BTAX Business Taxation Session 6: Income Tax 2

Topics Basis periods for commencing sole traders Overlap profits Basis periods on cessation Losses Partnerships Deadlines Penalties and interest Record-keeping Tax returns

Basis Period Fiscal year - From 6 April to 5 April For a continuing business: 12 month Period of Account ending in Fiscal Year (SA basis) Gives examples of WB to show how Self Assessment applies

Basis Period: New Business 1st Year Start date to 5th April 2nd Year: 12 months to accounting date (if possible), or First 12 months of trading (if there is an accounting date in the tax year), or Tax year 4

BASIS PERIODS 2015/16 2016/17 Y/e 31/12/16 3/12 5

If any period of time lies in two basis periods What is Overlap Profit? If any period of time lies in two basis periods Carry forward & deduct at cessation (or change of accounting date) 6

From end of last basis period until cessation 7

Losses All the same rules apply to losses in early years but Overlapping part of loss will only be calculated once Questions 6.1 6.2 6.3 6.4 Example page Page 7.13: Juan Loss A Trader from handout

Capital allowances claimed by the partnership Jointly run a business, agree on share of profit, joint/several liability in UK Each partner assessed on share of tax-adjusted profit as if a sole trader Capital allowances claimed by the partnership Opening year/cessation rules apply to partners joining/leaving 9

Dividing trading profits between partners Calculate adjusted trading profits, after Capital Allowances, for Partnership Divided between partners in accordance with partnership agreement If no agreement then shared equally

Complex profit shares Take account of partnership ‘salaries’ Take account of interest on capital Take account of interest on drawings Appropriation of remaining profits according to partnership agreement Page 7.19: Penn, Quill & Wright Students practice Sue & Tim from handout

Partnership losses Also shared out according to partnership agreement Each partner can decide how to use their share of the loss Questions 6.5 6.6 Mary & Natalie

Payment of Income Tax Due: 31st January after tax year Payments on account unless: < £1,000 owed, or > 80% tax collected under PAYE Assume same tax as last year 50% due by 31st January in tax year 50% due by 31st July after tax year. Balancing payment by 31st January following tax year

Filing of tax return By 31st October following end of tax year for paper based returns By 31st January following tax year for electronic filing

Penalties What are the penalties for late filing? £100 Plus daily (£10) penalty if more than 3 months late Further £300 (or 5% tax due) if more than 6 months late Further £300 (or 5% tax due) if more than 12 months late

Penalties What are the penalties for late payment of tax? 30 days allowed free for payment More than 30 days = 5% of tax due Further 5% if still unpaid by 31 July Further 5% if still unpaid 12 months later

Penalties What are the penalties for: Incorrect return: Lack of reasonable care: 0% to 30% of extra tax due Deliberate: 20% to 70% of extra tax due Deliberate and concealed: 30% to 100% of extra tax due Failure to keep records Up to £3,000 per tax year.

Penalties

Interest Interest payable on all late payments and underpayments of POA (currently 3%) Question 6.7 students

Keeping records How long should records be retained? Retain for 5 years after filing deadline i.e for 15/16 until 31/01/22 Extended if inquiry started Records will include P/L a/c and balance sheet Cash books & bank statements Account ledgers and working papers Invoices on expenses and fixed asset purchases Tax working papers Copies of tax returns

The Tax return Self employment (full) : SEF1 – SEF3 Self employment (short) : SES1 – SES2 Required when turnover is below £82,000 pa and straight forward (i.e not cessation) Partnership (short) Supplementary pages for each partner (outside AAT syllabus) Partnership return also required showing results of whole partnership (SA800) Question 6.8 students Page 7.35: Mark Upp Students practice Qu 7.5: Mark, Norma & Olga Students practice Qu 7.6: Shaun Slapp

Homework Tutorial book questions 7.2, 7.4, 7.1, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8, 7.9 Make notes from chapter 7