The Gazette 1991

JU LY/AUGUST

1991

GAZETTE

Changes in the basis of income tax assessment under the Finance Act 1990

In this article I wish to outline the changes in the basis of assessment for income tax brought about by the Finance Act, 1990 as set out in Chapter 2 of that Act (Sections 14 to 27). Obviously the changes in the method of assessment of income under Cases 1 and 2 of Schedule D of the Income Tax Act, 1967 (Trading and Professional Income) are of immediate and personal importance to all self-employed people, including Solicitors.

1988/1989 - The first twelve months of practice (i.e. the 1st of May 1989 to the 30th of April 1988). 1989/1990 - The income arising

in the accounting period ending in the preceding year i.e. the accounting period ending on the 30th of April 1988.

Section 14 sets out the changes in the assessment of income arising from Cases 1 and 2 of Schedule D sources. Case 1 relates to trading income, Case 2 relates to professional income. However both sources are treated in exactly the same way. Heretofore income tax for self- employed people was, generally speaking, assessed on a preceding year basis i.e. for the financial year 6th April 1989 to 5th April, 1990 taxable income was assessed on the accounts of the business for an accounting period ending in the financial year 1988/1989. If I had my yearly accounts done up to the "As a consequence of Section 14, from 5th April 1990 income tax assessment under Case 1 and Case 2 will no longer be based on a preceding year but on a current year set of accounts . . . " 31st of July of each year, then my income tax assessment for 1989/ 1990 would be based on my accounts for the period 1st August 87 to 31st July 1988. Case II profits for year to 31 July 1988 Case II Income Tax assessment for financial year 1989/1990 £30,000 As a consequence of Section 14, from the 5th of April 1990 income tax assessment under Case 1 and Case 2 will no longer be based on a preceding year but on a current year, set of accounts e.g. for the financial year 1990/1991 where annual accounts are made up to £30,000

the 31st of July my income tax assessment will be based on my accounts for the period 1st of August, 1989 to 31st July 1990

by Paul McNally, Solicitor

Case II profits for 12 months to 30 April 1988 £15,000 Case II profits for 12 months to 30 April 1989 £20,000 Case II profits for 12 months to 30 April 1990 £25,000

rather than the period 1st of August, 1988 to the 31st of August 1989 as was the case hereto- fore.

Assessments 1st year - 1987/1988 Period 1/5/87 to 5/4/88 £15,000 X H

Case II profits for year to 31 July 1989 Case II profits for year to 31 July 1990 Case II Income Tax assessment for financial year 1990/1991

£35,000

= £13,750

£40,000

12 2nd year - 1988/1989 12 months to 30 April 1988

£40,000

£15,000

Under the old rules in com- mencement and cessation situa- tions the income of the actual year of assessment could be used as the basis for the income tax assessment for that year. For example, if I started a Solicitor's practice on the 1st of May, 1987 and I had annual accounts done up to the 30th of April of each year, the basis of my income tax assessment for my first three years would have been as follows:

The actual income from the 1st of May 1987 (the date of commencement) to the 5th of April 1988.

1987/1988 -

Paul McNally

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