Case I & Case II Basis of Assessment Calendar Tax Year

This article is a follow up to an article on the Changeover to the Calendar Year of Assessment, which was published in Tax Briefing, Issue 44 (June 2001). It is confined to the special rules that apply to the taxation of a trade or profession as a result of the changeover to the calendar year basis of assessment.

References in this article to the ‘tax year 2001’ are to the period 6/4/2001 to 31/12/2001.

The Finance Act 2001 provisions dealt with herein include

• the rules for deciding the basis period for the tax year 2001
• the rules for deciding what is the “corresponding period” where the basis of assessment for the preceding year must be reviewed following a change in basis period for either 2001 or 2002 and
• the commencement and cessation rules to deal with the implications of the short tax year 2001.

Euro v Punts

All the examples in this article use euro figures only. In practice, accounts for some years may be in punts and accounts for periods ending after 1 January 2002 in euro. When this arises in practice it is very important to remember to first convert the adjusted profit figures into euro before making the apportionments referred to in the article. If necessary, the resulting assessable figures should be converted back to punts for assessing purposes, for example, if the tax return and assessment were made in punts for the year in question.

Pay & File

The Pay and File system provides for a single date for:

• payment of preliminary tax for income tax
• tax return filing for the previous tax year (income tax and CGT)
• payment of the balance of income tax for the previous tax year
• payment of capital gains tax for the previous year.

In addition to this, if there is a change in the basis period, requiring a review of the preceding year, any tax payable as a result of such review must be fully paid by the same date as above under the Pay and File system – see examples 5, 6, 7 and 8 herein.

The first Pay and File date is 31 October 2002 - See Tax Briefing Issue 44 (June 2001) for further details.

What are the rules regarding the basis of assessment under Case I and Case II for continuing businesses and what are the changes arising from the introduction of the calendar tax year?

The basic rules remain unchanged but a number of transitional rules have been introduced. These new rules are contained in 6 new subsections [(3A) to (3F)], introduced into Section 65 TCA 1997 by Schedule 2 Finance Act 2001.

Existing rules:

The general rule is that income tax is charged on the full amount of profits of a trade or profession arising in a year of assessment.

Special rules apply where it has been customary to make up accounts as follows [Section 65(2) TCA 1997]:

Special Rule 1

• where there is one account for a period of a year made up to a date in the year of assessment

the profits of that period of one year are taken to be the profits of the year of assessment: Section 65(2)(a) TCA1997.

Special Rule 2

• where there is an account for a period greater or less 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

the profits of the period of one year up to the date on which the period ends or the date on which the last of the periods of accounts ends is taken to be the profits of the year of assessment: Section 65(2)(b) TCA 1997.

Special Rule 3

• Where there is an account covering the year of assessment but that account does not end in the year of assessment

the profits of the year of assessment itself are to be taken as the basis of assessment: Section 65(2)(c) TCA 1997.

How do these special rules affect the Tax Year 2001?

• Persons assessed to tax on the basis of Special Rule 1 will be assessed for 2001 on the basis of 74% of the profits of the 12-month accounting period ending in the tax year 2001: Section 65(3A) TCA 1997.

Example 1:

A trader normally makes up accounts to 30 June each year. The adjusted profits of the account for the year ended 30 June 2001 are ₤200,000.

Profits or gains to be assessed for 2001:
Year ended 30 June 2001 ₤200,000 × 74% = ₤148,000

• Persons assessed on the basis of Special Rule 2 will be assessed on 74% of the profits or gains of the year ending on either:
  1. the date in the year of assessment to which an account (not being a single 12 month account) is made up [example 2] or
  2. the date in the year of assessment which is the date to which the last of two or more accounts is made up [example 3].

Example 2:

A trader makes up accounts with adjusted profits of ₤360,000 for an 18-month period to 31 December 2001.

Profits or gains assessed for 2001:
₤360,000 × 12/18 × 74% (see (i) above) = ₤177,600

Example 3:

A trader makes up two sets of accounts as follows:

What is the position if the 12 months accounts end in the period from 1 January 2002 to 5 April 2002?

For the purposes of Special Rule 1, an account made up for a period of one year to a date falling in the period from 1 January 2002 to 5 April 2002, in addition to being an account made up to a date in the year of assessment 2002, is deemed to be an account made up to a date within the year of assessment 2001. Section 65(3B) TCA 1997.

This means that the same 12-month period of account can form the basis period of the tax years 2001 and 2002. The assessment for 2001: will be on the basis of 74% of the profits of the account, while the assessment for 2002 will be on the basis of the full profits of the 12 months.

Example 4:

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

Profits or gains to be assessed 2001:

Basis period for 2001 = y/e 31 March 2002

What is the position if there are changes in the basis period requiring a review of the preceding year?

Existing rule:

Where the basis period for a tax year in accordance with Special Rules 2 or 3 does not correspond to the basis period for the preceding year, the preceding year must be reviewed.

Where the profits or gains of the corresponding period relating to the previous year of assessment exceed the profits or gains assessed for that year, the profits or gains for that corresponding period are to be taken to be the profits or gains of that previous year.

Example 5:

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

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.

