66 Special basis at commencement of trade or profession

Summary

In the case of the commencement of a trade or profession, the first year’s assessment is based on the profits arising from the date of commencement to the following 31 December. 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. A taxpayer may elect to have the assessment for the third year of assessment reduced by any excess of the profits assessed for the second year over the actual profits of that second year (that is, profits from 1 January to the following 31 December). 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

Commencement year

(1) In a start up situation the Case I or II assessment for the first year of assessment is based on the profits arising from the commencement date of the trade or profession to the following 31 December.

Second year of assessment

The assessment for the second year of assessment depends on a number of situations that might arise in that second year.

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

(2)(a) If there is only one set of accounts for a period ending in the second year of assessment and these are for 12 months, the individual is chargeable to income tax on the profits of that 12 month period of account.

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

(2)(b) If there is only one set of accounts for a period ending in the second year of assessment and the period to which the accounts relate is in excess of 12 months, the individual is chargeable to income tax on the profits of the 12 month period ending on the date to which the accounts are made up.

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

(2)(b) If there is more than one set of accounts for periods ending in the second year of assessment, the taxpayer is assessable on the profits of the 12 month period ending on the date to which the latest such accounts are made up provided that date is at least 12 months after the commencement of the trade or profession.

Other cases

(2)(c) In all other cases the assessment for the second year of assessment is based on the full amount of profits in the year of assessment, i.e. on a calendar year basis. 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 of the trade or profession.

Third year of assessment

(3) The assessment for the third year of assessment is based on the normal rules of section 65 (normally the latest 12 month period of account in that year). However, where the amount of the assessment for the second year of assessment exceeds the actual profits of that year, the taxpayer may elect in writing to the inspector to have the assessment for the third year of assessment reduced by the excess. A claim for this treatment must be made with the return of income required under Chapter 3 of Part 41A. Where the reduction cannot be given full effect in the third year of assessment due to insufficiency of profits, the balance may be treated as a loss for the purposes of section 382 (which allows the carry forward of losses to future years) and carried forward and relieved in a subsequent year of assessment.

The revised assessment for 2004 is €10,000 ***(i.e. €12,000 less €2,000).

What are the special arrangements to cater for the changeover to a calendar year of assessment in the case of the commencement of a trade or profession?

Commencement Year

The basic rule remains unchanged.

Second Year of Assessment

(3A) The basis rules remain unchanged but where the second year of assessment is the short “year” of assessment 2001, and the basis of assessment is a 12 month period ending in that “year”, the profits chargeable are 74% of the profits of that 12 month period.

The provisions of subsection (2) are intended to apply only in the case of the second year of assessment in which a trade or profession is carried on. Thus, the subsection speaks of a trade or profession which has been set up and commenced “within one year preceding the year of assessment”.

(3B)(a) The move to a calendar year basis of assessment involves a mismatch between the length of the year of assessment for the short transition “year” 2001 (9 months from 6 April to 31 December 2001) and the length of previous and subsequent years of assessment (12 months). Therefore, because of the reference to “within one year preceding the year of assessment”, subsection (2) could (in the absence of a legislative provision) operate in the case of the third year of assessment in which a trade or profession is carried on if that third year were the year of assessment 2002. In order to prevent this it is provided that, as respects the year of assessment 2002, subsection (2) is to apply as if “within the period from 6 April 2001 to 31 December 2001” were substituted for “within one year preceding the year of assessment”. In effect, therefore, “second year treatment” in a commencement situation will apply for the year of assessment 2002 only if the trade or profession had been set up and commenced in the period from 6 April 2001 to 31 December 2001.

Third Year of Assessment

The provisions of subsection (3) are intended to apply only in the case of the third year of assessment in which a trade or profession is carried on. Thus, the subsection speaks of a trade or profession which has been set up and commenced “within the year next before the year preceding the year of assessment”.

(3B)(b)&(3C) Again, because of the mismatch between the length of the year of assessment for the short transition “year” 2001 (9 months from 6 April to 31 December 2001) and the length of previous and subsequent years of assessment (12 months), and also because of the reference in subsection (3) to “within the year next before the year preceding the year of assessment”, subsection (3) could (in the absence of a legislative provision) operate in the case of the fourth year of assessment in which a trade or profession is carried on if that fourth year were either the year of assessment 2002 or the year of assessment 2003. In order to prevent this, it is provided that subsection (3) is to apply —

• as respects the year of assessment 2002, as if “within the period from 6 April 2000 to 5 April 2001” were substituted for “within the year next before the year preceding the year of assessment”, and
• as respects the year of assessment 2003, as if “within the period from 6 April 2001 to 31 December 2001” were substituted for “within the year next before the year preceding the year of assessment”.

In effect, therefore, “third year treatment” in a commencement situation will apply for the year of assessment 2002 only if the trade or profession had been set up and commenced in the year of assessment 2000–2001 (i.e. in the period from 6 April 2000 to 5 April 2001), and for the year of assessment 2003 only if the trade or profession had been set up and commenced in the short “year” of assessment 2001 (i.e. in the period from 6 April 2001 to 31 December 2001).

Relevant Date: Finance Act 2019