Revenue Note for Guidance

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Revenue Note for Guidance

CHAPTER 3

Income tax: basis of assessment under Cases I and II

Overview

Chapter 3 of Part 4 sets out the basic rules governing the basis of assessment to income tax under Cases I and II of Schedule D. The Chapter also sets out special rules which apply to the basis of assessment on commencement, discontinuance and change of ownership of a trade or profession and to certain “short-lived” businesses.

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.

Example 1

Where a person makes up annual accounts to, say, 31 October each year, the profits of the year ended 31 October 2002 will be taken to be the profits of the year of assessment 2002.

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.

Example 2

Where a person makes up accounts for, say, an 18 month period to 30 September 2002, the profits for the year ended 30 September 2002 will be taken to be the profits of the year of assessment 2002.

Example 3

Where a person makes up annual accounts to, say, 30 April 2002 but then makes up further accounts for the six month period to 31 October 2002, the profits for the year ended 31 October 2002 will be taken to be the profits of the year of assessment 2002.

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).

Example 4

Annual accounts drawn up to 31 October 2002 give the basis of assessment for the year of assessment 2002. If the next accounts are not made up until 31 January 2004, a period of 16 months, there will be no period of account ending in the year of assessment 2003. In such a case the profits of the year of assessment itself (i.e. the profits of the year ending 31 December 2003) will be the profits which will be assessed to tax for the year of assessment 2003.

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.

Example 5

Following a number of years where accounts are prepared up to 30 September, accounts covering 15 months to 31 December 2003 are submitted. The profits are —

  • year ended 30 September, 2002, €120,000
  • 15 months ended 31 December, 2003, €250,000

The basis for assessment for 2003 will be the profits arising for the 12 months ended 1 December, 2003. The assessment for 2003 will be €250,000 × 12/15 = €200,000.

The assessment for 2002 was €120,000 based on the profits for the year of account ending on 30 September, 2002. However, the assessment now requires to be revised as the profits for the period of 12 months ended 31 December 2002 are greater than the profits actually assessed for 2002. The revised assessment is —

€120,000 × 9/12 =

€90,000

€250,000 × 3/15 =

€50,000

€140,000

The additional tax payable of €20,000 is due for payment by 31 October 2004 under the rules of Self Assessment (see Part 41). If the revised figure had been less than the original assessment, the assessment would not be adjusted.

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.

Example 6

A trader normally makes up accounts to 30 June each year. The profits for the year ended 30 June 2001 are €200,000. The profits to be assessed for the short “year” of assessment 2001 are:

Year ended 30 June 2001 – €200,000 × 74% = €148,000.

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.

Example 7

A trader makes up accounts for an 18-month period to 31 December 2001. The profits of that period are €360,000. The profits to be assessed for the short “year” of assessment are:

€360,000 × 12/18 × 74% = €177,600.

Example 8

A trader makes up two sets of accounts as follows:

12 months to 30 April 2001—

profits: €72,000

8 months to 31 December 2001—

profits: €48,000

The profits to be assessed for the short “year” of assessment 2001 are:

[basis period y/e 31/12/2001] [€48,000 + (4/12 × €72,000)] × 74% = €53,280.

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.

Example 9

A trader makes up accounts to 31 March each year as follows:

Year-end 31 March 2001 – profits €400,000

Year-end 31 March 2002 – profits €100,000

Basis period for the year of assessment 2000/2001 = y/e 31/3/2001 = €400,000

Profits to be assessed for the short “year” of assessment 2001:

Basis period is y/e 31/3/2002 (€100,000 × 74%) = €74,000.

Profits to be assessed for the year of assessment 2002:

Basis period is y/e 31/3/2002 = €100,000.

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.

Example 10

A trader normally makes up his accounts to 30 April each year. He changes the accounting date to 31 December 2001. The profits are as follows:

Year ended 30/4/2000

€120,000

Year ended 30/4/2001

€180,000

8 months ended 31/12/2001

€140,000

The basis period for 2001 is the year ended 31/12/2001. The corresponding period for 2000/01 is the year ended 31/12/2000.

Profits assessed originally [basis period y/e 30/4/2000]

€120,000

Profits for corresponding period y/e 31/12/2000

[€120,000 × 4/12] + [€180,000 × 8/12] =

€160,000

As the profits of the corresponding period exceed the profits charged to tax, the assessment for 2000/01 is increased to €160,000. The additional tax payable is due for payment by 31/10/2002 under the rules of Self Assessment (see Part 41).

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.

Example 11

A trader makes up accounts as follows:

12 months ended 31/12/2000

profits

€72,000

18 months ended 30/6/2002

profits

€120,000

Year of Assessment 2001 – basis period is the period 6/4/2001 to 31/12/2001

Year of Assessment 2000–2001 Review:

Profit originally assessed [Special Rule 1]

€72,000

Profits of corresponding period [y/e 5/4/2001]:

€72,000 × 9/12 + €120,000 × 3/18 =

€74,000

Increase assessment to

€74,000

As for example 10, the additional tax liability is due and payable by 31/10/2002.

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.

Example 12

A trader makes up accounts as follows:

year ended 30/4/2000 – profits

€120,000

year ended 30/4/2001 – profits

€96,000

9 months 31/1/2002 – profits

€90,000

2002 Basis period is y/e 31/1/2002.

2001 Review:

Corresponding period is year ended 31/1/2001

Profits [3/12 × €120,000 + 9/12 × €96,000] × 74% =

€75,480

Profit originally assessed [Special Rule 1] €96,000 × 74% =

€71,040

Result: Increase assessment to

€75,480

The additional tax payable is due for payment by 31/10/2003 under the rules of Self Assessment (see Part 41).

(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.

Example 13

A trader makes up accounts as follows:

year ended 30/9/2001 – profits

€100,000

18 months ended 31/3/2003 – profits

€200,000

Year of assessment 2002: basis period is period 1/1/2002 – 31/12/2002 under Special Rule 3

Year of assessment 2001 Review: Corresponding period is short “year” of assessment 2001, i.e. profits 6/4/2001 to 31/12/2001

Profits of corresponding period:

€100,000 × 6/12 + 3/18 × €200,000 =

€83,334

Profit originally assessed under Special Rule 1:

€100,000 @ 74% =

€74,000

Result: Increase assessment to

€83,334

The additional tax payable is due for payment by 31/10/2003 under the rules of Self Assessment (see Part 41).

Relevant Date: Finance Act 2019