Basis Period for assessment
Normally, for a business that has been running on for years, the basis period is either:
1. the period of the year of assessment if the annual accounts ends on 31 March;
2. the accounting year that ends in the year of assessment if the accounts ends on a day other than 31 March; or
3. the lunar year that falls in the year of assessment if the annual accounts so adopts.
Commencement of business
The day of business commencement declared by the business owner upon registration of business is usually adopted without queries. However, in some cases involving disputes, it is not easy to determine the exact day of business commencement. Indeed, this is largely a question of facts. In general, a retailer starts to trade when goods are first offered for sale. A manufacturer starts trading when the manufacturing begins. A property developer starts trading when he first enters a project of property development by taking such steps as appointment of an architect to draw up the development plan.
The date of business commencement may affect the deductibility of expenses. Although by accounting principle all expenditures to set up a business should be capitalized, the Revenue may by concession allow deduction for revenue expenditure such as rent and staff wages before the business commencement.
Section 18C of Inland Revenue Ordinance deals with the basis period for business commencement. As a basic principle, the basis periods throughout the business life should start from the date of commencement to the date of cessation. Normally, if business account is made on a 12-months basis, the first basis period is the first accounting year. Otherwise, there are special provisions.
Cessation of business
Like business commencement, business cessation is largely a question of facts. Usually, the Revenue adopts the day declared as such in the taxpayer’s notification to Business Registration Office.
Sometimes disputes arise on this question. Again, the question of whether a business ceases or when it ceases depend on the circumstances of each case. Generally, we may look to whether actions are done to close the business — such actions include disposal of stock without replenishment, sale of capital assets, death of a sole-proprietor, etc.
Change of accounting date
Where there is a change of accounting date, at least one of the following must occur in a year of assessment:
1. there are two sets of accounts ending within one year of assessment; or
2. accounts are not made up to the old accounting date.
That year of assessment is called the year of change.
In these situations, Section 18E of Inland Revenue Ordinance empowers the Revenue to assess the profits for the year of change and the year preceding the change on such basis as it thinks fits. In practice, the Revenue is to assess as far as possible all the profits throughout the business life on one hand; and to get the assessments on to the new accounting date as soon as possible on the other.