Income Tax 7... · For tax purposes, trading profits are normally calculated in accordance with...

Professional, Practical, Proven

Self-employed income computation

Income Tax 7

Schedule

2

Week Monday Chapter Ref. Topic Areas

Wk/Lecture 1 23rd Sep 1 Introduction and review of Tax Administration Procedures

Wk/Lecture 2 30th Sep 6 Introduction to CGT/Scope

Wk/Lecture 3 7th Oct 6 Capital Gains Tax Computation

Wk/Lecture 4 14th Oct 6 Capital Gains Tax Computation

Wk/Lecture 5 21st Oct 6 Special CGT Rules

28th Oct – 3rd Nov Reading Week 1

Wk/Lecture 6 4th Nov 2 Income Tax - Introduction

Wk/Lecture 7 11th Nov 2 Income Tax - Computation

Wk/Lecture 8 18th Nov 2 Income Tax - Losses

Wk/Lecture 9 25th Nov 3 Employment Income

Wk/Lecture 10 2nd Dec 4 Benefits in Kind

Wk/Lecture 11 9th Dec 5 Rental Income

Wk/Lecture 12 16th Dec 7 Self-Employment

23rd Dec – 12th Jan 2020 Christmas Break

Schedule

3

Week Monday Chapter Ref. Topic Areas23rd Dec – 12th Jan 2020 Christmas Break

Wk/Lecture 13 13th Jan 8 Capital Allowances

Wk/Lecture 14 20th Jan 9 Basis Periods

Wk/Lecture 15 27th Jan 10 Corporation Tax – Introduction

Wk/Lecture 16 3rd Feb 10 Corporation Tax – Capital Allowances

Wk/Lecture 17 10th Feb 10 Losses

Wk/Lecture 18 17th Feb 11 Chargeable Gains

Wk/Lecture 19 24th Feb 11 Close companies and Self-Assessment2nd Mar – 8th Mar Reading Week 2

Wk/Lecture 20 9th Mar 12 VAT - Introduction

Wk/Lecture 21 16th Mar 13 VAT – Detailed computation

Wk/Lecture 22 23rd Mar 14 CIS & NIC

Wk/Lecture 23 30th Mar 6 Revision - CGT

Wk/Lecture 24 6th Apr N/A Revision - Income tax

Wk/Lecture 25 13th Apr N/A Revision - Corporation tax

Wk/Lecture 26 20th Apr N/A Revision – Admin and VAT

Week 27 27th Apr

Week 28 4th May

11th May Examinations

Schedule

4

5

1. Badges of trade (6)2. Adjustment of profit3. Disallowable expenditure

• Capital expenditure• Wholly and exclusively • Specifically disallowed (16)

4. Income not taxed as trading income5. Trading income not shown in the accounts6. Self-employment and national insurance

• Class 2 • Class 4

Self-employment

6

The profits of a self-employed person are charged to income tax by the Income Tax (Trading and Other Income) Act 2005.A self-employed person may be conducting a trade or may be exercising a profession or vocation. However, the profits of trades, professions and vocations are all taxed in accordance with the same set of rules. Therefore, references to "trades" and "trading" should be assumed to include professions and vocations. Similarly, the terms "trader" and "sole trader" will be used to refer to any self-employed person, regardless of whether that person is actually conducting a trade or is in fact exercising a profession or vocation.

Introduction

7

ITTOIA 2005 states that the trading profits of a person who is resident in the UK are chargeable to income tax wherever the trade is carried on. The trading profits of a non-UK resident are chargeable to income tax only if the trade is carried on wholly or partly in the UK. When deciding whether or not a person is trading it is necessary to make two important distinctions:a) the distinction between employment and self-employment b) for a taxpayer who sells goods or other assets, the distinction

between trading activities (which give rise to trading profits) and non-trading activities (which will usually fall within the scope of capital gains tax).

The Badges of Trade

8

Section 989 of the Income Tax Act 2007 states that a "trade" includes "any venture in the nature of trade". This circular definition is of little real help and therefore it has been left largely to the courts to decide whether or not a given activity constitutes trading.The main criteria which have arisen from case law decisions and which may be used to distinguish between trading and non-trading activities are known as the "badges of trade". They are as follows:a) Frequency of transactionb) Subject matter of the transactionc) Length of period of ownershipd) Modification/Supplementary worke) Profit Motivef) Way asset was acquired

The Badges of Trade

9

The more often that a taxpayer repeats a certain type of transaction, the more likely it is that the activity will be construed as trading. In Pickford v Quirke (1927), the taxpayer bought a cotton mill and sold off its assets at a profit. This was the fourth time that the taxpayer had carried out this particular type of transaction and therefore he was held to be trading.

1. Frequency of transaction

10

If a taxpayer sells assets of a type which might normally be acquired for personal enjoyment or held as a source of income, this may suggest that any profit arising on their sale should be treated as a capital gain rather than a trading profit.But if the assets concerned do not provide personal enjoyment and do not yield income, it would seem that the only way in which they could be turned to advantage is by selling them. In these circumstances, any profit arising on their sale might be treated as a trading profit. In Martin v Lowry (1926), the taxpayer bought and sold a huge quantity of war surplus linen. In Rutledge v CIR (1929), the taxpayer bought and sold one million toilet rolls. In both of these cases, it was held that the subject matter of the transaction was such that the activity must be construed as trading.

