1. 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
Reasons for acquisition and sale
Case study page 6.4
Students attempt activity 6.1

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
Question 5.1
Example page 6.10: Rachel Sole
Students practice Question 6.3

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)
Question 5.4
Demonstrate page 6.13 Capitol Ideas
Students practice 6.4: candies & Cakes

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

11. Limit on reliefs Greater of Applies to relief against total income
£50,000
25%(Total Income – pension contributions)
Applies to relief against total income
Does not apply to relief against profits of same trade

12. Losses and Capital Allowances
Capital Allowance claims may be reduced to reduce size of loss relief claim
Question 5.6
Demonstrate example Page 6.17: Downhill Trading
Students practice Questions 1 & 2 from handout

13. Homework Tutorial book questions 6.1, 6.2, 6.6, 6.3, 6.4, 6.5
AAT e-learning “Sole Trader Losses (FA2016)” pages 12 and 13.
Make notes from chapter 6