Year - 1998/99 Taxpayer is assessable on 47,000 i.e. Profit for 10 months ended 28/2/1999 Profit for 2 months to 30/4/98 (21,000 x 2/6) Total 7 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. 8 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. Example 4 Business commenced 1 October 1997 Profits year ended 30/9/98 - 16,000 Profits year ended 30/9/99 - 12,000 Original assessments will have been made as shown in the table on page 4. The taxpayer may claim when submitting the Return of Income for 1999/2000 to have the assessment for 1999/2000 reduced by the excess of the assessed profits for 1998/99 over the actual profits for 1998/99 (year ended 5 April 1999). 40,000 7,000 47,000

4.3.3 Assessed profits Actual profits (i.e. 6/12 of y/e 30/9/98, + 6/12 of y/e 30/9/99) Excess The revised assessment for 1999/2000 is therefore 10,000 (i.e. 12,000 less 2,000). Example 4 (Table) ASSESSMENTS 1st Year - 1997/98 2nd Year - 1998/99 3rd year - 1999/2000 9 BASIS PERIOD 1/10/977 - 5/4/98 1/10/97 - 30/9/98 year ended 30/9/99 ASSESSABLE PROFITS 8,000 16,000 12,000 16,000 14,000 2,000

Commencement - Return Filing and Payment Dates 9.1 Return Filing Section 1084 (4) TCA 1997 provides that in a situation where a new trade or profession is set up and commenced within a year of assessment and no other trade or profession is carried on, the due date for submission of the return for that year will be the due date for the second year. This provision was introduced to recognise the fact that the first years accounts might not have been finalised by the time the first years return was due. Example 5 Trade commenced 1 February 1998 Returns prepared for 12 months to 31 January 1999 But for the provisions of Section 1084 (4), the return would have to be filed by 31 January 1999, i.e. before the actual profit figures were known. The filing of the return may now be deferred until 31 January 2000.

4.3.3 9.2 Payment Dates There is some confusion regarding the due date(s) for payment of tax in commencement situations. Some practitioners wrongly thought that, because the return filing deadline for the first year is extended to the return filing deadline for the second year, a similar deferral is provided for payment of tax. The due date for payment of the first years tax liability is the normal specified date for that year. Continuing the example above this means that: Due date for Preliminary Tax 1997/98 is 1 November 1997[NIL Preliminary tax may be paid based on the 100% of previous years liability rule.] Due date for Preliminary Tax 1998/99 is 1 November 1998 Due date for payment of balance of 1997/98 liability is 30 April 1999

While a Nil preliminary tax may be paid for 1997/98 in the above example, this would lead to a taxpayer having to pay Preliminary Tax for 1998/99 on 1 November 1998 and ALL 1997/98 income tax on 30 April 1999. This may cause cash-flow problems for taxpayers. Practitioners should consider advising their clients to make provision for such payments or to consider entering into a direct debit arrangement from the first year so as to avoid such cash-flow problems. Practitioners should remind clients of their possible exposure to interest charges if they fail to pay the appropriate tax on a timely basis.