Lecture 4- Trading income- unincorporated business

Trading income- Anyone who is in [blank_start]trade[blank_end] or with [blank_start]professional services[blank_end] such as accountants, lawyers, etc

Every [blank_start]trade[blank_end], [blank_start]manufacture[blank_end], [blank_start]adventure[blank_end] or concern in [blank_start]nature[blank_end] of trade must be considered when looking at [blank_start]taxation[blank_end] of trading income. These rules also apply to [blank_start]professions[blank_end] & [blank_start]vocations[blank_end] such as accountants & lawyers

Badges of trade- Differences between someone who is [blank_start]actually trading[blank_end] or someone who is just [blank_start]buying[blank_end] & [blank_start]selling[blank_end] [blank_start]capital[blank_end] items

Distinguishing badges of trade is important in calculating [blank_start]tax[blank_end] for trading income. This is because [blank_start]income tax[blank_end] due on trading income is much [blank_start]higher[blank_end] than [blank_start]tax[blank_end] on [blank_start]one off[blank_end] [blank_start]capital[blank_end] transactions which, if taxable, subject to capital gains tax

One principle that is applied in courts when deciding whether trading was occurring or not is [blank_start]subject matter[blank_end] so what is it that is being [blank_start]bought[blank_end] or [blank_start]sold[blank_end]

Another principle that is applied in courts when deciding whether trading was occurring or not is [blank_start]length of ownership[blank_end] so how [blank_start]long[blank_end] has person [blank_start]owned[blank_end] that item

Third principle that is applied in courts when deciding whether trading was occurring or not is [blank_start]frequency of transactions[blank_end] so how [blank_start]often[blank_end] does that person [blank_start]buy[blank_end] & [blank_start]sell[blank_end] those sorts of items

Fourth principle that is applied in courts when deciding whether trading was occurring or not is [blank_start]supplementary work[blank_end] so have that person [blank_start]improved[blank_end] item between [blank_start]purchase[blank_end] & [blank_start]sale[blank_end]

Fifth principle that is applied in courts when deciding whether trading was occurring or not is [blank_start]reason for sale[blank_end] so why did that person [blank_start]sell[blank_end] that [blank_start]item[blank_end]

Sixth principle that is applied in courts when deciding whether trading was occurring or not is [blank_start]motive[blank_end] so why did that person [blank_start]undertake[blank_end] or [blank_start]put[blank_end] that [blank_start]item[blank_end] up for sale

In relation to calculating adjusted profit, [blank_start]allowable expenditure[blank_end] is deductible & [blank_start]disallowable expenditure[blank_end] is non deductible

Allowable expenses include [blank_start]interest[blank_end] (if for [blank_start]trading purposes[blank_end]), [blank_start]legal[blank_end] & [blank_start]professional[blank_end] fees (including renewal for [blank_start]short lease[blank_end]), [blank_start]premium[blank_end] on short lease, [blank_start]patent royalties[blank_end] for trade purposes, employees' [blank_start]remuneration[blank_end], [blank_start]pre-trading[blank_end] expenditure, [blank_start]travel[blank_end] expenses & [blank_start]car leasing[blank_end] for certain situation

Goods for own use- If there is own [blank_start]consumption[blank_end] of trading stock & owner made no [blank_start]adjustments[blank_end] in accounts, [blank_start]accounting profits[blank_end] should be adjusted by adding [blank_start]full selling price[blank_end] to profits less any [blank_start]contribution[blank_end] made by owner. However, if [blank_start]adjustments[blank_end] were made to pay for those goods at cost, [blank_start]full profit[blank_end] should be added to accounting profits

If there is non-trading income in accounts, you would have to [blank_start]deduct[blank_end] & then [blank_start]tax[blank_end] as normal in owner's personal [blank_start]tax account[blank_end]

Expenditure not in accounts, which is allowable is [blank_start]capital allowance[blank_end]

Normal method of calculating accounting profits is using [blank_start]accruals[blank_end] basis, & [blank_start]most[blank_end] traders will use this. However, small businesses can instead opt to simply & take as their profit, [blank_start]cash received[blank_end] less [blank_start]cash paid[blank_end] ([blank_start]cash basis[blank_end]). For this purposes small businesses are those with sales less than [blank_start]£150,000[blank_end]

Cash basis is [blank_start]simpler[blank_end] way of calculating profit & would give [blank_start]automatic relief[blank_end] for irrecoverable receivables because if money is never [blank_start]received[blank_end] from sale, it never becomes [blank_start]taxable[blank_end]. However, if business has been funded by [blank_start]loans[blank_end], maximum [blank_start]interest[blank_end] that can be deducted is [blank_start]£500[blank_end]. Also, there is restriction to use of [blank_start]losses[blank_end]

For small businesses certain [blank_start]expenses[blank_end] can be calculated by way of [blank_start]general calculation[blank_end] rather than keeping [blank_start]detailed records[blank_end] (simplified expenses) i.e. to [blank_start]mileage[blank_end] & use of home for [blank_start]business[blank_end]

