Self-employment income Flashcards
current year basis of assessment
Whichever tax year that ending date falls into, the profits of that entire year will be assessed in that tax year.
Badges of Trade
These are used to help differentiate whether a person is
a. trading (Income Tax and NIC)
b. selling their capital assets. (CGT)
- Subject Matter
- Length of OWnership
- Frequency of operations
- Subsequent Work
- Circumstances
- Motive
Badges of Trade 1
Subject matter
anything can be trading stock but some items are more likely to be so than others.
For example, the purchase and resale of a substantial number of toilet rolls is considered trading.
Badges of Trade 2
Length of ownership
normally, trading stock is held for a short period of time.
For example an item that is held for less than 12 months will be considered trading stock, but an item that is held for more than 12 months is likely to be considered a capital asset.
Badges of Trade 4
**Subsequent work **
Change of character of an asset to make it more saleable is likely to be indicative of trading.
Bulk to Smaller bundles?
Advertising?
Marketing?
Badges of Trade 3
Frequency of similar operations
the more often a deal takes place, the greater the assumption that it is a disposal of trading stock.
Multiple Cars sold? - Trading. One Car - Capital
Badges of Trade
Circumstances
sudden emergency, for example the urgent need of cash can negate the presumption of trading.
Badges of Trade
Motive
intention of making a profit is necessary for trading.
Capital expenditure including depreciation
Not Allowable
Repair to an asset is revenue expenditure and is allowable
Improvement to an asset is capital expenditure and is not allowable
Is Qualifying Loan Interest a relief?
- such as qualifying loan interest payments are not allowable as they are dealt with as a deduction from total income.
For example, paying interest on a loan used to purchase inventory is known as a qualifying loan interest, this is already deducted under a different heading in the income tax computation, therefore it cannot be deducted again.
Entertaining and gifts
Entertaining is disallowed
Entertaining employees is allowed
Gifts to Customers must cost less than £50 per person per year AND must not be food, drink, tobacco, vouchers exchangeable for services AND must be advertising for company
Subscriptions and donations
National Charity donations DISALLOWED
Charitable donations (made under Gift Aid) these are not allowable as tax relief is given by extending the tax bands when calculating income tax.
Political donations DISALLOWED
Trade or professional association subscriptions are allowable
Charitable donation (Not made under Gift Aid)
If it is wholly and exclusively for trading purposes (e.g promoting business’ name), and it is to a local charity then it is allowable
Fines and penalties
Fines of employee while on business - ** ALLOWED**
Other fines are not allowed.
owner’s salary, or drawings or interest on capital invested
Disallowed
the owner of the business pays himself 10% interest on the capital that he has invested of £200,000 - this £20,000 interest is disallowed and cannot be deducted.
Interest paid on overdue tax
Interest received on overpaid tax
Not deductible or taxable
Irrecoverable Debts (Trade debt write offs & allowances)
These are allowable; the tax treatment follows the accounting treatment
However non trade write offs are not allowable and so the expense is added back.
Legal and professional charges
Allowable if connected with the trade and are not related to capital items specifically allowed by statute:
- costs of obtaining loan finance
- costs of renewing a short lease (50 years or less)
Interest payable
Premium paid for the grant of a lease
Any salary paid to the family of the owner
Only salary at the commercial rate for the work done is allowable.
Pre-trading expenditure
allowable if it is expenditure incurred in the seven years before a business commences to trade then it is treated as an expense incurred on the day the business starts trading and follows the above rules.
CASH BASIS
If the business’ turnover does not exceed £150,000
Use until turnover exceeds £300,000
CASH BASIS
Calculation of Profit
Total cash receipts of the business plus the sale of capital items are included.
Total cash expenses of the business including purchase of capital items used for business are deducted.
Motor Vans are allowed but other vehicles excluded
Relief for pre-trading expenditure
Trading commences on the first day on which a trader makes a sale.
Pre-trading expenditure qulification:
It is incurred within 7 years of the commencement of the trade
It is an allowable expense
The first tax year (TY1)
The first tax year is the year during which the trade commences.
The second tax year (TY2)
Does the accounting date fall in Tax Y2?
YES
How long is this accounting period?
< 12 months long
Calculate profits for the first 12 months of trading
≥ 12 months long
Calculate profits for the 12 months to the accounting date ending in Y2
The second tax year (TY2)
Does the accounting date fall in Tax Y2?
NO
Assess the profit for TY2
April 6 - April 5
Overlap Profits
Trading Profit
less Profit Assessed
Cessation of a business
Actual trading profits from the end of the previous accounting period to the date of cessation.
Deduct any overlap profits to find the trading profit assessment of the final year.
WDA - Main Pool 12%
Computers, equipment, shelving, vans and lorries
Movable office partitioning
Alterations to building incidental to the installation of plant and machinery
Tables and chairs
Fire regulation expenditure
WDA - Special Pool 6%
Long life assets
Integral features of a building
First Year Allowances
new motor cars with zero CO2 emissions
The F.Y.A. is not time apportioned for a period of less than 12 months
