Basis of Assessment & Partnership

Question 1

What are the Steps of a Sole Trader/Partner?

Answer 1

Step 1, adjust profits for accounting period.
Step 2, calculate and deduct capital allowances for accounting period.
Step 3, tax profits arising in tax yr according to rules of basis of assessment.

Question 2

How is the Commencement of Trade Assessed?

Answer 2

Trader taxed on profits during the tax year (5th April).
Apportion tax adjusted profits for period of accounts according to how many months falls in the first tax year. Work to the nearest month.

Question 3

How are Continuing Businesses Assessed?

Answer 3

Sole Trader taxed on profits arising in the tax year.
Accounting Period 04/04 to next 05/04.
If ends between 31/03 & 01/04, treat as if ends 05/04 (“late date accounting”).
Any other dates, apportion to nearest month.

Question 4

How are Ceasing Trades Assessed?

Answer 4

In tax year in which business ceases to trade, trader is taxed on all profits from 06/04 to date of cessation.

Question 5

What is a Partnership?

Answer 5

Collection of one or more individuals carrying on a business. Profit making view.
Unlimited liability of parents, but can be limited. Taxed same way.
Partners liable to tax on their individual shares of taxable trading profit.

Question 6

How is Profit Allocated Between Partners to Find Taxable Income?

Answer 6

Salaries paid to partners added back in adjustment to profit workings.
Profits time-apportioned, each partner allocated according to relevant agreement.

Question 7

How is Tax Adjusted Trading Profit (Trading Income) Allocated?

Answer 7

Allocate Trading Income between partners. From which, profit, salaries & interest on capital allocated to each partner.
Remaining profit shared according to Profit Share Agreement (PSA).

Question 8

What is a Partnership Step-by-Step Summary?

Answer 8

1. Adjust profits for accounting period.
2. Deduct capital allowances for accounting period.
3. Share this between partners using profit sharing agreement (PSA)
   a. Allocate salary
   b. Allocate interest on capital
   c. Share remaining profit using PSA.
4. Tax each partner individually on profits arising in tax year. Apply basis of assessment rules and tax profits between 06/04 and 05/04.