Trading allowance- Businesses with [blank_start]sales[blank_end] of less than [blank_start]£1,000[blank_end] do not need to declare their [blank_start]income[blank_end]. Businesses with [blank_start]expenses[blank_end] of less than [blank_start]£1,000[blank_end] can just claim [blank_start]£1,000[blank_end]

Current year basis- Normal [blank_start]basis of assessment[blank_end] for taxation of profits. Therefore, you [blank_start]tax[blank_end] in any tax year [blank_start]profits[blank_end] for accounts ending at [blank_start]any[blank_end] time during that year

Rather than sending [blank_start]end of year[blank_end] returns to HMRC, from 2013-14 employers are required to send [blank_start]details[blank_end] of PAYE for all employees to HMRC at time that employees are [blank_start]paid[blank_end]. Each time an employee is [blank_start]paid[blank_end], employer must give [blank_start]full details[blank_end] of amount paid & deductions to HMRC, using [blank_start]payroll software[blank_end], via “full payment submission”. If no payments are made, they still need to submit [blank_start]report[blank_end] saying there has been no payments. These submissions must be done [blank_start]electronically[blank_end]

Employer is required to deduct [blank_start]income tax[blank_end] & [blank_start]national insurance[blank_end] from all employees, & amounts are deducted [blank_start]monthly[blank_end]/[blank_start]weekly[blank_end] from income to pay tax. To work out amount of tax to deduct, HMRC will issue [blank_start]tax code[blank_end] to employer. This will take into account restricted [blank_start]personal allowance[blank_end] if earning over £100,000, [blank_start]benefits in kind[blank_end], [blank_start]expenses[blank_end] such as professional subscriptions & if employee requests, HMRC can amend [blank_start]tax code[blank_end] so that tax is also paid to take into account [blank_start]small[blank_end] amounts of other [blank_start]income[blank_end] to reduce amount of [blank_start]tax[blank_end] that an individual has to pay directly to [blank_start]HMRC[blank_end]

When PAYE was done manually, each employer used to get [blank_start]two[blank_end] separate sets of [blank_start]tax tables[blank_end]. [blank_start]Table A[blank_end] showed [blank_start]tax free income[blank_end] to date[blank_start]. Table B[blank_end] showed [blank_start]tax due on pay[blank_end] to date

One tax form that an [blank_start]employer[blank_end] is required to send all [blank_start]employees[blank_end] is [blank_start]P60[blank_end]. This details of [blank_start]employment income[blank_end], [blank_start]tax[blank_end] deducted & [blank_start]national insurance contributions[blank_end] for full tax year. It is to be available to an employee by [blank_start]31 May[blank_end]

Another tax form is [blank_start]P11D[blank_end]. An [blank_start]employer[blank_end] is required to send this to an [blank_start]employee[blank_end] if they have got any [blank_start]benefits in kind[blank_end] (& [blank_start]cash equivalent[blank_end]) for year – by [blank_start]6 July[blank_end]

Third tax form is [blank_start]P45[blank_end]. It details of [blank_start]pay to date[blank_end] for employee leaving during [blank_start]tax year[blank_end]. There are [blank_start]three[blank_end] copies (one for [blank_start]employee[blank_end] & two which is given to [blank_start]new employer[blank_end] to allow them to put correct [blank_start]tax code[blank_end] on your remuneration for rest of that year

Need to inform [blank_start]HMRC[blank_end] of income requiring [blank_start]submission[blank_end] of tax return by [blank_start]5th October[blank_end] following end of [blank_start]tax year[blank_end] so that they can [blank_start]set up[blank_end] system to allow you to do that

Tax returns must be submitted by [blank_start]31st October[blank_end] following end of tax year ([blank_start]paper[blank_end]) & [blank_start]31st January[blank_end] following end of tax year ([blank_start]electronically[blank_end])

HMRC can amend obvious [blank_start]errors[blank_end] ([blank_start]principle[blank_end] or [blank_start]arithmetic[blank_end]) within [blank_start]9[blank_end] months of its submission. Taxpayer can amend return within [blank_start]12[blank_end] months of normal [blank_start]filing date[blank_end]. Claims for “[blank_start]overpayment relief[blank_end]” can also be made within [blank_start]4[blank_end] years of end of tax year to which [blank_start]tax return[blank_end] relates

Normal payment date of personal tax is if you are an [blank_start]employee[blank_end], you will have had [blank_start]tax[blank_end] deducted by your [blank_start]employer[blank_end] when they pay you [blank_start]monthly/weekly[blank_end]

If you are [blank_start]self employed[blank_end] or have got any other sources of [blank_start]income[blank_end] & have to do [blank_start]tax return[blank_end] & have some tax to pay directly to HMRC, you have to pay on account. First payment on account is [blank_start]31st January[blank_end] in tax year. Second payment on account is [blank_start]31st July[blank_end] following end of tax year. Balance is paid on [blank_start]31st January[blank_end] following end of tax year