2. Subject matter of the transaction

11

Trading stocks are normally retained for only a short period before being sold, whereas assets acquired for personal use or as a source of income are generally retained for longer. Therefore, if assets are bought and sold within a short space of time it is more likely that any profit made will be treated as a trading profit.

3. Length of period of ownership

12

A taxpayer who buys an asset, performs work on the asset so as to make it more saleable and then sells the asset is more likely to be regarded as trading than someone who simply buys and sells an asset without performing any supplementary work. In Cape Brandy Syndicate v CIR (1921), a group of individuals bought a large quantity of brandy which they first blended and then sold. They were held to be trading.

4. Modification/Supplementary work

13

The presence of a profit motive in the mind of the taxpayer when acquiring an asset provides strong evidence of trading. In Wisdom v Chamberlain (1969), the taxpayer acquired silver bullion with the intention of selling it at a profit and eventually did so. He was held to be trading.However, this test is not always conclusive. After all, many investments are bought at least partially with a view to their long-term sale at a profit and yet such profits are generally treated as capital gains. This point emphasises the need to consider the evidence provided by all of the badges of trade (not just one) when trying to decide whether or not trading has occurred.

5. Profit Motive

14

If goods are acquitted intentionally, i.e. purchased, they are likely to be considered trading.If goods are acquired unintentionally, i.e. through inheritance or gift, any sale is unlikely to be considered trading.As with the profit motive test this “badge” needs to be considered along with the evidence provided by all of the badges of trade (not just one) when trying to decide whether or not trading has occurred.

6. The Way the Asset was acquired

Calculation of profit

16

The computation of a self-employed person's trading profit begins with the net profit shown by that person's accounts. For tax purposes, trading profits are normally calculated in accordance with generally accepted accounting practice, which means that income and expenditure should be measured on the accruals basis.It is usually necessary to make a number of adjustments to the net profit shown by the accounts in order to arrive at the trading profit for tax purposes.

The calculation of trading profits

17

These adjustments can be summarised as follows:

The calculation of trading profits

Step Action £Step 1 Take the net profit per the accounts XStep 2 Add back disallowable expenditure XStep 3 Deduct income not taxed as trading income (X)Step 4 Add income that has not been included in the accounts XTax Adjusted Profit X

Addback

££7.2Adjustment of Profit

Net profit shown by the accountsxxx

Add:Expenditure shown in the accounts but notStepAction£

deductible for tax purposesxxx Step 1Take the net profit per the accountsX1

Trading income not shown in the accountsxxx xxx Step 2Add back disallowable expenditureX2

xxx Step 3Deduct income not taxed as trading income(X)3

Less:Expenditure deductible for tax purposesStep 4Add income that has not been included in the accountsX4

but not shown in the accountsxxx Tax Adjusted ProfitX

Non-trading income shown in the accountsxxx xxx

Trading profit adjusted for tax purposesxxx

NIC

Page 210 in the manual.

Tax adjusted profits56,000

Class 2£2.8052145.60

Class 4Profits between8,060and43,000

£43,000 - £8,060 = 34,940*9%3,144.60

Profits greater than43,000

£56,000 - £43,000 = 13,000*2%260.00

Total Class 43,404.60

Total Class 2 and Class 4 NIC3,550.20

Page 210 in the manual. - VARIATION


Class 2£2.80*52145.60


£43,000 - £8,060 = 34,940*9%3,144.60


£46,000 - £43,000 = 3,000*2%60.00



Genna & Wayne

Kaplan F6 kit 16-17 Q5 Page 2 (48)Answer on page 196 (242)

Gennasalary5,000

Wayneproperty income40,000

Election to transfer the fixed amount of personal allowance from Genna to Wayne

What is Wayne's income tax liability for the tax year 2015/16?

Property income40,000

Personal allowance

Basic 15/1610,600

Genna's fixed amount1,060(11,660)

Taxable income28,340

20%

Tax liability5,668

Their solution (it is a tax reducer)


Personal allowance

Basic 15/16(10,600)

29,400

Income tax liabilityAll left of gennna4,760

Income at basic rate29,40020%5,880Ignore5,880

Less: Marriage allowance1,06020%(212)Add6,092

Income tax liability5,668Correct5,668

Mock Exam 2017

Gennasalary5,000





£


Personal allowance

Basic 16/17(11,000)

29,000





Katie


Annual salary55,000

Business miles14,50010,0004,500

Employer's rate0.43

Employer paid6,235

HMRC rates

Up to 10,000 miles0.454,500

Over 10,000 miles0.251,125

5,625

Excess mileage allowance610

Assessable employment income55,610

18

Generally expenses which are incurred “wholly and exclusively for the purposes of the trade” are deductible for tax purposes.Some expenses are specifically disallowable. If they are in the income statement (profit and loss account) of the trader they must be added back to the net profit to get the taxable profit.”Disallowable”, “non-deductible” and “not allowable” all mean the same thing, i.e. that the expenditure must be added back to the accounting profit to get the tax profit.The disallowable expenditure will be considered as follows:1. Capital expenditure2. Wholly and exclusively (16 examples)

Disallowable expenditure

19

Capital expenditure is a disallowable expense for income tax purposes and therefore has to be added back if there is any in the profit and loss account.The distinction between capital and revenue expenditure is not always straight forward. The general rule is that:• Repairs are revenue expenditure and are deductible; and • Improvements are capital expenditure and are disallowable.Capital expenditure generally brings an enduring benefit to the business, whereas revenue expenditure simply remedies wear and tear on an asset. The phrase enduring benefit came from Atherton v British Insulated & Helsby Cables Ltd (1926).Capital allowances are normally available on capital expenditure to give some tax relief on capital expenditure.

