BUSINESS INCOME

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BUSINESS INCOME
Theory and practice of taxation ACode C33TA1
Lecture 17

• INTRODUCTION TO
• TRADING INCOME
• CONTINUED

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TRADING INCOME

• Business trading profits are charged to Income
  Tax as Trading Income
• These comprise profits from any Trade,
  Profession or Vocation i.e. the profits of the
  self- employed
• The self-employed include both sole traders and
  partnerships

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TRADING INCOMEREVISED

• The profits assessable to Tax are based on the
  Business Accounts profits adjusted for
  
• 1) Expenses in the Accounts which are not
  allowable for Tax purposes eg entertainment,
  depreciation
• 2) Income assessable but not included in the
  accounts
• 3) Income in the Accounts which is not taxable as
  Trading Income (eg profit on goods for own use)
• 4) Expenditure not in the accounts but allowed as
  a deduction (eg capital allowances, business use
  of private facilities)

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TRADING INCOME BASIS PERIODS

• In an ongoing business the profits used as the
  basis of the assessment for a Fiscal Year will be
  the profits of the business year
• Eg profits of year to 30 September 2007 will be
  the Basis Period for Fiscal Year 2007-08
• Eg Accounts year end is 30 April each year. The
  Basis Period for Fiscal Year 2007-08 is the
  year to 30 April 2007
• A Current Year basis of assessment

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TRADING INCOME BASIS PERIODS

• A trader has the following results
  
  Profits for year ended 30 Sept 2002
  20,000 Profits for year ended 30 Sept 2003
  30,000Profits for year ended 30 Sept 2004
  40,000 Profits for year ended 30 Sept 2005
  50,000
• What is the basis period for the 2004-05Trading
  Income assessment?
• In which tax year will the profits of 20,000 be
  assessed?

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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• There are special rule for new businesses and
  businesses ceasing to trade - referred to as
  Commencement and Cessation provisions.
• Commencement of trade
• 1) First year of assessment
• The firms first year of assessment is the fiscal
  year in which the firm starts to trade.
• Eg if a firm starts to trade on 1 October 2007
  its first year of assessment will be 2007-08
• Profits assessable in the first year are the
  profits from the date of commencement to the
  following 5th April. Actual profits
• The basis period for 2007-08 is
• 1 October 2007 to 5 April 2008

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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• Year of commencement- example
• Jake commences business on 1 January 2007.
  Profits for year to 31 December 2007 were
  36,000 Profits for year to 31 December
  2008 were 48,000
• Name the first year of assessment
• State the basis period
• Compute the assessable profit for the first year
  of assessment

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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• Year of commencement Jake solution
• The first year of assessment is 2006-07.
• The basis period for 2006-07 is 1 January to 5
  April 2007.Profits made in Jan, Feb, Mar 2006
  will be 3 months out of the years profits to 31
  Dec 2007
• The assessable profit is 3/12 x 36,000 9,000
• Strictly the calculation should use number of
  days
• Jan 31 Feb28 Mar31 Apr 5 95
• The assessable profit is 95/365 x 36,000
  9,369
• In practice it is more common to round to the
  nearest month ie 3/12

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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• 2) Second year of assessment
• (a) 12 months to the accounting date in year two,
  if possible, or
• (b) first 12 months of trading if the accounting
  date in year two is less than 12 months after
  commencement, or
• (c) the actual profits (ie 6 Apl to 5 Apl) if
  there is no accounting period ending in the year.
  

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THE SECOND YEAR OF ASSESSMENTA DECISION CHART
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Does an Accounting Period end in the Year of
Assessment? YES
NO
Is the Accounting Period for 12 months? YES
NO
ACTUAL BASIS
Is the Accounting Period less than 12 Months YES
NO
CY BASIS
12 months ending on Accounting Date
1st 12 months Trading
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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• 3) Third year of assessment
• Profits for year three are assessed on a current
  year basis where possible
• ie where there is an accounting period of
  twelve months ending in the current year
• Where the accounting period ending in the third
  year is greater than 12 months
• the basis period is the twelve months ending on
  the accounting date (calculate a proportion of
  the profits)
• 4) Fourth and subsequent years Profits for
  years four and onwards are assessed on the
  current year basis

