commencing business - tax

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funcrusher

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My son started a trading in business 1st Nov 2007, and intends to have a financial year-end 30th Sept each year. So accounts for 2008 will be 11 months, not the usual 12 months. Does this mean his tax for 2007 will be based on 2/11 of the profits, and for 2008 based on 11/11 of this figure?.
 
answer to question 1: YES

answer to question 2: NO

these dates might bo good for tax planning depending on the figures

funcrusher said:
My son started a trading in business 1st Nov 2007, and intends to hauestion 1: YES ve a financial year-end 30th Sept each year. So accounts for 2008 will be 11 months, not the usual 12 months. Does this mean his tax for 2007 will be based on 2/11 of the profits, and for 2008
based on 11/11 of this figure?.
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Ideally a year-end date needs to make long term sense, which might not be the date of start-up.

If the tax for 2008 is not based on 11/11 of the year end accounting figure, what else can it be based on? There would be no other accounbts until 30 Sept 20 2009. Can anyone help?
 
funcrusher said:
Does this mean his tax for 2007 will be based on 2/11 of the profits
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My answer to this question was yes.

Rule for determing taxable profits for first tax year is date of commencement until the end of the first tax year, i.e. if son started on 1 November 2007 and accounts were for 11 months to September 2008 then 1 Nov to 31 December (2/11 x adjusted case I profit).

funcrusher said:
Ideally a year-end date needs to make long term sense, which might not be the date of start-up.

If the tax for 2008 is not based on 11/11 of the year end accounting figure, what else can it be based on? There would be no other accounts until 30 Sept 20 2009. Can anyone help?
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If no period of account which is 12 months long ends in second tax year (2008 in your case) rule of S66(2)(c) TCA 1997 applies.
 
Thanks Mark Mc. Does that mean 12/11 of the 11 month period? I did look up the on the web law which you quoted, which seems to say exactly what you said - but doesn't say how you arrive at a 12month 'profit' from 11 months' figures.
 
Why not do accounts for 14 months ended 31/12/08?

2007 assessed profit (2 months) = 14 months profit x 2/14
2008 assessed profit (12 months) = 14 months profit x 12/14

Far simpler imho...

Btw, your son should really get professional advice on this, especially if you/he does not understand or have experience of handling the basic concepts. This is important as the choice of year end date can have implications for double-taxation of income both in the first year and the final year of trading.
 
Simple in what context? For the client to understand. Yes, certainly it is but if he goes Nov to Jan 08 and then Feb 08 to Jan 09 you potentially get the same effect as that illustrated below (subject to the apportionment exercise being done) to review the figures but you possibly avoid the double taxation and the client gets the benefit of delaying liabilities for 2009 (based on 12 months ending Jan 09) until October 2009 & 2010 respectively.

As I said in another post cashflow aswell as tax liabilities need to be considered by a good tax advisor for start up clients as cashflow can be the death knell of any profitable business.

It is difficult to advise any person on this without number crunching as that is what is most important in advising a person in these circumstances. The OP will have to engage someone (I am not going to suggest the type of advisor but we are talking tax here not accountancy) to crunch some projected figures at least to decide best course of action.

ubiquitous said:
Why not do accounts for 14 months ended 31/12/08?

2007 assessed profit (2 months) = 14 months profit x 2/14
2008 assessed profit (12 months) = 14 months profit x 12/14

Far simpler imho...

Btw, your son should really get professional advice on this, especially if you/he does not understand or have experience of handling the basic concepts. This is important as the choice of year end date can have implications for double-taxation of income both in the first year and the final year of trading.
Click to expand...
 
Mark_Mc said:
Simple in what context? For the client to understand. Yes, certainly it is but if he goes Nov to Jan 08 and then Feb 08 to Feb 09 you potentially get the same effect as that illustrated below (subject to the apportionmenmt exercise being done to review the figures but you possibly avoid the double taxation and the client gets the benefit of delaying liabilities for 2009 (based on 12 months ending Feb 09) until October 2009 & 2010 respectively.
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But a January year end in one year, followed by a February year end the following year, makes no practical sense, especially for a VAT-registered client.

If annual tax liabilities are likely to be sufficiently large so as to cause potential cashflow problems, then incorporation should be on the agenda from day one. Which is another reason to get specific professional advice from day one.
 
The Feb 09 ref should have read Jan 09 and I edited that as you can see on the post now.


ubiquitous said:
But a January year end in one year, followed by a February year end the following year, makes no practical sense, especially for a VAT-registered client.
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Problematic for who and why. The accounting date chosen has no impact on the quantum of an Income Tax liability. VAT periods are statutory after all and accounting year end dates for sole traders are not.


ubiquitous said:
A January year end is still problematic as it falls in the middle of a VAT period.
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Problematic for the taxpayer in reconciling sales/purchases per accounts to sales/purchases per VAT returns.

Problematic for Revenue in verifying their own reconciliations in this regard.

Greater possibility of Revenue audit if discrepancies (real or imagined) arise.
 
I'm sorry my question was too difficult to answer. Actually, my son (and I for that matter) are competent at accounts/bookeeping; it's just that we have no knowledge of the relevant tax law. Nether cash flow nor Vat are an issue; my son just wanted a year end that suited the circumstances of his business, but doesn't know how to calculate the tax liability.
 
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