As the profits of the corresponding period exceed the profits charged to tax, the assessment for 2000/2001 is increased to ₤160,000. The tax payable on this is due for payment by 31/10/02 under the rules of self-assessment - see Tax Briefing Issue 44 (June 2001) page 6.

How do you deal with the mismatch of ‘corresponding periods’ which arise as a result of the introduction of the calendar tax year?

Normally the corresponding period is a period of 12 months ending on the same date in the preceding tax year. The move to a calendar tax year creates problems of matching the basis of assessment with a corresponding period in the preceding year. The legislation sets out how to deal with this as follows:

Tax year 2001 and revision of 2000/01

Where the basis period for 2001 is the period 6/4/2001 to 31/12/2001, [Special Rule 3] the corresponding period for 2000/01 is the year ended 5/4/2001: Section 65(3C) TCA 1997.

Example 6:

A trader makes up accounts as follows:

2001 - basis period is the period 6/4/2001 to 31/12/2001

2000/01 Review:

As for example 5, the additional tax liability is due and payable by 31/10/02.

Tax year 2002 and revision of tax year 2001

• Where the basis period for 2002 is a period of 12 months ending in the year 2002, on the basis of Special Rule 2 the corresponding period for the tax year 2001 is the period of 12 months ending in the calendar year 2001. The profits of the corresponding period are taken as 74% of the profits of this period: Section 65(3D) & (3E) TCA 1997.

Example 7

A trader makes up accounts as follows:

2002 Basis period is y/e 31/1/02.

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 tax payable on this is due for payment by 31/10/03 under the rules of self-assessment - see Tax Briefing Issue 44 (June 2001) page 6.

• Where the basis period for 2002 is the profits of the tax year on the basis of Special Rule 3 the corresponding period for the tax year 2001 is the tax year 2001.

Example 8:

A trader makes up accounts as follows:

2002 basis period is profits of period 1/1/2002 - 31/12/2002 [Special Rule 3]

2001 Review: Corresponding period is tax year 2001

i.e. profits 6/4/2001 to 31/12/2001

Profits of corresponding period

Profit originally assessed under Special Rule 1:

As for example 7, the additional tax liability is due and payable by 31/10/03.

What are the changes arising in the case of commencement of a trade or profession as a result of the introduction of the calendar tax year?

An article in Tax Briefing Issue 35, (March 1999) pages 8 and 9, addressed the special rules applicable at the commencement of a trade or profession.

• First and second year

The basic rules remain unchanged but where the second year of assessment is the tax year 2001 and the basis of assessment is a period of 12 months ending in that year, the profits chargeable are 74% of the profits of that period.

Example 9:

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

First Year 2000/01 Basis Period 1/6/2000 - 5/4/2001
Profits or gains to be assessed

Second Year 2001:
Basis Period 12 months to 31/12/2001
Profits or gains to be assessed =
[₤40,000 + ₤60,000 × 5/12] × 74% = ₤48,100

Third Year

Existing rule

Where the assessable profits for the second year exceed the actual profits of the second year the taxpayer may elect to have the assessment for the third year reduced by the excess.

Transitional Rule:

For the tax year 2002, the review will apply where the trade or profession was set up or commenced in the tax year 2000/01. For the tax year 2003, the review will apply where the trade or profession was set up or commenced in the tax year 2001.

Example 10: Calculation of Second Year Excess

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

Original assessments will have been made as shown in the table below.

Second Year Excess:

Actual profits of second year

i.e. period 6/4/2001- 31/5/2001

₤20,000 × 2/12 = ₤3,333

and period 1/6/2001 - 31/12/2001

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

The claim in respect of the excess must be made in writing by the taxpayer to the Inspector of Taxes no later than 31 October following the third year of assessment (in this example the claim must be made by 31/10/2003).

What are the changes arising in the case of cessation of a trade or profession as a result of the introduction of the calendar tax year?

An article in Tax Briefing, Issue 36 - June 1999 (pages 17 and 18) addressed the special rules applicable at the cessation of a trade or profession. Again, the basic rules remain unchanged but some technical amendments are necessary to reflect the change to a calendar tax year, including a provision to the effect that the increase in profits charged for the year preceding the year of cessation refers to the profits of the tax year preceding the tax year in which the cessation takes place.

Example 11:

A trade is permanently discontinued on 31/5/2002. Accounts are made up as follows:

Year of cessation 2002:

Basis period = profits 1/1/2002- 31/5/2002

Penultimate year 2001:

Actual profits of tax year 2001

Profits 6/4/2001 - 30/9/2001

Profits for 3 months

1/10/2001 - 31/12/2001

As the profits of the tax year 2001 exceed the original assessment for 2001 the assessment will be increased to ₤67,000.

The additional tax due is due one month from the date of the amendment - see Tax Briefing Issue 43 - April 2001 (page 27) for more details about this.

What about losses?

Strictly, relief is given for the adjusted loss as actually sustained in the year of assessment and not the loss of the basis period for the year: Section 381 TCA 1997. However, Revenue accepts that in the case of a continuing business a loss sustained in the basis period may be treated as a loss of the tax year. Where the basis period is a period of 12 months, relief will be given by reference to 74% of the loss for that period.