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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• Profits for the second and third years of
  assessment Example Continuing Jake
• Starts to trade on 1 January 2007. Profits for
  year to 31 December 2007 were 36,000 Profits for
  year to 31 December 2008 were 48,000
• Name the 2nd and 3rd years of assessment
• Name the Basis Period for each
• Compute the profits for these years

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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• 2nd year of assessment is 2007-08
• Basis period is 12 months to accounting date in
  year 2 - ie year to 31 December2007
• Assessable profit 36,000
• 3rd year of assessment is 2008-09
• Basis period is year to 31 December 2008
• Assessable profit 48,000

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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• Profits for opening years Example Joshua
• Starts to trade on 1 January 2007.Profits for
  period to 31 May 2007 10,000 Profits
  for year to 31 May 2008 48,000
• Name the 1st, 2nd and 3rd years of assessment
• Name the Basis Period for each
• Compute the profits for these years

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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• Joshua first three years of assessment
• The first year of assessment is 2006-07
• The basis period for 2006-07 is 1 January to 5
  April 2007 ie actual dates when trading to end of
  tax year. The assessable profit is three months
  profits (Jan Feb Mar) out of the five months
  accounts (Jan to May) 3/5 x 10,000 6,000
• Strictly the calculation should use number of
  days
• Jan 31 Feb28 Mar31 Apr 5 95
  
• Jan 31 Feb28 Mar31 Apr 30 May 31 151
• The Assessable Profit is 95/151 x 10,000
  6,291
• From now on we shall stick to months
• .

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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• Joshua first three years of assessment contd
• The second year of assessment is 2007-08
• There is no 12 month accounting period ending in
  the second year.
• (there is a five month period)
• The basis period for that year therefore is
• First 12 months trading 1 January to 31
  December 2007
• The Assessable profits are
• Period to 31 May 2007 (5 months) 10,000
• Plus 7/12 x year to 31 May 2008 (48,000)
  28,000
• 38,000

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SCH D III BASIS PERIODS NEW BUSINESSES

• Joshua first three years of assessment contd
• The third year of assessment is 2008-09
• The year to 31 May 2008 ends in the year 08-09.
• Therefore it is the basis period for 2008-09.
• Assessable profits are 48,000

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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• Profits for opening years Example Jonah
• Jonah starts to trade on 1 January 2006.
  Profits for period to 30 June 2007
  36,000 Profits for year to 30 June 2008
  48,000
• What are the assessable profits for the opening
  years of the business? (years 1 to 4)

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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• Jonah opening years
• The first year of assessment is 2005-06.
• The basis period for 2005-06 is 1 January to 5
  April 2006.
• This is 3 months which is part of the 18 months
  1 Jan 2006 to 30 June 2007
• Profits assessable 3/18 x 36,000 6,000
• The second year of assessment is 2006-07.
• There is NO accounting period ending in the year
  (Accounting period runs from 1/1/06 to 30/6/07)
• Therefore the basis period for 2006-07 is
• The fiscal year to 5 April 2007. ie 12 months out
  of the 18 month accounting period
• Assessable profits will be 12/18 x 36,000
  24,000)

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TRADING INCOME BASIS PERIODS NEW BUSINESSES

• Jonah opening years
• The third year of assessment is 2007-08.
• Again there is no 12 month accounting period
  ending in the year. (there is an 18 month one)
• Therefore the basis period is
• 12 months ending on the regular accounting date
• - 30 June 2007.
• Assessable profits are 12/18 x 36,000
  24,000
• The fourth year of assessment is 2008-09.
• Basis period is 12 months to 30 June 2008.
• Assessable profits 48,000.

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TRADING INCOME BASIS PERIODSOVERLAP PROFITS

• Overlap profits Where the same profits are
  charged to tax more than once. This will occur
  with most new businessesJake commenced trading
  on 1 Jan 06 and had profits of 36,000 for the
  year ended 31 December 2006
• 1st yr of assessment 2005-06 actual 3/12 x
  36,000 9,000
• 2nd yr assessment 2006-07 yr to 31 Dec 06
  36,000
• This is referred to as Overlapping Basis
  Periods1 Jan to 5 Apl has been used twice ie
  9,000 out of 36,000 taxed twice
• 9,000 is called overlap profits which give
  rise to overlap relief Relieved when the
  business ceases trading.

