	Non- Savings	Savings	Dividend	Total
	£	£	£	£
Trading Income (CYB Accruals)	X			X
Employment income received	X			X
Savings income (Received)		X		X
Dividend income (Received)			X	X
Property income (Received)	X			X
Net income	X	X	X	X
Less Personal Allowance	(X)	(X)	(X)	*(12,500)**
Taxable income	X	X	X	X

Income Tax Rates

On non-savings income:
At 20% then 40% then 45%	X
On savings income (after personal savings allowance Note 2)
At 0% then 20% then 40% then 45%	X
On dividends (after dividend allowance Note 3)
At 0% then 7.5% then 32.5% then 38.1%	X
Income tax liability for the year	X
Less: PAYE tax deducted Payments on Accounts	(X) (X)
Income tax due by self-assessment 31/01/21	X

Exempt income: Not included in computation

National savings certificate (NSC) interest
Rent a room relief £7,500
ISA income (dividends and interest)
Winnings e.g. premium bond prizes
Statutory redundancy payments
Scholarships

Rates Of Tax

	Non-savings	Savings	Dividends
Personal savings allowance (Note 2) Dividend nil band on £2,000 (Note 3)		0%	0%
Basic rate band to £37,500	*20%*	*20%*	*7.5%*
Higher rate band to £150,000	*40%*	*40%*	*32.5%*
Additional rate over £150,000	*45%*	*45%*	*38.1%*

Personal Allowance (See Tax Tables)

£12,500 per annum even to children
Reduced by claw back* if adjusted net income > £100,000
If adjusted net income > £125,000 PA is nil
No c/f or c/b: use it or lose it

*Claw back by £1 for every £2 above limit of £100,000

Married Couples And Civil Partnerships

Joint income is split 50:50 Irrespective of actual entitlement.

(If interests are unequal & couple declare actual entitlement to HMRC they can split in the actual proportions rather than 50:50).

Trading Income

Step 1: Adjustments to profit

Net profit per the accounts	X
Add: Disallowable expenses (Not wholly & exclusively e.g. client entertaining, political donations Or capital in nature e.g. depreciation, capital in repairs)	X
Less: Income not taxed as trading income (E.g. Property Income, Interest or exempt Income)	(X)
Add: Income not in accounts (e.g. goods taken for own use)	X
Less: Expenses not in accounts (expenses borne privately)	(X)

Step 2: Deduct capital allowances

Less: Capital Allowances on plant and machinery	(X)
Adjusted trading profit	(X)

Step 3: Basis periods: Allocate adjusted profit to tax years

This is normally done on a current year basis (CYB). This means that the profits of a 12-month accounting period whose balance sheet date ends in the tax year is taxed.

So, if accounts end on 31/12 each year then in 2019/20 the profit for year ended 31/12/19 is taxed.

If accounts end on 31/3 each year, the year ended 31/03/20 will be taxed in 2019/20.

Note: In opening and closing years profits are allocated differently ( see page 8).

STEP ONE: Adjustments to profit

The General Principle:

Revenue expenditure is allowed if wholly and exclusively incurred for trade purposes but capital expenditure is disallowed as relieved via capital allowances instead (step two).

Therefore, DISALLOW capital transactions and any revenue transactions that fail the wholly and exclusively rule.

Common disallowable expenditure:

Personal expenditure and appropriation of profits:

(1) Salary of proprietor (2) Tax/NIC of proprietor e.g. Class II and IV NIC’s (3) The sole trader’s private proportion of expenses borne by the business (4) Dual expenses e.g. clothing and food (5) sole traders Drawings or salary

Capital:

(1) Depreciation (2) Loss or profit on sale of asset (3) Legal expenses re capital items (4) Capital in repairs accounts (5) taking out a new lease or renewing a long lease

Entertaining

Disallow customer entertaining (but staff entertaining and gifts are always allowable)

Gifts to customers or suppliers

Disallow unless – cost <£50, have logo and must not be food/drink/tobacco. Trade samples are allowable though.

Political donations
Fines, fraud
General provisions – movement
National Donations (small local donations are allowable)
Lease car rentals if lease charge relates to a high emission car (over 130g/km) 15% disallowance
Short lease premium (<50 years disallow capital) but

(Page 15) allowable amount each year being P-2%(n-1) P

Tax relief is only given on the business proportion of expenses so if a sole trader uses an asset personally the personal use proportion of the asset’s expense is added back in step 1. When claiming CAs on the asset only the business proportion of the CAs is allowed in step 2.

