# Sole Trader Tax Year



## Eadaoin (19 Sep 2012)

Hi there, I had a look around online and on these forums for a definite answer to this question but was unable to find one, so perhaps someone here can clarify it for me. 

My question is in relation to the end of the tax year for a sole trader, and when tax returns need to be filed. 

If I start a business on 1st November 2012, does my first tax year end on 31st October 2013 (a full year after I start business) or does it end on 31st December 2012?  

I understand that tax returns are due the October after your tax year ends, so if my tax year ends in Oct 2013 my first return will be due before Oct 2014 - but if my tax year ends in Dec 2012 then the first return is due before Oct 2013?

Sorry if this is simplistic, I just want to get everything straight in my head and know what im doing before I start anything!


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## smeharg (19 Sep 2012)

Hi Eadaoin

The tax year is set as the calendar year.  It's your accounting year that you can be flexible with.  In a business that has been trading for a number of years you will be taxed on the profits for the accounting year that ends in the relevant tax year.

There are different rules for a new business.  To use your example a business starting on 1 November 2012 would be liable to tax on its profits arising between 1 November 2012 and 31 December 2012.  The tax return would be due in October 2013, although there is a special provision for new businesses which means it wouldn't actually be due until October 2014.  Although, it is sometimes preferable to file it early to determine whether any preliminary tax is due.

If it prepared its accounts to the year ended 31 Ocotber 2013, in the tax year 2013 it would be taxable on the profits for that year (to 31 October 2013). That tax return would be due on 31 October 2014.


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## Eadaoin (19 Sep 2012)

Ah thank you, now I understand it. 

I had read about the provision for new businesses not needing to file a return in the first year, but I think I will anyway, so that I can stay on top of everything. 

Ive just been doing some research and there's actually a course on taxation for beginners run by the Dublin City Enterprise Board, so I'm going to sign myself up for that. I know all the information is online, but some of it I find hard to digest and I think a class will help me!


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## mandelbrot (19 Sep 2012)

You need to have a look at this: [broken link removed], in particular pages 7-8 and 15-16.

*How am I taxed in my start up years?*
There are special rules for taxation of profits in commencement
years:
*First Year:*
You are taxed on the profits of the trade, profession or vocation
from the date your business commenced to the following
31 December.
*Second Year:*
You are taxed on the profits of a twelve month period, ending in
the second tax year. Generally, you are taxed on the basis of the
profits for the first year of trading. Where accounts are made up
to a number of dates within the second year, special rules apply.
You will be taxed on the profits of the twelve months to the
latest accounting date ending in the tax year or on the profits of
the tax year. Where no accounts are made up to a date within
the tax year, you are taxed on the profits of the tax year.
*Third Year:*
You are taxed on the profits of your accounting year in that tax
year.
*Second Year Excess*
If the actual profits of the second year from 1 January to the
following 31 December are less than the profits assessed the
excess will be deducted from the profits to be charged for the
following year (the third year). When you are sending in your
tax return for the third year, you must ask Revenue to reduce
the profits to be taxed in the third year by the amount of the excess.​


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## T McGibney (19 Sep 2012)

Eadaoin said:


> Ive just been doing some research and there's actually a course on taxation for beginners run by the Dublin City Enterprise Board, so I'm going to sign myself up for that. I know all the information is online, but some of it I find hard to digest and I think a class will help me!



You might be better off just getting proper advice from an accountant or tax advisor. Classrooms are generally not the best environment for business tax planning.

For what its worth, I firmly believe that the best accounts year end date is generally 31 December although others may disagree.


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## smeharg (19 Sep 2012)

T McGibney said:


> ...
> For what its worth, I firmly believe that the best accounts year end date is generally 31 December although others may disagree.


 
I'll second that.  Much simpler and straightforward both at commencement and when the business ceases.


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## DB74 (19 Sep 2012)

31-Dec may be the simplest year-end but 31-Jan is potentially the most tax-efficient for a sole-trader when it comes to cessation and/or transferring the trade to a limited company.


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## smeharg (19 Sep 2012)

DB74 said:


> 31-Dec may be the simplest year-end but 31-Jan is potentially the most tax-efficient for a sole-trader when it comes to cessation and/or transferring the trade to a limited company.


 
Posponing the cessation of a sole-trade to shortly after the 31 December _can_ be more tax efficient where the business year end is not 31 December and profits are increasing.

It is the choice of date of cessation that can make a difference not the normal year-end of the business.


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## DB74 (19 Sep 2012)

smeharg said:


> Posponing the cessation of a sole-trade to shortly after the 31 December _can_ be more tax efficient where the business year end is not 31 December and profits are increasing.
> 
> It is the choice of date of cessation that can make a difference not the normal year-end of the business.



If you have a December year-end and choose to cease trading on a 31-Jan then you won't save any tax at all. You would really need to have a 31-Jan y/e for a couple of years for any significant tax saving to be made

eg - if you have a y/e 31-Dec and decide to cease trading on, say 31-Jan-12, then

2009 - taxed on profits y/e 31-Dec-09
2010 - taxed on profits y/e 31-Dec-10
2011 - taxed on 12/13 of profits p/e 31-Jan-12
2012 - taxed on 1/13 of profits p/e 31-Jan-12

so no tax saving here at all

However, if you have a regular y/e of 31-Jan then

2009 - taxed on profits y/e 31-Jan-09
2010 - taxed on profits y/e 31-Jan-10
2011 - taxed on profits y/e 31-Jan-11
2012 - taxed on 1/12 profits y/e 31-Jan-12

so 11/12ths of the profits for the y/e 31-Jan-12 fall out of the tax net

I know that Revenue have the option to review the 2011 year and revise the assessment upward but in practice, the potential extra tax is nothing compared to the tax saving from the 11 mths profits not being taxed


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## smeharg (20 Sep 2012)

DB74 said:


> If you have a December year-end and choose to cease trading on a 31-Jan then you won't save any tax at all. You would really need to have a 31-Jan y/e for a couple of years for any significant tax saving to be made
> 
> eg - if you have a y/e 31-Dec and decide to cease trading on, say 31-Jan-12, then
> 
> ...


 
As I said:


smeharg said:


> Posponing the cessation of a sole-trade to shortly after the 31 December _can_ be more tax efficient *where the business year end is not 31 December*


 


DB74 said:


> However, if you have a regular y/e of 31-Jan then
> 
> 2009 - taxed on profits y/e 31-Jan-09
> 2010 - taxed on profits y/e 31-Jan-10
> ...


 
If the business ceases on 31 December then there is no saving, therefore it's the timing of the cessation that makes the difference where the year end is not 31 December. The scenario you outline is not restricted to January year-ends. It's just not applicable to December year ends.

Revenue don't have an "option" to review the penultimate year. It will be reviewed if the actual profits arising in that year are greater than those originally assessed.


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## capnhand (20 Sep 2012)

Hi

One other thing that should be stated here is if you use the 31 January year end as the cessation date that there is a potential problem if the client then decides to start up again in the same business as a sole trader a few years later.

Revenue can argue that it is not a cessation at all, and that the business never ceased, it just took a break for a period of time just having no sales or costs. In which case the cessation rules would not apply and the period that fell out of assessment would then be taxable.

If the saving was significant you would need to make sure the client did not leave the room unless he heard and understood this issue. Any further trading would need to be done via a company.

capnhand


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