Capital expenditure

20

There are a number of specific cases of capital expenditure to be aware of:1) Depreciation/loss on sale/profit on sale – these are all accounting

measures designed to match the cost of using an asset over its useful life. Therefore depreciation and loss on sale should be added back to profit and a profit on sale should be deducted from profit.

2) Legal fees in acquiring an asset – these are part of the cost of the asset and should be added back if included in the profit and loss account

3) Cost of improving an asset – an improvement is capital expenditure and should be added back, although the replacement of single glazed windows with double glazed is treated as a repair.

Capital expenditure

21

4) Cost of repairs to a newly acquired asset to make it usable – this is capital but if the asset is usable before it is acquired the cost of repairs is generally allowed. In the case of Odeon Associated Theatres Ltd v Jones (1971), repairs to cinemas which had been bought in a state of disrepair (but were nonetheless usable) were allowed as revenue expenditure.

Capital expenditure

22

In general, expenditure is deductible (allowable) when computing trading profits only if it is incurred wholly and exclusively for the purposes of the trade. This rule is not as restrictive as the "wholly, exclusively and necessarily" rule applied to the expenses of an employee but it does have the following implications:1) Remoteness Test

Expenditure which has no connection with the trade is disallowed. In Strong & Co of Romsey Ltd v Woodifield (1906), damages paid by a brewery to a hotel guest injured by a falling chimney were disallowed. These damages were incurred by the brewery in its capacity as a property owner, not in its capacity as a trader, and therefore failed the remoteness test.

Wholly and exclusively

23

2) Duality testExpenditure which serves both a business purpose and a private purpose cannot be allowed in full. If the expenditure can be apportioned with reasonable accuracy, then the private element is disallowed. However, in Mallalieu v Drummond (1983), the cost of black clothing worn in court by a lady barrister was wholly disallowed, since it was not possible to apportion the cost of the clothing between the part which satisfied professional standards of dress and the part which simply provided warmth and decency.

Even if expenditure passes both of these tests (remoteness and duality) it may still be disallowed by statute.

Deductibility of expenditure

Disallowed expenditure

25

Certain classes of expenditure are disallowed (either by statute or by case law) when computing trading profits. If any of these types of expenditure have been deducted in the accounts of a self-employed person, then the amount of the expenditure must be "added back" to the profit shown by the accounts in order to arrive at the trading profit for tax purposes.

Disallowed expenditure

26

Appropriations of profit made by the owner of a business (whether these are described as drawings, owner's salary or anything else) are disallowed. The cost of salaries and/or bonuses paid to employees is allowed if paid within 9 months of the end of the period of account in which they are accrued. If not then they will be allowed in the period in which they are actually paid.The owner's personal income tax payments and personal National Insurance contributions are also disallowed.A salary paid to a family member is allowable only if there is a requirement to employ someone in that position. The payment to the connected person must be reasonable and not over and above the industry average for that position.Redundancy payments (a form of pay) are allowable if paid to employees who are working wholly within the trade.

1. Salaries/Drawings

27

Patent royalties are allowable if paid for trade purposes. The cost of registering patent royalties and trade marks are allowable.

2. Patent royalties

Bank interest is an allowable expense if it relates to the business. However if the loan is non-business related (personal) then it is a private expense and it must be added back to the accounting profit.

3. Bank interest

28

Generally HMRC allow taxpayers to apportion an expense between the private element and the business element. The private element of the expense is disallowable and added back to the net profit.

ExampleJane has motor running costs in her accounts of £3,000. However, she believes that 20% of her motoring is private and only 80% related to business use. She also has interest costs of £450 in her profit and loss account. £350 of this relates to overdraft interest on her business bank account and £100 relates to interest on her personal credit card.Her accounting profit for the year is £14,800.Calculate Jane’s tax adjusted profit.

4. Private element of expenses

29

Solution

4. Private element of expenses

£3,000 x 20% = £600

Addback

££7.2Adjustment of ProfitJane - example in lecture.


Add:Expenditure shown in the accounts but notStepAction£StepAction£

deductible for tax purposesxxx Step 1Take the net profit per the accountsX1Step 1Take the net profit per the accounts14,8001

Trading income not shown in the accountsxxx xxx Step 2Add back disallowable expenditureX2Step 2Add back disallowable expenditure2

xxx Step 3Deduct income not taxed as trading income(X)3Motor expenses - 20% private element60020%3,000

Less:Expenditure deductible for tax purposesStep 4Add income that has not been included in the accountsX4Interest expense - private credit card interest100100

but not shown in the accountsxxx Tax Adjusted ProfitXTax Adjusted Profit15,500



NIC



Class 2£2.8052145.60


£43,000 - £8,060 = 34,940*9%3,144.60


£56,000 - £43,000 = 13,000*2%260.00





Class 2£2.80*52145.60


£43,000 - £8,060 = 34,940*9%3,144.60


£46,000 - £43,000 = 3,000*2%60.00



Genna & Wayne


Gennasalary5,000





Personal allowance

Basic 15/1610,600



20%

Tax liability5,668



Personal allowance

Basic 15/16(10,600)

29,400





Mock Exam 2017

Gennasalary5,000





£


Personal allowance

Basic 16/17(11,000)

29,000





Katie


Annual salary55,000


Employer's rate0.43

Employer paid6,235

HMRC rates

Up to 10,000 miles0.454,500

Over 10,000 miles0.251,125

5,625



30

Staff entertaining costs are allowable but the employees concerned may incur an income tax liability if the amount involved exceeds specified limits.The cost of customer entertaining is disallowed.

