Sole trader and partnership tax • Trading Income • Application to partners

Sole trader and partnership
Trading Income
Application to partners
Stamp Duty
Trading Income
See Introduction to Tax Ch 5
• Income Tax (Trading and Other
Income) Act 2005
• Profits of trade, profession or
• Paid by self-employed persons - sole
traders and partners
Tax paid on the profits of
the business
• Profit figure taken from the business
• See the profit and loss account pg
Profit and loss account
• Sales
• Less cost of sales
• =gross profit
• Less expenses
• =Net profit
Trading Income
• Only receipts of an income nature are
subject to income tax ie profits from
trade / profession
• But, only expenses of an income nature
can be deducted
• e.g. money spent on stock,
heating/lighting premises, insurance
• Must be incurred ‘wholly and
exclusively’ for the purposes of the
trade or profession
• Some expenditure excluded by tax
Acts, e.g. special rules for cars,
pensions etc
Capital expenditure and
• Capital expenditure is money spent on
long term assets, premises, plant and
machinery, etc
• Not of income nature and so not
deductible from profits as an expense.
• Some capital items qualify for a capital
allowance (also called depreciation)
Example of capital allowance
• Sole trader spends £10,000 on office furniture
(capital asset)
• £ spent is not an expense (capital expenditure)
• Can claim a capital allowance / depreciation
every year on the item
• The main rate for capital allowances is 25% every
year on the net book value of the asset
• Special rate for small & medium sized businesses
- 1st year only 50% (small) 40% (medium)
Example for a medium sized
• 1st Year – asset purchased for £10,000
– 10,000 x 40% = 4,000 (deductible)
– At end yr 1 value is 10,000 - 4,000 = 6,000
• 2nd year
– 6,000 x 25% = 1,500 (deductible)
– At end yr 2 value is 6,000 – 1,500 = 4,500
• 3rd Year
– 4,500 x 25% = 1,125 (deductible)
– At end yr 3value is 4,500 – 1,125 = 3,375
Relevance to Income Tax
• The capital allowance figure (depreciation)
not only used to reduce value of the asset
on the balance sheet
• It also reduces the profit made in the same
year for tax purposes
• Eg in yr 1 the business made £50,000
• Capital allowance in year 1 was £4,000 so
profit reduced to £46,000
Practice Question
Capital Allowances
• Manisha is a sole trader and her
business is classed as ‘small’.
• She buys a business asset in year 1
for £83,000.
1) Calculate the net book value at the
end of year 1.
2) If her profit (after expenses) in
year 1 is £125,000 calculate her
taxable profit.
• Asset bought for £83,000
• Cap All is 50% (in yr 1) = £41,500
• End of yr 1 net book value = £41,500
• Profit in yr 1 = £125,000
• Deduct Cap All of £41,500
• Taxable profit = £83,500
Income Losses
• If the taxpayer makes a loss
• (ie expenditure exceeds income)
• it can be set off against profits made
– on income from other sources that year
– on income from any source in the
previous year (one year only) or
– on income from same trade only in
future years (without time limit)
Losses made in early years
and final year
• Losses made in first four years of a
new business can be carried back
against income from any source in
the three years prior to the loss
• A loss made in the last year of the
business can be carried back up to
three years, but only against the
profits of the same trade
Basis of assessment
• Assessed on the profits for the accounting
period ending in the tax year
• Taxpayer chooses own accounting period
(‘financial year’)
• Self assessment tax return sent to HMRC
with the accounts and the tax due
• Special rules for opening and closing
years of business (see p 24)
• Sole trader’s financial year ends
30th September each year
• Tax for 2007 - 08 is based on
accounts for period ending
September 30th 2007
• Tax return to IR not later than 31st
January 2009
• With cheque for tax due
Partnerships: income tax
• Partners are liable for their own tax on their
share of the profits of the firm
• Each partner submits a tax return and the firm
submits a partnership tax return, with a copy
of the partnership accounts
• Each partner may have other income,
different personal allowances, may choose
different form of loss relief, etc.
• Partners not liable for each other’s tax
Partnerships: CGT
• Partnership sells a capital asset
• Each partner liable to CGT on their
share of the gain.
VAT Chapter 11 p 52
Value Added Tax (VAT)
• Tax on supply of goods, services,
sometimes land
• Supplier has to be registered for VAT
(compulsory if turnover is £64,000)
• Supplier charges customers VAT
• sends VAT collected (output tax) less
VAT paid to others (input tax) with
quarterly VAT return
VAT Rates
Standard rate
Zero rate
Special rate
Some supplies exempt
• Builder supplies £100,000 worth of
• If all charged at 17.5%
• Output tax = 100,000 x 17.5% = £17,500
• Builder buys £60,000 worth of goods
• If all charged at 17.5%
• Input tax = 60,000 x 17.5% = £10,500
• Builder pays 17,500 - 10,500 = £7,000 VAT
• Compulsory if turnover is £64,000
• Voluntary registration may be
beneficial if:
– most supplies are zero rated or exempt, or
– useful to register when set up business
then de-register
• Allows VAT paid out to be reclaimed
(otherwise not possible)
Solicitors’ Disbursements
• A disbursement is money paid out on
behalf of a customer on their
• Examples are stamp duty and search
costs incurred when conveyancing
• These may be excluded from the VAT
account so that VAT does not have to
be charged to the client
Stamp duty
Chapter 12 p 54
Stamp Duty
• Historically a tax on documents
• Document had to be stamped to
show the tax has been paid
• Paid by purchaser
• System recently changed with intro
of Stamp Duty Land Tax (SDLT)
Shares and other securities
Calculated as a percentage of the
Transfers of shares, etc.
– Round up the tax to the nearest £5.00
– Not payable on gifts
Time limit
• Document must be stamped within
30 days after execution
• Financial penalties for late stamping
• Duty payable on all UK property
transactions – freehold and
• See handbook for basic details
Next lecture
• Corporation tax
• See chp 10 tax handbook