Each year, sole traders all around Ireland need to submit their annual income tax returns by 31 October (or mid Nov if filed on R.OS) for the previous year. What can really confuse people is what period should your financial cover when doing these income tax returns in the first, second, and third year after commencing their trade or profession.
In this blog post, we will guide you through how it all works.
The most common question in relation to sole traders income tax returns
Many people will register for income tax and commence their sole trader businesses in the middle or later part of the the year and can be confused about what their responsibilities are in terms of submitting an income tax return (Form 11).
Your first income tax assessment is based on the profits arising from the commencement date of the trade or profession to the following 31 December. For example, if an individual registered on the 1st of December 2023, they would still need to complete an income tax return for 2023 (Form 11) by 31 October 2023 or mid Nov if filed on ROS.
Let’s now go through a practical example, so we all understand how things work.
Billy’s Butchers commenced business on 1 October 2023. Below is a summary of his accounts and profits over the following financial periods:
- Accounts 12 months ended 30 Sept 2024: Profit €19,000
- Accounts 12 months ended 30 Sept 2025: Profit €14,000
- Accounts 12 months ended 30 Sept 2026: Profit €30,000
2023 Income Tax Assessment
For the 2023 income tax return, Billy’s Butchers is required to report 3 months profit (Oct-Dec).
This can be calculated by apportioning 12 months accounts ending 30 Sept 2024 which is a profit of €4,750 [ €19,000* (3/12) = €4,750].
2024 Income Tax Assessment
In the second year you’ll be assessed the latest set of accounts, which is 12 months in length and ending in that year. Two other situations could arise:
If there is more than one set of accounts for periods ending in the second year of assessment, the taxpayer is assessable on the profits of the 12-month period ending on the date to which the latest such accounts are made up provided that date is at least 12 months after the commencement of the trade or profession.
If there is only one set of accounts for a period ending in the second year of assessment and the period to which the accounts relate is in excess of 12 months, the individual is chargeable to income tax on the profits of the 12-month period ending on the date to which the accounts are made up.
If there is no accounting period ending within the year, then you need to compute the profit on a calendar year basis.
For Billy’s Butchers this is the accounts that are the 12 months ending 30 Sept 2024. Therefore, profits of €19,000 will be reported in the 2024 income tax return.
2025 Income Tax Assessment
Again in the third year of assessment, the same rules apply, you’ll be assess on the latest set of accounts with a 12 month period that ends in the year of assessment.
For Billy, this will be the the accounts ending of 30 Sept 2025 with profits of €14,000.
In the third year of assessment, you can also look back retrospectively at the second year and assess whether the profits reported were higher than the profits based on the calendar year of Jan-Dec.
For Billy, his income tax return was assessed on €19,000 for 2024. However, the calendar year profits were €17,750 (19,000* 9/12 + €14,000 * 3/12). The difference of €1,250 can be deducted from the assessable profits in year three.
Therefore the assessable profits in 2025 will be €12.750.
Are you planning on transferring your sole trader business to a limited company? Then check out this post for all the implications and how to go about it.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.