5. Entertainment

31

The cost of gifts made to customers is also disallowed, other than:a) Gifts to employees, if made wholly and exclusively for trade

purposes. The employee may be taxed on the BIK if the gift is considered to be excessive;

b) Gifts to customers costing no more than £50 per customer per year, displaying a conspicuous advertisement for the business and not consisting of food, drink or tobacco; and

c) Reasonably small gifts to local charities, if made wholly and exclusively for the purposes of the trade, i.e. the purpose is to attract favourable publicity and to enhance the image of the business.

6. Gifts

32

Bad debts incurred in the course of trade are allowable. But loans written off are generally not allowable unless:a) the taxpayer is in the business of lending money and the loan concerned was made in the course of trade, orb) the loan was to an employee and was made by reason of the employment and for trade purposes; in this case, the amount of the written-off loan will usually be taxable on the employee as income from employment.Transfers to a specific bad debts provision (or allowance) are allowable but transfers to a general provision are usually disallowed, as stated earlier. Bad debts recovered and reductions in a specific bad debts provision are both treated as trading income.

7. Bad debts

33

Fines or penalties incurred because of infringements of the law are not regarded as trading expenses and are disallowed. An exception occurs if an employer pays parking fines incurred by employees whilst on their employer’s business. Such payments are usually allowed when computing trading profits but may then be assessed on the employees as income from employment.

8. Fines and penalties

34

Accountancy fees are generally allowable, however accountancy fees that relate to specialist consultancy taxation work are disallowable.Fees in relation to a HMRC enquiry are disallowable if the enquiry results in an additional tax liability.

9. Accountancy fees

10. Charitable donationsDonations made to local charities are allowable on the basis that the business will attract favourable publicity as a result of making the donation. Donations made to national charities are not allowable for tax purposes, however relief may be given on the personal tax return via gift aid rules.

35

Political donations are allowable if they provide a benefit to the business; however this is unusual and most political donations are disallowable.In Morgan v Tate & Lyle Ltd (1954), the costs of a political campaign against nationalisation were allowed on the grounds that the campaign was waged for the survival of the trade.

11. Political donations

36

12. Subscriptions

Trade subscriptions are generally deductible, examples include subscriptions to trade magazines, professional subscriptions etc.

13. Keyman insuranceKeyman insurance that relates specifically to the owner of the business is disallowable.

37

Pension payments to registered pension schemes for employees are allowed in the period of account in which they are paid. Therefore any pension accrual included in the income statement is disallowed and allowed in the year it is paid. Pension contributions for the business owner are disallowed and tax relief is given in the income tax computation.

14. Pension contributions

38

15. Car lease rental payments/Contract hire

Cars which have CO2 emissions exceeding 110g/km, will have 15% of their lease rental/contract hire payments added back when calculating the tax adjusted profits. There is a further restriction for personal use.

16. VAT accrualAny accrual in relation to a VAT liability is disallowable and allowable only when paid.

39

Shane runs a consultancy business in Kilrea. These are his accounts for the year ending 5 April 2020:

Example - Shane

£Income 100,000Expenses:Wages 1 44,710Bank interest 2 1,120Telephone 3 840Repairs and maintenance 4 16,200Depreciation 1,490Loss on disposal of laptop 150Donation to Dogs Trust 400Hire charge for car 5 2,400Advertising 6 1,230

68,540

Net profit 31,460

Addback











Rodney

Rodney

£

Sales49,287

Expenses:

Wages to staff19,500

Drawings taken by owner17,500

Electricity1,770

Motor expenses1980

Advertising and entertainment2670

Depreciation865

Parking fine incurred by Rodney75

Bad debts3768

Interest41,050

43,178

Net profit6,109

Breakdown of expenses£

(1) Motor expenses

Rodney's expenses (20% is private related)65020%

Staff expenses330

980

(2) Advertising and entertainment

Leaflets printed370

Gifts of key rings with logo to 150 customers225

Dinner with customers75

670

(3) Bad debts

Increase in specific bad debt368

Increase in general bad detb100

Trade debts written off300

768

(4) Interest

Overdraft interest590

Interest on loan to son300

Personal credit card interest160

1,050

Tax adjusted profit for the year.

Net profit6,109

Add back:


Motor expenses (1)130

Advertising and entertainment (2)75

Depreciation865


Bad debts (3)100

Interest (4)460

19,205

25,314

Shauna

Shauna

£

Gross profit77,320

Expenses:

Wages144,990

Electricity25,829

Repairs and maintenance38,500

Depreciation1,490

Donation to Oxfam250

Hire charge for car42,750

Advertising51,175

64,984

Net profit12,336


(1) Wages


Drawings by Shauna19,500

Provision for Shauna's income tax3,780

44,990

(2) Electricity

Relating to flat15%

(3) Repairs and maintenance

Extension to dining area in restaurant7,500

Repainting whole of building1,00020%

8,500

(4) Hire charge for car2,750

(5) Advertising

Gifts of hampers to customers690

Adverts in local newspapers290

Membership of Food Circle195

1,175


Net profit12,336

Add back:



Electricity (15% x £5,829)874


Repainting part of building200

Hire charge for car x 15%413


Depreciation1,490


34,697

Tax adjusted profit47,033

Shane

Shane - my example for lecture.