STEP TWO: Capital Allowances On Plant And Machinery

Proforma: computation claim for the accounting period:

Period of accounts	Main Pool	Special Rate Pool	Private Use Asset	Bus. Use 80%	Allow.
	£	£	£	£	£
TWDV b/f	X	X	X
Additions – NO AIA (cars)	X	X
Additions – qualifying for AIA
Purchases X £1M pa Max (X) X	X	X			X
Disposal proceeds (or cost if lower)	(X)	(X)
TWDV	X	X	X
WDA @ 18%	(18%)				X
WDA @ 6%		(6%)			X
WDA @ 18% / 6%			(X)	@ 80% Bus. Use	= X
TWDV c/f	X	X	X
Total allowances for accounting period					X

Deduct total capital allowances for the accounting period from the adjusted profit from step 1.

STEP THREE: Basis periods

Opening Traders:

In the opening year of trade CYB will not apply unless the trader has chosen 31 March or 5 April as the balance sheet date. The rules used are as follows:

1st tax year of trade:

Actual basis

Tax profits from start date to 5^th April

2^nd tax year of trade:

CYB if valid

(if opening period is long or short then CYB may not be valid – this will not be tested)

3rd tax year of trade:

CYB if valid or 12 months

Overlap of profits will arise unless a 31 March or 5 April year end is selected. Relief for this is given in the final tax year when the overlap is deducted.

Closing traders:

The final tax year is the tax year in which trade ceases. The years before the final tax year use the CYB rule. The final assessment catches any profits not taxed less the overlap relief from opening.

Final year:	Balance of profits less overlap
Penultimate year:	CYB

E.g. Harry opens 1 May 2016 and prepares accounts to 30 April 2017 £24,000 and year ended 30 April 2018 £30,000 but Harry closes on 30 April 2019 declaring £ 25,000 profits. Note Harry has earned £79,000 in total.

1st tax year 2016/17	Actual basis From start date to 5th April 11/12 x 24k = £22,000
2^nd tax year 2017/18	CYB if valid Taxes profits for y/e 30 April 2017 = £ 24,000
Penultimate year 2018/19	CYB Taxes profits for y/e 30 April 2018 = £30,000
Final year 2019/20	Balance of profits less overlap £25,000 less £22,000 overlap = £3,000
	TOTAL TAXED £79,000

Partnerships

Individuals in a partnership are a collection of sole traders. The business is taxed in the income tax computations of each individual partner and therefore an extra step is required to share the business profits between the individual partners.

STEP ONE: Adjust the net profits per the accounts of the whole business

STEP TWO: Calculate capital allowances for the accounting period of the partnership and deduct from the adjusted profit for the whole business.

EXTRA STEP: Share the business profits between the partners

Allocate salaries and interest paid on capital accounts to each partners
The balance of the trading profit is shared on the basis of the profit sharing agreement.
The total allocated to each partner is their taxable trading income.

STEP THREE: Tax each partner according to the relevant basis period rules that apply to their individual circumstances:

New partners joining – tax using special opening year rules.

Existing on-going partners – tax on the CYB.

Retiring partners leaving – tax on the special closing year rules.

E.g. Tom, Dick and Harry have been in partnership together for many years. Tom retires and is replaced by Edmund.

Edmund new partner joining – tax using special opening year rules.

Dick and Harry on-going partners – tax on the CYB.

Tom is leaving – tax on the special closing year rules.

Trading Losses of a sole trader

Net Profit/Loss for the period	X/(X)
Adjustments to profit e.g. add back depreciation	X
Less Capital Allowances	(X)
Trading Income Loss	(X)

Note: trade profit figure in computation is NIL

Tax Planning

Try to minimize tax payable
Best possible cash flows
Minimize wasted allowances and reliefs

Options For Loss Relief In Continuing Trades:

Current Year And/Or Carry Back Claim

Set against Total Income before PA

Current tax year and/or previous tax year
All/nothing claim (PA may be wasted)

Carry Forward Of Trade Losses

Any remaining loss is carried forward
Set against first available trading profits from same trade
Automatic and compulsory offset once carried forward

Employed v Self-employed

Determination of status depends primarily on the “wording” of the contract

contract for services indicates self-employment
contract of service indicates employment status

Other factors/criteria that HMRC will consider in the absence of a contract:

Control Test: Employees are controlled by their employer e.g. hours of work, method and place of work
Economic Reality Test (employees pay class 1 NIC’s and are entitled to holiday pay, sick pay)
Integration Test: An employee normally holds an integral position whereas self-employed contractors are used for peripheral tasks
Financial risk: Employees gets a regular pay but self -employed bear the risk and reward of profits
Mutuality of obligations to provide work and undertake work indicates employed status
Equipment provided by employers for employees self-employed contractors use their own tools and equipment
Exclusivity indicates employed status

Tax implications

	Self-employed (OWN BOSS)	Employee
How taxed & Deductibility of expenses	· Trading income earned (accruals) taxed CYB · Expenses: ‘wholly and exclusively for trade’	· Employment income received in the tax year · Expenses: ‘wholly exclusively and necessarily in performance of duties’
Payment of income tax	Tax Year 2019/20: · 31 January 2020 POA 50% Estimate · 31 July 2020 POA 50% Estimate · 31 January 2021 balance tax	Monthly – PAYE
Pensions	Personal pension scheme is the only option available	Occupational pension scheme or personal pension scheme

Employment Income

Proforma Working £

All Cash receipts:
Salary/bonus/commissions/tips/reimbursed mileage	X
Benefits in kind (Working)	X

Less allowable deductions:
Occupational pension scheme contributions (up to 100% relevant earnings max £40,000)	(X)
Contributions to a payroll giving scheme GAYE	(X)
Professional subscriptions	(X)
*Authorised mileage allowance if drives own car for business mileage	(X)
Out of pocket expenses if in performance of duties “Wholly, exclusively and necessarily incurred”	X
Employment Income	X

*Authorised Mileage Allowances (see tax tables)

Employees driving their own vehicle for business purposes are allowed a tax free allowance as listed in the tax tables. Payments above the rates (45p or 25p) become taxable and below the rates employees claim the extra relief.

Employment Benefits Working (See Table next page)

Benefits are calculated for the entire tax year. If an employee has the benefit for part of the year it is time apportioned accordingly. Any payment made by the employee in respect of the benefit to his employer will reduce the assessable charge.

[Benefit] pa (table) x n/12 – Employee contribution to perk (unless fuel)

UNLESS Exempt Benefits: Tax free perks

Job-related accommodation
Subsidised canteen available to all staff
Car parking (at or near place of work)
Bicycles to get to work
Workplace nursery
Employer’s pension contributions
Removal and relocation costs (up to £8,000)
Mobile phones (one per employee)
Loans <£10,000 are tax free

Summary of Annual Benefit in Kind Rules

[Benefit] pa (table) x n/12 – Employee contribution to perk (unless fuel)

Perk

P9D

P11D Employees (> £8.5k) all directors unless charity

Gift of asset

2^nd hand value

Marginal Cost to the employer of providing perk

Use of asset

N/A

20% X MV (at 1^st use)

Watch for furniture in house

Cheap loan

Interest

N/A

If loan < £10K for the whole year: ignore benefit

Average Method is used normally

(opening + closing)/2 x (OR-rate paid)

OR = official rate of interest (tax tables)

Co. Car &

Private Fuel

N/A

Petrol Car: % x List Price(new)

Diesel Car (extra 4%): % x List Price (new)

Extra 4% not applicable to RDE2 or hybrid cars

If private fuel uses same % x £24,100 (tables)

JRA

Exempt

Job Related Accommodation is tax free

(if necessary, for security reasons or customary)

Non JRA

House

Living Costs

As per

P11D

N/A

Higher of annual value or rent paid by employer +

+ expensive house extra charge: (cost* -£75K) x OR%

*(replace cost with MV at date employee moves in if house >6yrs old) cost includes all capital incurred prior to the start of the tax year

Living expenses are marginal cost to Employer

(Limited to 10% net emoluments if JRA)

Tax Efficient Investments: Pensions

To encourage individuals to save for their retirement tax relief is given on payments to a pension fund whether it is a personal fund or an occupational fund as follows:

Maximum tax relievable gross contributions are higher of

£3,600 and
100% of UK relevant earnings

Subject to an overriding limit the Annual Allowance (£40,000). Maximum input into the pension scheme for which tax relief is received.

Pensions Schemes

Personal Pension Scheme

Occupational Pension Scheme

Available to employees or sole traders (and also non-earners)

Available to those in employment where the employer operates an approved scheme.

Maximum contributions which will attract relief is higher of:

1. £3,600 (gross) or

2.100% of Relevant Earnings

Capped at the annual limit

Maximum contributions which will attract relief is higher:

1. £3,600 (gross) or

2.100% of Relevant Earnings

Capped at the annual limit £40k

UK Relevant Earnings (NRE):

Trading income (net of losses) X

Employment income X

Furnished holiday lettings X

(Capped at the annual limit of £40k)

UK Relevant Earnings will be employment income.

