LECTURE 5: Employment Income, Income from Property and Partnerships Flashcards
What are the 7 determinants of being employed or self employed? (CIRCLES)
Control Integration Risk and Reward Contract Legal Rights Equipment Substitute
Control for employed and self-employed
Employed - employer controls when, where and how work is to be carried out
Self-employed - Individual is in control
Integration for employed and self-employed
Employed -works for only one business, and integrated. Holiday pay, sick pay, pension provided.
Self-employed - Several clients, customers. Individuals provide own pension, insurance cover, is not paid when on holiday and ill.
Risk and Reward for employed and self-employed
Employed - No risk, fixed fixed wage or salary.
Self employed - Bears risk, but also profits from sound management.
Contract for employed and self-employed
Employed - Fall v Hitchin
Employment = contract of service
Self-employed - contract for services
Legal rights for employed and self-employed
Employed - Mutual obligation on employer to provide work, and employee to carry out work provided.
Self-employed - Once a particular task is done, there is no obligation to provide further work.
Equipment for employed and self-employed
Employed - Employer provides
Self-employed - Individual provides own
Substitute for employed and self-employed
employed - employee carries out work set, and corrects unsatisfactory work during normal working hours.
Self-employed - Individual can hire and fire, send a substitute, must correct unsatisfactory work in own time.
Basis of assessment for income from property
Rent and expenses are calculated according to generally accepted accounting principles (GAAP) for a tax year for property businesses where:
- Property business income exceeds £150,000 in the tax year, or
- The landlord has elected to apply GAAP rather than the cash basis
What property expenses are allowable?
As trading income
i. e.
- Wholly and exclusively for the purpose of the business.
- Revenue, not capital expenses
Allowed:
- Painting/decoration
- Agent’s fees
- Advertising for tenants.
Furnished lets - replacement domestic items relief - no relief when an item is originally purchased, but relief when it is renewed.
Premiums on leases
The assessable amount of a premium on a lease of 50 years or less is:
Premium x
Less
2%* (no. of years of lease -1) *premium (y)
Z
Y is the capital proportion of the premium
Z is the revenue proportion
Example
Premium 10,000
2%1410,000 = (2,800)
Taxable 7,200
How can a trader (tenant) paying a premium obtain relief (allowable) against trading profits?
Z (revenue proportion)/No. of years of the lease
from other example
7,200/15 = 480 p.a.
How to calculate relief against assessable premium on a sub-lease?
Z (revenue proportion) * (duration of sublease/duration of head lease)
How are partners taxed on income?
Income tax is charged on the individual partners rather than the partnership. Profits are divided amongst the partners according to the profit sharing arrangement in force for the period for which accounts are prepared.
If the profit sharing arrangements change during the accounting year, that year must be time-apportioned, and separate calculations done for the period before and the period after the change.
NOTIONAL LOSSES
Where a partnership has made a profit allocation results in any partner showing a loss, this notional loss must be allocated to the remaining partners in proportion to their original profit allocation.
A similar provision exists for notional profits - i.e. where the partnership has made a loss, but the original profit allocation shows one or more partners with a profit.
