If you have been trading as a Sole Trader and any of the following happens then your income tax position needs to be examined: Cease or Retire from the business? Sell the business? Take on a Partner? Transfer the business to family members? Convert business to a limited company?
If any of the above applies, then special rules come into play which affect your tax liability for your last two tax years. You may recall we explained the special rules regarding accounting dates for when you commenced business. When you cease in business the reverse of these rules apply. If your accounting date is the 31st December in tandem with the end of the tax year then the rules will not affect you (as you are already assessed on the actual calendar year basis). On the other hand if you use an April accounting date then the special rules will apply.
How these rules operate can be best explained by an example.
Business ceases on the 31st December 2024. Prior to this accounts prepared to 30th April each year.
Net Profit for Tax Purposes Taxable Profit Year to 30th April 2023 €40,000.
Year to 30th April 2024 €60,000. 7 Months to 31st December 2024 €55,000. Total Taxable Profits €155,000.
Initial Tax Assessments (assumed business continues)
Year 2023 based on Accounts 30th April 2023 €40,000
Year 2024 based on Accounts 30th April 2024 €60,000
Total €100,000
New Tax Assessments (because business ceased)
*Year 2023 Profits to 31st December 2023 €58,350
Year 2024 – Profits to 31st December 2024 €60,000
Total €118,350 *You can see that because the business ceased in December 2024 the amount of taxable profits for tax year 2023 increased by €18,350.
TAX SAVING TIP
If you have control over when you cease business you may be able to avoid any increase in tax liability as a result of same. In the example if the business had continued to January 2025, no additional tax would arise for the tax year 2023 thereby saving circa €9,000.
How these rules affect you will depend on your own particular circumstances. If you have plant and equipment e.g. company cars, vans, machinery etc, which you used in the business and the cost of them has been claimed for tax purposes then what happens them when you cease business needs to be considered. If you sell them you may owe VAT and in addition pay tax on all or part of the sale proceeds, which depends on the tax value of the items concerned. This will likely only be of significance if the plant and equipment etc. involved has a substantial resale value.
Professional advice should be sought well in advance of ceasing business to see if steps can be taken to reduce or eliminate the impact of the special income tax rules for ceasing business. We can provide this service by way of consultation subject to an extra charge.
