Cessation of a Trade or Profession Basis of Assessment

General

Under the general rule for an ongoing business, Income Tax under Cases I and II is charged on the full amount of the profits of a trade or profession arising in the year or assessment. Where it has been customary to make up accounts for the trade or profession a taxpayer is charged to Income Tax on the profits arising in the twelve month period of account ending in the year of assessment.

Different rules apply in the case of:

• An account which is for a period greater or lesser than one year
• Commencement of a trade or profession
• Cessation of a trade or profession.

This article is confined to the special rules applicable at the cessation of a trade or profession. It also contains a worked example of the revised basis of assessment where the profit or gains of the penultimate year of assessment have been computed in accordance with Section 65(2)(c) TCA 1997. The same principle applies where the profits of the penultimate year of assessment are computed in accordance with Section 65(2)(b). (Section 65(2) (b) and (c) apply in the case of an accounting period greater or lesser than 1 year).

Special Basis on cessation of a trade or profession Section 67 TCA 1997

The final year.s assessment is based on the profits from the preceding 6 April to the date of cessation.

Example

Business ceases on 30 November 1998. Accounts for 10 months ended 30/11/98 showing an adjusted profit of ₤22,000 are submitted. Final year of assessment is 1998/99. Basis period for 1998/99 is 6 April 98 to 30 November 1998.

Assessable profit is: ₤22,000 × 8/10 = ₤17,600.

Revision of year preceding the year of cessation

The penultimate year of assessment is initially based on the profits arising in the twelve month period of account ending in the year of assessment provided the rules of Section 65 (2) (a) have applied. The Inspector must compare the assessed profits with the actual profits and revise the assessment to the actual profits if greater.

Example

Business permanently ceases on 30/6/99. Accounts have been submitted showing the following profits as adjusted for tax purposes:

Year ended	Profit
30/9/97	₤22,000
30/9/98	₤24,000
Nine months ended
30/6/99	₤36,000

Assessments

1997/98
Basis Period	y/e 30/9/97
Assessable Profits	₤22,000
1998/99
Basis Period	y/e 30/9/98
Assessable Profits	₤24,000
1999/00
Basis Period	6/4/99 - 30/6/99
Assessable Profits	₤12,000*
*(₤36,000 × 3/9)

Review 1998/99 - Penultimate Year

Assessed Profits	₤24,000
Actual Profit
6/4/98- 30/9/98
(₤24,000 × 6/12)	₤12,000
1/10/98 - 5/4/99
(₤36,000 × 6/9)	₤24,000
	₤36,000

As assessed profits ₤24,000 is less than actual profits ₤36,000, assessment must be revised to actual profit of ₤36,000.

Penultimate year revision and pre-penultimate year revision where Section 65 (3) rules are applicable.

Example

Business permanently ceases on 31 July 1999. It is customary to make up accounts to 31 July. Accounts are submitted for year ended 31 July 1997 showing a profit (as adjusted for tax purpose) of ₤32,000. Accounts are then submitted for 24 months ended 31 July 1999. These accounts as adjusted for tax purposes show profits of ₤100,000.

Assessments

1997/98
y/e 31/7/97	₤32,000
1998/99
₤100,000 × 12/24	₤50,000
1999/00
₤100,000 × 4/24	₤16,667

As no accounts were made up to a date within the year 1998/99, Section 65(2)(c) applies i.e. tax is charged on the full amount of the profits or gains of the year of assessment. By virtue of Section 65(3) the profits or gains of the corresponding period relating to the previous year of assessment (1997/98) must be ascertained and compared with the profit actually assessed.

Profits or gains of the corresponding period (6/4/97 to 5/4/98) relating to the previous year of assessment (1997/98) are ₤44,000 i.e.:

6/4/97 - 31/7/97
₤32,000 × 4/12	₤10,667
1/8/98 - 5/4/98
₤100,000 × 8/24	₤33,333
	₤44,000
Assessed Previously	₤32,000

The assessment for 1997/98 must be increased to ₤44,000

Footnote

To make a full and true disclosure the taxpayer or practitioner is obliged to notify the Inspector of all material facts necessary for the making of an assessment. The fact of cessation is a material fact. To ensure that the due date for any additional tax due by reason of a penultimate year review is one month from the date of any necessary amendment, notification of cessation together with revised computations of liability for all years should where possible be provided to the Inspector as soon as is practicable and without unreasonable delay. If this is not done, the taxpayer may be liable to a surcharge in accordance with Section 1084(1)(b)(ii) TCA 1997 and any tax due by reason of a penultimate year review will be deemed to have been due on the same day as the tax charged by the original assessment (Section 958 (8) TCA 1997).