£1Salaries/wages/drawingsü

Income100,0002Patent royaltiesû

Expenses:3Bank interest - privateü

Wages144,7104Private elementü

Bank interest21,1205Entertainmentü

Telephone38406Giftsü

Repairs and maintenance416,2007Bad debtsû

Depreciation1,4908Fines and penaltiesû

Loss on disposal of laptop1509Accountancy feesû

Donation to Dogs Trust40010Charitable donationsü

Hire charge for car52,40011Political donationsû

Advertising61,23012Subscriptionsû

68,54013Keymanû

14Pension contributionsû

Net profit31,46015Car lease rentalü

16VAT accrualû

Breakdown of expenses

(1) Wages£Repairsü


Drawings by Shane 19,500

Provision for Shane 's income tax3,500

44,710

(2) Bank interest£



1,120

(3) Telephone£

Business premises600

Home phone (40% personal use)24040%

840

(4) Repairs and maintenance£

New front porch to business premises15,000

Repainting whole of building1,200

16,200

(5) Hire charge for car£2,400

Emissions of car hired:135g/km

(All business use)

(6) Advertising£

Bottles of gin to customers for Xmas690

Advertising board at local football club540

1,230


£

Net profit31,460

Add back:




Home phone (40% x £240)96


Donation to Dogs Trust400


Depreciation1,490

Loss on disposal of laptop150


41,406


Fergus

Fergus- my 2nd example for lecture.

£

Sales100,000

Less: Cost of sales(30,000)

Gross profit70,000

Other income:

Rental income6,000

Interest received50

6,050

76,050

Expenses:

Wages127,5001Salaries/wages/drawingsüû

Bad debts21,0202Patent royaltiesûû

General expenses34403Bank interest - privateüû

Accountancy45,0004Private elementüû

Depreciation1,8005Entertainmentüû

Travel expenses (all business)4006Giftsüü

Insurance52,7007Bad debtsûü

Advertising61,6808Fines and penaltiesûü

40,5409Accountancy feesûü

10Charitable donationsüû

Net profit35,51011Political donationsûû

12Subscriptionsûü

Breakdown of expenses13Keymanûü

(1) Wages£14Pension contributionsûü

Wages to staff24,00015Car lease rentalüû

Personal pension contribution by Fergus3,50016VAT accrualûû

27,500

Repairsüû

(2) Bad debts£

Specific bad debts written off220

Increase in general bad debt provision300

Loan to customer written off500"Loans written off are only allowable if:

1,020 taxpayer is a money lender, or

loan was to an employee (BIK for employee)

(3) General expenses£

Parking fine for Fergus100

Parking fine for van driver on delivery100

Subscription to local chamber of commerce240

440

(4) Accountancy£

Accounts preparation work2,000

Tax planning advice for inheritance tax3,000

5,000

(5) Insurance£

Business property insurance2,000

Keyman insurance on Fergus300

Holiday home insurance400

2,700

(6) Advertising£

Weekly advertisements in local press1,080

Calendars for customers with logo (£6 each)600

1,680

Goods taken for own use600


£

Net profit35,510

Add back:

Personal pension contribution by Fergus3,500


Loan to customer written off500





Depreciation1,800


10,500

Deduct:

Rental income6,000

Interest received50

6,050


Kevin

KevinExercise 1 on page 209 of 17/18 manual

Solution on page 217

£

Net profit22,578

Expenses:

Car expenses2,900

Business miles19,000

Private miles13,75032,750

Fine for polluting local river1,000

Specialist tax consultancy work2,250

Gifts to customers with logo costing £4.50 each

Drawings7,800

Wife's wages6,500

Keyman insurance for Kevin450

Depreciation725


£

Net profit22,578

Add back:

Car expenses (13,750/32,750 x £2,9001,218



Drawings7,800


Depreciation725

13,443


NIC

Page 210 in the manual. (214 17/18)


Class 2£2.8552148.20


£45,000 - £8,164 = 36,836*9%3,315.24


£56,000 - £45,000 = 11,000*2%220.00





Class 2£2.85*52148.20


£45,000 - £8,164 = 36,836*9%3,315.24


£46,000 - £45,000 = 1,000*2%20.00



Genna & Wayne


Gennasalary5,000





Personal allowance

Basic 15/1610,600



20%

Tax liability5,668



Personal allowance

Basic 15/16(10,600)

29,400





Mock Exam 2017

Gennasalary5,000





£


Personal allowance

Basic 16/17(11,000)

29,000





Katie


Annual salary55,000


Employer's rate0.43

Employer paid6,235

HMRC rates

Up to 10,000 miles0.454,500

Over 10,000 miles0.251,125

5,625



40

Breakdown of expenses:

Example - Shane

(1) Wages £Wages to staff 21,710Drawings by Shane 19,500Provision for Shane 's income tax 3,500

