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GAZETTE
JU
LY/AUGUST
1991
Changes in the basis of income tax
assessment under the Finance Act 1990
In this article I wish to outline the changes in the basis of
assessment for income tax brought about by the Finance Act, 1990
as set out in Chapter 2 of that Act (Sections 14 to 27).
Obviously the changes in the method of assessment of income
under Cases 1 and 2 of Schedule D of the Income Tax Act, 1967
(Trading and Professional Income) are of immediate and personal
importance to all self-employed people, including Solicitors.
Section 14 sets out the changes
in the assessment of income
arising from Cases 1 and 2 of
Schedule D sources. Case 1 relates
to trading income, Case 2 relates to
professional income. However both
sources are treated in exactly the
same way.
Heretofore income tax for self-
employed people was, generally
speaking, assessed on a preceding
year basis i.e. for the financial year
6th April 1989 to 5th April, 1990
taxable income was assessed on
the accounts of the business for an
accounting period ending in the
financial year 1988/1989. If I had
my yearly accounts done up to the
"As a consequence of Section
14, from 5th April 1990 income
tax assessment under Case 1
and Case 2 will no longer be
based on a preceding year but
on a current year set of
accounts . . . "
31st of July of each year, then my
income tax assessment for 1989/
1990 would be based on my
accounts for the period 1st August
87 to 31st July 1988.
Case II profits for year
to 31 July 1988
£30,000
Case II Income Tax
assessment for financial
year 1989/1990
£30,000
As a consequence of Section 14,
from the 5th of April 1990 income
tax assessment under Case 1 and
Case 2 will no longer be based on
a preceding year but on a current
year, set of accounts e.g. for the
financial year 1990/1991 where
annual accounts are made up to
the 31st of July my income tax
assessment will be based on my
accounts for the period 1st of
August, 1989 to 31st July 1990
by
Paul McNally,
Solicitor
rather than the period 1st of
August, 1988 to the 31st of August
1989 as was the case hereto-
fore.
Case II profits for year
to 31 July 1989
£35,000
Case II profits for year
to 31 July 1990
£40,000
Case II Income Tax
assessment for financial
year 1990/1991
£40,000
Under the old rules in com-
mencement and cessation situa-
tions the income of the actual year
of assessment could be used as the
basis for the income tax
assessment for that year. For
example, if I started a Solicitor's
practice on the 1st of May, 1987
and I had annual accounts done
up to the 30th of April of each
year, the basis of my income tax
assessment for my first three years
would have been as follows:
1987/1988 -
1988/1989 - The first twelve
months of practice
(i.e. the 1st of May
1989 to the 30th of
April 1988).
1989/1990 - The income arising
in the accounting
period ending in the
preceding year i.e.
the
accounting
period ending on
the 30th of April
1988.
Case II profits for 12 months to
30 April 1988
£15,000
Case II profits for 12 months to
30 April 1989
£20,000
Case II profits for 12 months to
30 April 1990
£25,000
Assessments
1st year - 1987/1988
Period 1/5/87 to 5/4/88
£15,000 X H
= £13,750
12
2nd year - 1988/1989
12 months to 30 April 1988
£15,000
The actual income
from the 1st of May
1987 (the date of
commencement) to
the 5th of April
1988.
Paul McNally
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