Revenue Note for Guidance

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Revenue Note for Guidance

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.

Example 1

Business commenced 1 July 2002. Taxpayer makes up accounts as follows:

Profits 12 months period ended 30 June 2003

€12,000

Profits 12 months period ended 30 June 2004

€24,000

First Year – 2002

Assessable on profits from 1/7/2002 to 31/12/2002

€12,000 × 6/12 = €6,000

Second Year – 2003

Assessable on profits of 12 months ended 30/6/2003

€12,000

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.

Example 2

Business commenced 1 September 2002. Taxpayer makes up accounts as follows:

Profits 14 months period ended 31 October 2003

€28,000

First Year – 2002

Assessable on profits from 1/9/2002 to 31/12/2002

€28,000 × 4/14 = €8,000

Second Year – 2003

Assessable on profits of 12 months ended 31/10/2003

€28,000 × 12/14 = €24,000

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.

Example 3

Business commenced 1 October 2002. Taxpayer makes up accounts as follows:

Profits 6 months period ended 31 March 2003

€18,000

Profits 7 months period ended 31 October 2003

€21,000

First Year – 2002

Assessable on profits from 1/10/2002 to 31/12/2002

€18,000 × 3/6 = €9,000

Second Year – 2003

Assessable on profits of 12 months ended 31/10/2003 (i.e. 5 months to 31/3/2003 plus 7 months ended 31/10/2003)

(€18,000 × 5/6) + €21,000= €36,000

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.

Example 4

Business commenced 1 July 2002. Taxpayer makes up accounts as follows:

Profits 12 months period ended 30 June 2003

€16,000

Profits 12 months period ended 30 June 2004

€12,000

Original assessments will have been made as follows:

1st year – 2002 (basis period 1/7/02 – 31/12/02) Assessable profits

€8,000

2nd year – 2003 (basis period 1/7/02 – 30/6/03) Assessable profits

€16,000

3rd year – 2004 (basis period 1/7/03 – 30/6/04) Assessable profits

€12,000

The taxpayer may claim, when submitting the return of income for the year of assessment 2004, to have the assessment for that year reduced by the excess of the assessed profits for the year of assessment 2003 over the actual profits for the year of assessment 2003 (1/1/03 to 31/12/03).

Assessed profits for 2003

€16,000

Actual profits

(i.e. 6/12 of y/e 30/6/03 + 6/12 of y/e 30/6/04)

€14,000

Excess

€2,000

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.

Example 5

A trader commenced business on 1 June 2000 and makes up accounts as follows:

Profits for 12 months ended 31 May 2001

€60,000

Profits for 7 months ended 31 December 2001

€40,000

First Year 2000/2001 (basis period 1/6/2000 —5/4/2001)

Profits to be assessed

€60,000 × 10/12

= €50,000

Second Year 2001 (basis period 12 months to 31/12/2001)

Profits to be assessed

[€40,000 + (€60,000 × 5/12] × 74% = €48,100

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).

Example 6

Calculation of Second Year Excess

Business commenced 1 June 2000. Taxpayer makes up accounts as follows:

Profits 12 months period ended 31 May 2001

€20,000

Profits 12 months period ended 31 May 2002

€15,000

Original assessments will have been made as follows:

1st year – 2000/2001 (basis period 1/6/00 – 5/4/01)

Assessable profits €20,000 × 10/12 =

€16,666

2nd year – 2001 (basis period 1/6/00 – 31/5/01)

Assessable profits €20,000 × 74% =

€14,800

3rd year – 2002 (basis period 1/6/01 – 31/5/02)

Assessable profits =

€15,000

Second Year Excess:

Profits taxed in second year 2001

€14,800

Actual profits of second year 2001

€20,000 × 2/12 =

€3,333

€15,000 × 7/12 =

€8,750

€12,083

Second year excess =

€2,717

Since the actual profits for the second year, the year of assessment 2001, are less than the amount assessed for that year, the taxpayer may claim that the excess be deducted from the assessable profits for the third year, the year of assessment 2002, as follows:

Profits assessed in 3rd year 2002

€15,000

LESS Second year excess

€2,717

Assessable profits 2002

€12, 283

The claim in respect of the excess must be included on the return of income for the year 2002 and that return must be made not later than 31 October 2003.

Relevant Date: Finance Act 2019