44,710

(2) Bank interest £Overdraft interest 900Personal credit card interest 220

1,120

(3) Telephone £Business premises 600Home phone (40% personal use) 240

840

(4) Repairs and maintenance £New front porch to business premises 15,000Repainting whole of building 1,200

16,200

Addback











Rodney

Rodney

£

Sales49,287

Expenses:



Electricity1,770

Motor expenses1980


Depreciation865


Bad debts3768

Interest41,050

43,178

Net profit6,109


(1) Motor expenses


Staff expenses330

980


Leaflets printed370



670

(3) Bad debts




768

(4) Interest




1,050


Net profit6,109

Add back:




Depreciation865


Bad debts (3)100

Interest (4)460

19,205

25,314

Shauna

Shauna

£

Gross profit77,320

Expenses:

Wages144,990

Electricity25,829


Depreciation1,490



Advertising51,175

64,984

Net profit12,336


(1) Wages




44,990

(2) Electricity

Relating to flat15%




8,500


(5) Advertising




1,175


Net profit12,336

Add back:








Depreciation1,490


34,697


Sheet1








Repairs and maintenance416,2007Bad debtsü

Depreciation1,4908Fines and penaltiesü

Loss on disposal of laptop1509Accountancy feesü


Hire charge for car52,40011Political donationsü

Advertising61,23012Subscriptionsü

68,54013Keymanü

14Pension contributionsü


16VAT accrualû


(1) Wages£Repairs




44,710

(2) Bank interest£



1,120

(3) Telephone£



840




16,200



(All business use)

(6) Advertising£



Membership of Professional body240

1,230


£

Net profit31,460

Add back:








Repairs and maintenance400

Depreciation1,490



42,096


Kevin



£

Net profit22,578

Expenses:

Car expenses2,900






Drawings7,800

Wife's wages6,500


Depreciation725


£

Net profit22,578

Add back:

Car expenses (13,750/32,750 x £2,9001,218



Drawings7,800


Depreciation725

13,443


NIC



Class 2£2.8052145.60


£43,000 - £8,060 = 34,940*9%3,144.60


£56,000 - £43,000 = 13,000*2%260.00





Class 2£2.80*52145.60


£43,000 - £8,060 = 34,940*9%3,144.60


£46,000 - £43,000 = 3,000*2%60.00



Genna & Wayne


Gennasalary5,000





Personal allowance

Basic 15/1610,600



20%

Tax liability5,668



Personal allowance

Basic 15/16(10,600)

29,400





Mock Exam 2017

Gennasalary5,000





£


Personal allowance

Basic 16/17(11,000)

29,000





Katie


Annual salary55,000


Employer's rate0.43

Employer paid6,235

HMRC rates

Up to 10,000 miles0.454,500

Over 10,000 miles0.251,125

5,625



41

Breakdown of expenses (continued):

Required:Calculate Shane’s tax adjusted profit for this year.

Example - Shane

(5) Hire charge for car £2,400Emissions of car hired: 135 g/km(All business use)

(6) Advertising £Bottles of gin to customers for Xmas 690Advertising board at local football club 540

1,230

Addback











Rodney

Rodney

£

Sales49,287

Expenses:



Electricity1,770

Motor expenses1980


Depreciation865


Bad debts3768

Interest41,050

43,178

Net profit6,109


(1) Motor expenses


Staff expenses330

980


Leaflets printed370



670

(3) Bad debts




768

(4) Interest




1,050


Net profit6,109

Add back:




Depreciation865


Bad debts (3)100

Interest (4)460

19,205

25,314

Shauna

Shauna

£

Gross profit77,320

Expenses:

Wages144,990

Electricity25,829


Depreciation1,490



Advertising51,175

64,984

Net profit12,336


(1) Wages




44,990

(2) Electricity

Relating to flat15%




8,500


(5) Advertising




1,175


Net profit12,336

Add back:








Depreciation1,490


34,697


Shane














68,54013Keymanû



16VAT accrualû






44,710

(2) Bank interest£



1,120

(3) Telephone£



840




16,200



(All business use)

(6) Advertising£



1,230


£

Net profit31,460

Add back:








Depreciation1,490



41,406


Fergus


£

Sales100,000


Gross profit70,000

Other income:

Rental income6,000

Interest received50

6,050

76,050

Expenses:












12Subscriptionsûû





27,500

Repairsüû

(2) Bad debts£









Sundries240

440

(4) Accountancy£



5,000

(5) Insurance£




2,700

(6) Advertising£



1,680



£

Net profit35,510

Add back:








Depreciation1,800


10,500

Deduct:

Rental income6,000

Interest received50

6,050


Kevin



£

Net profit22,578

Expenses:

Car expenses2,900






Drawings7,800

Wife's wages6,500


Depreciation725


£

Net profit22,578

Add back:

Car expenses (13,750/32,750 x £2,9001,218



Drawings7,800


Depreciation725

13,443


NIC



Class 2£2.8552148.20


£45,000 - £8,164 = 36,836*9%3,315.24


£56,000 - £45,000 = 11,000*2%220.00





Class 2£2.85*52148.20


£45,000 - £8,164 = 36,836*9%3,315.24


£46,000 - £45,000 = 1,000*2%20.00



Genna & Wayne


Gennasalary5,000





Personal allowance

Basic 15/1610,600



20%

Tax liability5,668



Personal allowance

Basic 15/16(10,600)

29,400





Mock Exam 2017

Gennasalary5,000





£


Personal allowance

Basic 16/17(11,000)

