BTAX Business Taxation Session 5: Income Tax 1

2 Basis of business taxation of individuals Trading Income received by an individual is subject to Income Tax Need test to determine whether ‘trade’ is being carried out

3 Badges of Trade Profit motive Subject matter of activity Length of ownership Frequency of transactions Supplementary work on assets purchased Reasons for acquisition and sale

4 Starting trading Must notify HMRC within six months of the end of the tax year

5 Basis of assessment Traders can produce annual accounts up to any date Income Tax assessed based on fiscal years (6 April – 5 April) Need to establish link to particular tax year Need to establish basis period

6 Adjustment of Trading Profits Items in Profit/Loss a/c Add back expenses not allowable Deduct income that is not trading income Items not in Profit/Loss a/c Add income not included in accounts : not applicable to companies : goods for own use Deduct expenses not included in accounts: Capital Allowances

7 Differences from Companies Owners private expenditure Personal bills Personal tax Owners drawings: profits taken out Goods for own use

8 Allowable Expenses Revenue rather than capital in nature AND Wholly & Exclusively for the purpose of the trade Duality Also beware of excessive remuneration to relatives

9 Capital Allowances Calculated for the accounting period Claim same AIA WDA/AIA time-apportioned if accounting period not 12 months FYA 100% on low emission cars Assets can have private use which will not be claimable Separate pool for PU assets Can claim AIA on business portion of PU assets (not cars)

10 Dealing with trading losses Trading profit is Nil Three options available to set off loss

11 Losses and Capital Allowances Capital Allowance claims may be reduced to reduce size of loss relief claim

Homework Tutorial book questions 6.1, 6.2, 6.6, 6.3, 6.4, 6.5 Make notes from chapter 6 12