(Capped at the annual limit of £40,000)

20% tax relief is given at source by fund manager reclaiming basic rate income tax. If taxpayer is a basic rate taxpayer then no adjustment is needed in the computation as relief given already.

Higher rate taxpayers get the extra tax relief by extending the basic rate band by the gross amount of the pension contribution.

Employees obtain tax relief at source through the payroll.

Employment income in the computation is reduced by the gross pension contribution.

Employer’s contributions

No benefit in kind for employee i.e. a tax-free perk
Allowable deduction from employer’s trading profits

Property Income

Proforma working on pool basis

	£
Rental income on cash receipts basis	X
A proportion of premium on grant of short lease	X
Less: revenue expenses wholly & exclusively incurred for business of renting	(X)
Less: replacement cost of furniture (if furnished)	(X)
Net Property Income	X

Premium on short leases

The proportion of the lease premium (P) assessed on a landlord as rental income is P – 2% (n-1) P where n = number of years of the lease and P = premium received by the landlord.

Rent a Room Relief

Only available in respect of rental of rooms in your main residence:

If rental income > £7,500 then deduct either the expenses or £7,500
If rental income < £7,500 then not taxable

Capital Expenditure

There is no relief for the original cost of buying furniture or white goods however when they are replaced the landlord can claim relief for the replacement cost. If the item being replaced is superior in quality, the extra cost of the upgrade will be disallowed. Only the replacement value of an item of the same standard can be claimed.

Rental Losses

Used in pool and if total pool is a loss then must carry forward and set against future property income only. No carry back of rental losses is allowed.

National Insurance Contributions(NICs)

(See rates on tax tables)

Class 1 – Primary

Paid by Employees – from age 16
Based on gross cash earnings
Subject to upper earnings limit
Reduces spendable income
Payable under PAYE

Class 1 – Secondary

Paid by Employers – on employees age 16 +
Based on gross cash earnings
No upper limit
Allowable deduction from trading Income
Payable under PAYE

Class 1A

Paid by Employer only at 13.8%
Based on benefits in kind of Employee
Allowable deduction from trading Income
Payable 19 July following tax year

Class 2

Self-employed aged 16 to 60/65
£2.95 per week (subject to small earnings exception limit)
Usually paid monthly by direct debit

Class 4

Self-employed aged 16 (at start of fiscal year)
9% on trading Income profits between limits
Paid with income tax under self-assessment

Income Tax Self-Assessment 2019/20

Submission of returns for tax year 2019/20

Paper returns – file by 31.10.20 – HMRC will calculate the tax
Electronic returns – file by 31.1.21 – taxpayer calculates the tax

Payment of tax for 2019/20

Payments on Account (POA) required if income received gross:

31 January 2020

31 July 2020

Final payment of 2019/20 income tax due: 31.01.21

No payments on account required if tax collected at source

e.g. PAYE or untaxed income is small.

Notification of new source of income

By 5 October following the tax year (i.e. 5.10.20 for 19/20) unless already completing a tax return

Penalties

Submission Late

Late return automatic £100

Notification of new source of income late

Late notification 100% of outstanding tax

Late payment of tax

Late payment of tax – interest from due date to day before date paid

Capital Gains Tax Scope

Chargeable Disposal

Of A Chargeable Asset

By A Chargeable Person

Sale or gift of asset

All assets except :

· Motor cars

· Gilts and QCBs.

· Wasting chattels

· Chattels <£6,000

· NSCertificates

· Premium Bonds.

· Cash

· Shares in ISA

UK Resident

All individuals qualify for an annual exemption of £12,000 and gains are then taxed at 10% up to the end of the basic rate band (used by taxable income first) and the balance at 20% unless they relate to residential property.

Residential property gains are taxed at 18% up to the end of the basic rate band and the balance at 28%.

Proforma for fiscal year: Use of losses

Asset	Chargeable gains
Gain 1	X
Gain 2	X
Current year loss	(X)
Net gains	X
Less A/E	(12,000)
Loss brought forward losses	(X)

Taxable gain at 10% then 20% if non-residential and 18% and 28% if residential gains	X

CGT is due 31 January following end of tax year.