29,000





Katie


Annual salary55,000


Employer's rate0.43

Employer paid6,235

HMRC rates

Up to 10,000 miles0.454,500

Over 10,000 miles0.251,125

5,625



42

Tax adjusted profit for the year:

Solution - Shane

Cars which have CO2 emissions exceeding 110g/km have 15% of rental cost added back:

£2,400 x 15% = £360

£Net profit 31,460Add back:Drawings by Shane 19,500Provision for Shane 's income tax 3,500Personal credit card interest 220Home phone (40% x £240) 96New front porch to business premises 15,000Depreciation 1,490Loss on disposal of laptop 150Donation to Dogs Trust 400Hire charge for car x 15% 360Bottles of gin to customers for Xmas 690

41,406

Tax adjusted profit 72,866

Addback











Rodney

Rodney

£

Sales49,287

Expenses:



Electricity1,770

Motor expenses1980


Depreciation865


Bad debts3768

Interest41,050

43,178

Net profit6,109


(1) Motor expenses


Staff expenses330

980


Leaflets printed370



670

(3) Bad debts




768

(4) Interest




1,050


Net profit6,109

Add back:




Depreciation865


Bad debts (3)100

Interest (4)460

19,205

25,314

Shauna

Shauna

£

Gross profit77,320

Expenses:

Wages144,990

Electricity25,829


Depreciation1,490



Advertising51,175

64,984

Net profit12,336


(1) Wages




44,990

(2) Electricity

Relating to flat15%




8,500


(5) Advertising




1,175


Net profit12,336

Add back:








Depreciation1,490


34,697


Shane














68,54013Keymanû



16VAT accrualû






44,710

(2) Bank interest£



1,120

(3) Telephone£



840




16,200



(All business use)

(6) Advertising£



1,230


£

Net profit31,460

Add back:






Depreciation1,490





41,406


Fergus


£

Sales100,000


Gross profit70,000

Other income:

Rental income6,000

Interest received50

6,050

76,050

Expenses:












12Subscriptionsûü





27,500

Repairsüû

(2) Bad debts£









Subscription to local chamber of commerce240

440

(4) Accountancy£



5,000

(5) Insurance£




2,700

(6) Advertising£



1,680



£

Net profit35,510

Add back:








Depreciation1,800


10,500

Deduct:

Rental income6,000

Interest received50

6,050


Kevin



£

Net profit22,578

Expenses:

Car expenses2,900






Drawings7,800

Wife's wages6,500


Depreciation725


£

Net profit22,578

Add back:

Car expenses (13,750/32,750 x £2,9001,218



Drawings7,800


Depreciation725

13,443


NIC



Class 2£2.8552148.20


£45,000 - £8,164 = 36,836*9%3,315.24


£56,000 - £45,000 = 11,000*2%220.00





Class 2£2.85*52148.20


£45,000 - £8,164 = 36,836*9%3,315.24


£46,000 - £45,000 = 1,000*2%20.00



Genna & Wayne


Gennasalary5,000





Personal allowance

Basic 15/1610,600



20%

Tax liability5,668



Personal allowance

Basic 15/16(10,600)

29,400





Mock Exam 2017

Gennasalary5,000





£


Personal allowance

Basic 16/17(11,000)

29,000





Katie


Annual salary55,000


Employer's rate0.43

Employer paid6,235

HMRC rates

Up to 10,000 miles0.454,500

Over 10,000 miles0.251,125

5,625



Income not taxed as trading income

44

Income that is not taxable as trading income should be deducted from the net profit:

The types of income that must be deducted are:1. Capital receipts2. Income taxed under another heading3. Income specifically exempt from tax.


Step Action £Step 1 Take the net profit per the accounts XStep 2 Add back disallowable expenditure XStep 3 Deduct income not taxed as trading income (X)Step 4 Add income that has not been included in the accounts XTax Adjusted Profit X

Addback

££7.2Adjustment of Profit


Add:Expenditure shown in the accounts but notStepAction£

deductible for tax purposesxxx Step 1Take the net profit per the accountsX1

Trading income not shown in the accountsxxx xxx Step 2Add back disallowable expenditureX2

xxx Step 3Deduct income not taxed as trading income(X)3

Less:Expenditure deductible for tax purposesStep 4Add income that has not been included in the accountsX4

but not shown in the accountsxxx Tax Adjusted ProfitX



NIC



Class 2£2.8052145.60


£43,000 - £8,060 = 34,940*9%3,144.60


£56,000 - £43,000 = 13,000*2%260.00





Class 2£2.80*52145.60


£43,000 - £8,060 = 34,940*9%3,144.60


£46,000 - £43,000 = 3,000*2%60.00



Genna & Wayne


Gennasalary5,000





Personal allowance

Basic 15/1610,600



20%

Tax liability5,668



Personal allowance

Basic 15/16(10,600)

29,400





Mock Exam 2017

Gennasalary5,000





£


Personal allowance

Basic 16/17(11,000)

29,000





Katie


Annual salary55,000


Employer's rate0.43

Employer paid6,235

HMRC rates

Up to 10,000 miles0.454,500

Over 10,000 miles0.251,125

5,625



45

1. Capital receiptsThis refers to profits made on the disposal of a capital asset. This could be an “accounting profit” (as opposed to a loss on disposal) or a “capital gain”. These will be dealt with through capital allowances or capital gains tax.2. Income taxed under another heading.This refers to income in other parts of the income tax computation, e.g. rental income, dividends or interest received.3. Income specifically exempt from tax.This could include lottery wins etc (Income tax lecture 1, slide 10 –benefits etc).


