The Gazette 1991

GAZETTE

JU LY/AUGUST

1991

3rd year - 1989/1990 12 months ending in preceding tax year i.e. 12 months to 30 April 1988 £15,000 In respect of the second year the taxpayer could elect to have the assessment based on the actual income for that financial year if it is to his advantage. In the above example the actual income for the second year 1988/1989 is as follows: 1 X £15,000 = £1,250 12 It is clearly not in the taxpayers interest in this situation to elect for tax assessment on an actual year basis. In respect of the third year the taxpayer can again elect for an alternative form of assessment. If the total assessable income for the second and third years - when the third year is calculated on a pre- ceding year basis - exceeds the total income for the second and third years where both of these years are calculated on an actual basis then the tax-payer can elect to have the difference subtracted from the taxable income of the third year calculated on a preceding year basis. In respect of the above example the position would be as follows: 11^ X £20 , 000 = £18,333 12 £19,583

The taxpayer in these circum- stances will not make an election for the alternative method of assessment. As, a result of the changes brought about by the Finance Act, 1990, the method of calculating the first year's income will remain the sama The option allowed to the tax-payer in his second financial year has been revoked. The second financial year will now be based on the income for the first twelve months of business. The third year's assessment will be cal- culated on a current rather than a preceding year basis. In our example the taxable income for the third year will be calculated on the accounts for the year ending 30th of April 1989 rather than the year ending 30th of April 1988. How- ever a deduction is allowed for the taxable income for the third year in the amount by which the income for the first twelve months of business exceeds the income for the actual second year. Business commences on 1 May 1 9 9 0 : -

In cessation situations under the old rules, an actual year rather than a preceding year could also be used as the basis of assessment but this time at the option of the Revenue rather than the taxpayer. For the final year of business the taxable income was based on the income from the previous 6th of April to the date of cessation. For example, if a business ceased operating on the 31st of October, 1988, the taxable income for 1988/1989 would be the income of the business for the period 6th April 1988 to 31 October 1988. As regards the penultimate and pre-penultimate years of trading, the Revenue had the option to assess the taxable income for "[In cessation situations] as re- gards the penultimate and pre- penultimate years of trading . . . where a cessation occurs after 6th of April 1991 the Revenue will only have the option of reviewing the penultimate year."

15,000 20,000 25,000

Profits for 12 months to 30 April 1988 Profits for 12 months to 30 April 1989 Profits for 12 months to 30 April 1990

Assessments 1st year - 1987/1988 Profits to 5/4/1988 11 X 15,000= 13,750 12

= 15,000

2nd year - 1988/1989 Profits to 30/4/1988

= 20,000

3rd year - 1989/1990 Profits to 30/4/1989

TABLE 1

those years on the actual income for those years rather than the income arising in the preceding years. As a consequence of the new legislation where a cessation occurs after the 6th of April, 1991 the Revenue will only have the option of reviewing the penultimate year. Section 16 sets out transitional provisions for this year i.e. 1990/ 1991. For this financial year, people chargeable to income tax under Cases 1 and 2 of Schedule D can add together the taxable income for this year based on the old rules and the taxable income for this year based on the new rules and take the average of these two amounts as their taxable income for this

Actual Assessment

Original Assessment

2nd Year - 1988/1989

15,000

Assessment Actual profit for year 3rd Year - 1989/1990 Assessment Actual profit for year: 1 X 20,000

19,583

15,000

1,667

12 11 X 25,000

22,917

12

44,167

30,000

200