Capital losses

Must use against current year gains first
Then carry forward against future gains (use after the annual exemption)

Calculation Of Single Asset Gain/Loss For Individuals

	£	£
Gross sale proceeds (market value if gift)		A
Less Incidental costs of sale		(X)
Net sale proceeds		Net
Less Allowable expenditure: Original base cost (MV when acquired) Costs of acquisition Enhancement expenditure	X X X	(Cost)
Chargeable Gain		Gain

Part Disposals

If part of an asset is disposed of the sale proceeds are for part of asset \ cost allocated must also represent that part. This is computed as:

Cost x	A
	A + B

A = Gross Proceeds (MV of part sold)

B = Market value of remainder

Chattels: Tangible Moveable Property

There are two types of chattels:

Wasting are Exempt

Non-Wasting subject to rules below

Expected life < 50 years

Expected life > 50 years

racehorse

greyhound

antiques

jewellery

paintings

Non Wasting Chattels Rules (antiques)

Cost

Proceeds

< £6k

> £6k

< £6k

Exempt

Loss restricted

Goss proceeds are deemed to be £6,000

> £6k

Gain is lower of:

– Normal gain

– 5/3 [Gross proceeds – £6,000]

Normal gain

Connected persons

Proceeds = market value
Loss on disposal can only be used against gains made to same connected person

Husband and Wife / Civil Partners

No gain no loss rule: Used for Tax Planning
This allows use of both A/E’s as assets can move inside a marriage

Capital Gains Tax Reliefs

1a. Principal Private Residence (PPR)

Gains are fully exempt when covered by PPR relief; if occupied by the taxpayer as his main residence for the whole period of ownership. The relief covers the house and garden.

Otherwise:

Calculate gain then relief claimed is:

PPR = GAIN X Period of occupation

Period of ownership

Deemed periods of occupation include:

(a) Last 18 months of ownership Unconditional

(b) 3 years any reason Must be preceded/

(d) 4 years working in UK occupation*

*If prevented from returning to residence due to work related reasons the requirement is waived.

Note each individual is entitled to one PPR and a married couple can only have one between them.

1b. Letting Relief (only available with PPR)

If the main residence is let during a period of absence a further claim can be made for letting relief to cover the gains on the main residence. Note letting relief can only be used on the gain not covered by the PPR relief.

The Letting exemption is the lower of

PPR relief claimed
Maximum (£40,000)
The chargeable gain, not covered by PPR that relates to the period of letting.

Entrepreneur’s Relief

A reduced rate of 10% capital gains tax is available for individuals who have created wealth in a business and then dispose of the business assets. It is available to individuals who sell the whole of their sole traders business or on sale of shares they own in a personal company (if they owned more than 5% of the company & are an employee).

Conditions

Must have owned business for a minimum 1 year before date of disposal (for shares also need to be employed for a minimum of 1 year)
Only available on business assets
There is a £10,000,000 lifetime limit

Investor’s Relief

An extension of entrepreneurs’ relief.

A reduced rate of 10% capital gains tax applies to a further £10,000,000 gains as long as they are gains on newly issued unquoted trading shares. There is no minimum requirement on the number of shares and the investor should not be an employee.

Conditions:

Must have owned shares for a minimum 3 years before date of disposal
Only available on unquoted trading shares
There is a £10,000,000 lifetime limit

Gift Relief (holdover relief) on business assets

Available to individuals on the outright gift of qualifying business assets only

Conditions

Business assets (assets used in donor’s trade or personal company (must hold ³ 5% voting rights))
Unquoted shares/shares in donor’s personal company (trading company)
Joint claim required

Procedure

Calculate gain(s): consideration = MV

Gift relief applies to defer gain by deducting from donee’s base cost.

Rollover Relief: Replacement of business assets

Available when a trading asset is sold and the proceeds are then reinvested in a replacement business asset. Both assets must be used in the taxpayer’s trade. The gain is deferred until the replacement asset is sold or until the business ceases.

Conditions:

Qualifying assets:

Land and buildings used in trade

Goodwill

Fixed plant and machinery used in trade

Time limit:

Reinvest within 12 months before ® 3 years after original disposal

Steps:

Gain on asset 1

Rollover relief
(Balancing Figure)

(X)

Proceeds not reinvested are

Chargeable immediately

Rollover Relief: The allowable cost of the replacement asset is reduced by the amount of the gain rolled over.

Depreciating assets

When the replacement asset is a depreciating asset (i.e. life of no more than 60 years), the gain is frozen rather than rolled over indefinitely.
Calculate gain on the original asset.
This gain crystallizes on the earliest of the following 3 dates:
- Disposal of replacement
- 10^th anniversary of acquisition of replacement
- Date replacement ceases to be used in the trade

Description

Business Taxation, Revision Notes

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