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TRADING INCOME BASIS PERIODSOVERLAP PROFITS

• Calculate overlap profits for Joshua and Jonah

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TRADING INCOME BASIS PERIODSOVERLAP PROFITS

• Joshua1st yr 1 Jan - 5 Apl 20072nd yr 1 Jan -
  31 Dec 2007Overlap 1 Jan to 5 Apl 2007 3/5
  x 10,000 6,000
• Jonah1st yr 1 Jan - 5 Apl 20062nd yr 6 Apl 06
  - 5 Apl 073rd yr 1 Jul 06 - 30 Jun 07 Overlap
  1 July 2006 to 5 Apl 2007 9/18 x 36,000
  18,000

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TRADING INCOME BASIS PERIODSCESSATION OF TRADE

• The Final Year of Assessment
• The basis period runs from the end of the basis
  period of the previous year to date of cessation
• Example Abraham has a 31 December year end and
  ceases trading on 30 June 2007
• The basis periods fo his final two years will be
• penultimate year 2006-07. CYB 12 month accounts
  to 31 Dec 2006
• year of cessation 2007-08. Basis period 1 Jan
  2007 to 30 Jun 2007

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TRADING INCOME BASIS PERIODSCESSATION OF TRADE

• The Final Year of Assessment Unusual situations
• If a trade starts and ceases in the same Tax Year
  the basis period for that year is the whole life
  of the Trade
• If the final year is the second year, the basis
  period runs from 6 April at the start of the
  second year to date of cessation
• If there is no accounting date in the penultimate
  tax year (which could happen when the final set
  of accounts of a business is more than 12 months)
  the basis period for the penultimate year will be
  for the 12 months to the normal accounting date
  in that year

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TRADING INCOME BASIS PERIODSCESSATION OF TRADE

• Examples
• Harolds year end is 30 June. He ceases trade on
  31 May 2008 to which date he makes up his last
  accounts
• Amys year end is 30 June. She ceases trade on 31
  May 2008 She makes up her last accounts for the
  23 months to the date of cessation
• For Harold and Amy what are the basis periods for
  the last two years of assessment?

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TRADING INCOME BASIS PERIODSCESSATION OF TRADE

• Examples
• Harold2007-08 CYB year to 30 June 07
• 2008-09 1 Jul 07 - 31 May 08
• AmyLast account 1 Jul 06 - 31 May 08
• 2007-08 (no CYB so 12 months to normal accounting
  date) 1 Jul 06 - 30 Jun 072008-09 1 Jul 07 - 31
  May 08

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TRADING INCOME BASIS PERIODSOverlap Relief

• Overlap profits arising in the opening tax years
  are deducted from the assessment in the final
  year
• Overlap relief ensures that over the life of the
  business the total assessments will equal the
  total profits and
• the assessments will cover the period of time for
  which the business operates
• If overlap relief exceeds final assessment a loss
  is created (see later lecture)

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TRADING INCOME BASIS PERIODSCommencement
cessation and overlap

• EXAMPLE
• Jim trades from 1 July 2000 to 31 December 2005
  with these results
  Period
  Profit ()
• 1.7.00 to 31.8.01
  7,000
• 1.9.01 to 31.8.02
  12,000
• 1.9.02 to 31.8.03
  15,000
• 1.9.03 to 31.8.04
  21,000
• 1.9.04 to 31.8.05 18,000
• 1.9.05 to 31.12.05 5,600
• Show the profits to be assessed in each Tax year

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TRADING INCOME BASIS PERIODS- SOLUTION

• Year of Basis Period
  Assessable Profit Assessment
  
• 2000-01 1.7.00 to 5.4.01
  9/14x7,000 4,500
• 2001-02 12 months to 31.8.01 12/14x7,000
  6,000 Overlap period
  1.9.00-5.4.01 profits 7/14x7,000 3,500
• 2002-03 12 months to 31.8.02
  12,000
• 2003-04 12 months to 31.8.03
  15,000
• 2004-05 12 months to 31.8.04
  21,000
• 2005-06 12 months to 31.8.05
  18,000 Plus 4
  months to 31.12.05
  5,600 Less Overlap
  relief (3,500)
  Equals
  20,100
• Total assessments ( total profits)
  78,600
  

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