Taxation period of Sole Trader becoming Director of ltd company

mrben86

I'm a sole trader and I am forming a ltd company and becoming a director to continue my business.

Accounts are to end of May.
First year of accounts 1/6/2011 -> 31/5/2012 (2012 Tax return)
Last year of accounts 1/6/2019 -> 30/4/2020 (2020 Tax return)

2019 Profit: 55,000
2020 Profit: 50,000

I have an accountant but I basically want to confirm what he's saying as it seems a bit odd to me. He says that when I do my income tax return for 2020, it will include the 50,000 profit + anything I earn from 1/5/2020 to 31/12/2020.

This would mean that for 2020 I will be taxed on 19 months of income (1/6/2019 -> 31/12/2020) as if it was 1 year
Is this correct?

davindub

mrben86 wrote: »

I'm a sole trader and I am forming a ltd company and becoming a director to continue my business.

Accounts are to end of May.
First year of accounts 1/6/2011 -> 31/5/2012 (2012 Tax return)
Last year of accounts 1/6/2019 -> 30/4/2020 (2020 Tax return)

2019 Profit: 55,000
2020 Profit: 50,000

I have an accountant but I basically want to confirm what he's saying as it seems a bit odd to me. He says that when I do my income tax return for 2020, it will include the 50,000 profit + anything I earn from 1/5/2020 to 31/12/2020.

This would mean that for 2020 I will be taxed on 19 months of income (1/6/2019 -> 31/12/2020) as if it was 1 year
Is this correct?

Yes.

IT tax return on final accounts - cessation rules.

Any salary drawn from the company between the cessation of the sole trade and the end of the year. Probably best if you use the paye system to meet this obligation. You are now an employee! But you will not be taxed on the profit of the company only the salary you draw. The company pays corporation tax on profit.

tanit

2020 is going to be the last year you are trading as a sole trader, so Cessation rules apply.

For 2020 you will be taxed on actual profits from your trade (from 01/01/2020 to 01/04/2020) and whatever earnings you have as a PAYE employee.
Revenue will not loose the taxation of profits from 01/06/2019 to 31/12/2019, there will be a review of the penultimate year of trading based on actual profits. If in the review the profits taxed 2019 were lower than what they should have been, an amended return for 2019 will need to be submitted.

You can get more information in Revenue's Cessation of a trade Tax Manual

Read the manual, work out the figures (it is not very difficult) and talk with your accountant. If you have more queries I suggest you call Revenue and ask them

mrben86

For anyone interested it turned out that my accountant was wrong and I was right to question him.

After reviewing my first 2 tax returns as a sole trader, I could see that I had paid the first 7 months in my first return (2011) based on 7/12 of my 2012 year to end of May 2012. Then that full amount was paid for 2012.

So as per example above for 2020 I will owe tax on 4/11 of €50,000 = €18,181 (i.e. the 2020 portion, not the full amount) plus any income from the company, which will be taxed through PAYE.