46

The most common example of trading income being omitted from the accounts of a business occurs when the owner of the business appropriates trading stock (or inventory) for his or her personal use. This is referred to as "own consumption".In this situation, generally accepted accounting practice (GAAP) suggests that the cost of the goods concerned, less any contribution made by the owner, should be credited to the income statement. However, ITTOIA 2005 requires that own consumption of trading stock is accounted for at market value. This means that the profit of the business for tax purposes should be increased by the selling price of the goods, less any contribution made by the owner.

Trading income not shown in the accounts

47

Expenditure incurred up to seven years before the business commences can be deducted as though it was incurred on the first day of trade. The expenditure must be an allowable type of expenditure.

Pre trading expenditure

48

Fergus runs a small trading business in Augher. These are his accounts for the year ending 5 April 2020:

Calculate his tax adjusted trading profit for the year.

Example - Fergus

£Sales 100,000Less: Cost of sales (30,000)Gross profit 70,000Other income:Rental income 6,000Interest received 50

6,05076,050

Expenses:Wages 1 27,500Bad debts 2 1,020General expenses 3 440Accountancy 4 5,000Depreciation 1,800Travel expenses (all business) 400Insurance 5 2,700Advertising 6 1,680

40,540

Net profit 35,510

Addback











Rodney

Rodney

£

Sales49,287

Expenses:



Electricity1,770

Motor expenses1980


Depreciation865


Bad debts3768

Interest41,050

43,178

Net profit6,109


(1) Motor expenses


Staff expenses330

980


Leaflets printed370



670

(3) Bad debts




768

(4) Interest




1,050


Net profit6,109

Add back:




Depreciation865


Bad debts (3)100

Interest (4)460

19,205

25,314

Shauna

Shauna

£

Gross profit77,320

Expenses:

Wages144,990

Electricity25,829


Depreciation1,490



Advertising51,175

64,984

Net profit12,336


(1) Wages




44,990

(2) Electricity

Relating to flat15%




8,500


(5) Advertising




1,175


Net profit12,336

Add back:








Depreciation1,490


34,697


Shane














68,54013Keymanû



16VAT accrualû






44,710

(2) Bank interest£



1,120

(3) Telephone£



840




16,200



(All business use)

(6) Advertising£



Membership of Professional body240

1,230


£

Net profit31,460

Add back:








Depreciation1,490



41,406


Fergus


£

Sales100,000


Gross profit70,000

Other income:

Rental income6,000

Interest received50

6,050

76,050

Expenses:












12Subscriptionsûû





27,500

Repairsüû

(2) Bad debts£









Sundries240

440

(4) Accountancy£



5,000

(5) Insurance£




2,700

(6) Advertising£



1,680



£

Net profit35,510

Add back:








Depreciation1,800


10,500

Deduct:

Rental income6,000

Interest received50

6,050


Kevin



£

Net profit22,578

Expenses:

Car expenses2,900






Drawings7,800

Wife's wages6,500


Depreciation725


£

Net profit22,578

Add back:

Car expenses (13,750/32,750 x £2,9001,218



Drawings7,800


Depreciation725

13,443


NIC



Class 2£2.8052145.60


£43,000 - £8,060 = 34,940*9%3,144.60


£56,000 - £43,000 = 13,000*2%260.00





Class 2£2.80*52145.60


£43,000 - £8,060 = 34,940*9%3,144.60


£46,000 - £43,000 = 3,000*2%60.00



Genna & Wayne


Gennasalary5,000





Personal allowance

Basic 15/1610,600



20%

Tax liability5,668



Personal allowance

Basic 15/16(10,600)

29,400





Mock Exam 2017

Gennasalary5,000





£


Personal allowance

Basic 16/17(11,000)

29,000





Katie


Annual salary55,000


Employer's rate0.43

Employer paid6,235

HMRC rates

Up to 10,000 miles0.454,500

Over 10,000 miles0.251,125

5,625



49

Breakdown of expenses:

Example - Fergus

(1) Wages £Wages to staff 24,000Personal pension contribution by Fergus 3,500

27,500

(2) Bad debts £Specific bad debts written off 220Increase in general bad debt provision 300Loan to customer written off 500

1,020

(3) General expenses £Parking fine for Fergus 100Parking fine for van driver on delivery 100Subscription to local chamber of commerce 240

440

(4) Accountancy £Accounts preparation work 2,000Tax planning advice for inheritance tax 3,000

5,000

Addback











Rodney

Rodney

£

Sales49,287

Expenses:



Electricity1,770

Motor expenses1980


Depreciation865


Bad debts3768

Interest41,050

43,178

Net profit6,109


(1) Motor expenses


Staff expenses330

980


Leaflets printed370



670

(3) Bad debts




768

(4) Interest




1,050


Net profit6,109

Add back:




Depreciation865


Bad debts (3)100

Interest (4)460

19,205

25,314

Shauna

Shauna

£

Gross profit77,320

Expenses:

Wages144,990

Electricity25,829

Repairs and maintenance3

Income Tax 7... · For tax purposes, trading profits are normally calculated in accordance with...

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