Schedule D Case I/II – Self-Employed Income Calculation of Case I/II Taxable Profits Taxation of Business Profits Sole Traders Trade or Profession Accounts prepared under accepted accountancy standards The rules for calculating profit for tax purposes differ to accepted accountancy standards in some instances

Schedule D Case I/II – Self-Employed Income Adjustments Start with Net Profit figure from Accounts Expense not allowed for tax purposes – Add-back Expense allowed and included in accounts – No adjustment required Expense allowed and not included – Deduct Income included that shouldn’t be taxed under Case I/II - Deduct

Schedule D Case I/II – Self-Employed Income Three Main Categories of Adjustments Capital Expenses not wholly and exclusively for the purpose of the trade (business) Disallowed by statute

Schedule D Case I/II – Self-Employed Income Capital Capital expenditure is not allowed as an expense when calculating profit for tax purposes Includes the capital expenses itself and related expenses Capital income is not taxed under Case I/II

Schedule D Case I/II – Self-Employed Income What is Capital? Three factors to consider How is it treated in the accounts? Does it have an enduring benefit for the trade? Does it have a recurring quality?

Schedule D Case I/II – Self-Employed Income Common Capital Adjustments Improvements v Repairs Depreciation Capital Grants Profit or loss on capital disposals Expenses related to disposals of capital assets Repaying capital on a loan

Schedule D Case I/II – Self-Employed Income Not Wholly and Exclusively for the Trade Expenses not related to trade Related to other sources of income Personal Expenses Drawings Salary payments to spouse/child where he/she does not work in the business Income Tax payments Personal expenses such as phone bills Expenses can be apportioned between a personal and business element

Schedule D Case I/II – Self-Employed Income Disallowed by Statute Entertainment Donations Interest on late payment of tax Movements in General Provisions Specific provisions – no adjustment required for movements in specific provisions Add-back an increase in a general provision Deduct a decrease in a general provision

Schedule D Case I/II – Self-Employed Income Disallowed by Statute Motor Expenses Fines are not allowable expenses Motor expenses can be apportioned based on business/private use – Value for private use is added back Motor Lease Restriction Relates to cars that are leased by the sole trader Limits the amount of lease payment that can be claimed as a deduction Prevents sole traders from claiming a deduction for lease payments on expensive cars

Schedule D Case I/II – Self-Employed Income Disallowed by Statute Pension Fund Contributions Pension contributions for the sole trader are disallowed and added back Pension contributions for staff – Amount paid in the tax year are allowed

Schedule D Case I/II – Self-Employed Income Disallowed by Statute Patent Royalties – disallowed as a trading expense and added back Finance lease payments – interest and capital allowable Operating lease – interest only allowable, no adjustment required

Schedule D Case I/II – Self-Employed Income Disallowed by Statute Employee expenses All costs related to having an employee are allowed. The sole trader’s own salary / drawings are not allowed as an expense. Salary paid to a spouse or children is only allowed when the spouse / child works in the business.

Schedule D Case I/II – Self-Employed Income Pre-Trading Expenses Pre-trading expenses are allowed when: They were incurred for the purposes of a trade or profession, and They were incurred within 3 years of the trade commencing, and Were not otherwise allowable. Pre-trading expenses are treated as having been incurred on the date the trade commenced. A loss created by pre-trading expenses cannot be used against other income.

Schedule D Case I/II – Self-Employed Income Income Not Taxed Under Case I/II Non- Case I/II income must be deducted when they appear in the Income Statement Rental Income, Deposit Interest, Dividend income, etc. are not taxed under Case I/II and should not be part of the taxable profit from a business