What in the name of all that's holy, does this mean?

CapedCrusader

This is from a revenue leaflet:

Revenue wrote:

Special rules apply when a business is starting up or closing down. The profit assessed for the first tax year is the actual taxable income from the date of commencement to the following December 31.

In the second year the profits of a twelve month period that has ended in the second tax year are taxed. This means that you will be taxed on the profits of the twelve months to the latest accounting date ending in the tax year or otherwise on the profits of the tax year.

It is only in the third year that the normal ongoing system starts to operate. Most business expenses incurred prior to the actual start-up of the business are treated as allowable costs in calculating tax liability.

Could someone please explain to me what this means? Say for example:

- Business (sole trader) begins trading 01-Feb-2007
- Accounting Year = June 1st to May 31st

Could someone please take me through the chronology of returns in the first three years according to the above from the Revenue?

Baby4

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CapedCrusader

How does the second year work? I presume I am not taxed twice for the period 01/02/207 to 31/12/2007?

Legend100

The Revenue leaflet isn't too hepful unfortunatley. You will be able to get a review of the second year in commencement. This means that when the third "accounting year" is completed, you can get a prior year review on an actual basis. Please be very careful to take note of dates as it is crucial to the understanding of how it works.

As the previous poster said, say you prepare accounts from 01/02/07-31/01/08 then your first charge to income tax will be for 1st Feb to 31 Dec 07, ie the 2007 tax year. Then, in your Second year you will be taxed on the accounting year 01/02/07-31/01/08, ie the 2008 tax year. As you said this is a double charge to tax but it is in you third year that this is rectified.

You will initially be charged to tax in the third year (ie 2009) on your accounting year ended 31/01/09. Then you do a prior year review by taking the 12 months from Jan to Dec 08 and see what the taxable position would have been if you were taking this year as your accounting period.
This is where it gets a small bit tricky.

From the dates we have assumed you quantify the assessable profits by splitting the second year accounting profits.

So we look at your first accounting year end and see it was 31/01/08. That is one month of 2008 so take 1/12th of the profit from this period and add it to 11/12ths of the profit for the accounting year end 31/01/09 as 11 months of the year relate to the tax year 2008.

This is your new assessable profit for 2008 and you would do a tax comp on this revised profit. If the tax turns out to be less than you were originally charged on the accounting year ended 31/01/08, you can opt to have your tax return revised and receive a refund. If it is greater you do not have to do anything and will not have to pay over the increased charge.

From then on (ie year ended 31/01/09) you will be taxed on the profits for the current accounting period.

Apologies if it was a bit long winded. It can be a bit tricky to explain without an example in front of you.