Income from SelfEmployment Deductibility of Expenditure

1
Income from Self-Employment Deductibility of
Expenditure
Allowable expenditure must be incurred wholly and
exclusively for purposes of the trade

• Remoteness test
• excludes expenditure which has no connection with
  the trade
• Duality test
• excludes in principle, expenditure which serves
  both a business purpose and a private purpose
• but in practice only the private element is
  disallowed so long as the expenditure can be
  apportioned with reasonable accuracy

2
TRADING PROFITSBasic Principles (1)

• Expenditure must be incurred wholly and
  exclusively for the purposes of the trade
• Capital expenditure is never allowed
• Appropriations of profit are not allowed
• Specific rules are laid down by statute for
  allowing / disallowing certain items

3
Trading Profits - Basic Principles (2)

• Calculation of adjusted profits
• ordinary financial accounts of the trader are
  usedas a basis for calculating taxable profit
• Add back to net profit
• expenditure shown in the accounts but not
  deductible for tax purposes
• trading income not shown in the accounts
• Deduct from net profit
• expenditure deductible for tax purposes but not
  shown in the accounts
• non-trading income shown in the accounts

4
Trading Profits - Basic Principles (3)
Deductions for non-trading income shown in the
accounts

• Business property income (the old Schedule A)
• Interest (the old Schedule D Case III)
• Dividend income
• Profit on sale of fixed assets (capital)
• Decrease in general provision for bad debts

5
Trading Profits - Basic Principles (4)
Examples of allowable expenses

• Salaries, wages and pensions
• Payments and benefits taxed on employees
• Specific repair expenditure (not improvements and
  not capital)
• Specific provisions for bad debts
• Interest for purposes of the trade
• Hire purchase interest (not capital element)

6
Trading Profits - Basic Principles (5)
Examples of allowable expenses (cont)

• Advertising (not entertainment)
• Subscriptions to smallish charities which
  generate goodwill in the local community(not
  gift aid)
• Legal expenses of trading, e.g.
• debt collection
• normal audit and taxation work
• renewal of short leases
• defending title to or rights over assets

7
Income from Self-Employment
Disallowed expenditure-

• Capital expenditure
• Appropriations of profit
• Provisions
• Charges on income
• Entertaining and gifts
• Non-trade bad debts
• Criminal payments
• Fines and penalties

8
Trading Profits - Basic Principles (6)
Examples of capital items (disallowed)

• Depreciation
• Loss on sale of fixed assets
• Legal fees in respect of capital
• Goodwill written off
• Repairs to assets purchased in run-down condition

9
Adjustments-
Add back re sale of fixed asset
40 Deduct decrease in general provision for
bad debts, (400 - 300) (100)
10
Trading Profits - Basic Principles (7)
Examples of items specifically allowed by statute

• Patent registration fees
• Statutory redundancy payments
• Voluntary redundancy payments for up to 3 times
  the amount of the statutory minimum
• Payments for technical education of staff
• Salary of employees seconded to charity
• Approved professional subscriptions
• Incidental costs of obtaining loan finance

11
Trading Profits - Basic Principles (8)
Examples of items specifically disallowed by
statute

• Business entertaining, except -
• reasonable entertaining of staff
• Gifts to customers, except where each gift -
• costs not more than 50
• carries a conspicuous advertisement of the trade
• does not comprise food, drink or tobacco
• Political donations

12
Expensive Car Leases
e.g. rental 5,000 if purchased outright car
would cost 20,000