How to calculate your taxable profits

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Helpsheet 222

Tax year 6 April 2013 to 5 April 2014

How to calculate your taxable profits

Use this helpsheet to help you fill in the Self-employment pages of your personal tax return, or the Trading pages of the Partnership Tax Return and the Partnership pages of your personal tax return.

For information on:

• allowable business expenses, see page 6

• basis period – what it means, see page 10

• overlap profits, see page 12

• losses, see page 13.

To help you work out your taxable profits, you can choose to record money received (income) and money paid out (expenses) over the tax year, in one of the following ways.

• Cash basis accounting – record income when it actually comes in and goes out of your business.

• Traditional accounting (accruals basis) – record income and expenses when you invoice your customers or receive a bill.

Accounting periods

Your accounting date is the end date for your accounting period. This can be any day that you choose, for example, the anniversary of the date your business started, but you may find 5 April is the best date to pick as it keeps your tax calculation simple.

The beginning of your accounting period is usually the day after the end of your previous accounting period. For example, if you made your books up to 5 April 2013 last year, the date your books start this year will be 6 April 2013.

Cash basis

From the 2013–14 tax year, you can choose to start using cash basis.

This is a simpler way of working out your business profit or loss.

You record money when it actually comes in and goes out of your business.

If you use the cash basis:

• you only record income when it’s received

• you only record expenses when they’re paid

• payments for equipment, including vans, are allowable expenses

• a maximum of £500 is allowed as an expense for interest paid on cash borrowings

• any losses you make can’t be set off against your other income

• you can’t claim capital allowances for anything except cars.

You can use the cash basis if you are a self-employed business (sole trader or partnership) and your turnover is £79,000 or less for the year, (this is the threshold when you have to register for VAT). This increases to £158,000 if you claim Universal Credit.

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Contacts

Please phone:

• the number printed on page TR 1 of your tax return

• the SA Helpline on 0300 200 3310

• the SA Orderline on 0300 200 3610 for helpsheets

or go to hmrc.gov.uk/sa

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If you want to use the cash basis and you have more than one business, you must use the cash basis for all your businesses. The combined turnover of all your businesses must be below £79,000 for you to use the cash basis.

If you choose to use the cash basis or you are already using it, put an ‘X’

in the cash basis box on your Self-employment, Partnership pages or your Partnership Tax Return.

Talk to a chartered tax adviser, accountant or legal adviser if you need more help.

Limited companies, limited liability partnerships and the following specific types of businesses cannot use the cash basis.

• Lloyd’s underwriters.

• Farming businesses with a current herd basis election.

• Farming and creative businesses with a section 221 ITTOIA profit averaging election.

• Businesses that have claimed Business Premises Renovation Allowance.

• Businesses that carry on a mineral extraction trade.

• Businesses that have claimed research and development allowance.

Entering the cash basis

If you have an existing business and you are switching over to the cash basis, you might have to make some one-off adjustments to your tax in this period.

If this is your first tax period with self-employment income, you will not need to make any adjustments.

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The table below shows if you need to make an adjustment, and if so, how to make it.

When you need to make an adjustment How to do the one-off adjustment If your customers owed you money at the

end of the previous tax year, and you paid tax on that amount in that tax year, and your customers have now paid you in this tax year.

Take away the amounts owed to you from your total cash basis turnover for this current tax year.

If you owed money to your suppliers at the end of the previous tax year, and you received tax relief on that amount in that tax year, but you did not pay your supplier until this tax year.

Take away the amounts owed to your suppliers from your total cash basis expenses for this current tax year.

If you had a stock of items at the end of your previous tax year, but you did not get tax relief for the cost.

Add the cost of those items of stock to your cash basis expenses for this current tax year.

If you received money from your customers in the previous tax year (for example, payments made in advance of work done) that you did not pay tax on.

Add the amounts that your customers paid you (but you were not taxed on) to your total cash basis turnover for this current tax year.

If you paid money in advance for certain items in the previous tax year (for example, a subscription, or a deposit) that you did not get tax relief for.

Add the amounts that you paid to your suppliers (which you did not get tax relief for) to your total cash basis expenses for this current tax year.

If you paid in full for items of equipment, and you had a balance of capital allowances (see Capital allowances and balancing charges on page 13) still to claim on that equipment, at the end of your previous tax year.

Add the balance of capital allowances you can still claim, to your total cash basis expenses for this current tax year.

If you partly paid for items of equipment (for example, by instalments) by the end of your previous tax year, but you had claimed a different amount.

If the amount you partly paid was more than the capital allowances claimed, we treat the difference as an expense (increasing your total cash basis expenses) as a transitional adjustment for the current tax year.

If the amount you partly paid was less than the capital allowances claimed, we treat the difference as turnover (increasing your total cash basis turnover) as a transitional adjustment for the current tax year.

Partnership and cash basis

Partnerships can use the cash basis if the total partnership turnover is within the cash basis limits, see page 1.

Special rules for partners with other trading activities

If you are the controlling partner in your partnership (you have the right to more than one-half of the assets or more than one-half of the partnership income), you must add together the total turnover from the partnership and any other, separate, trading activities (businesses) that you have, to find out if you can use the cash basis.

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Contacts

Please phone:

• the number printed on page TR 1 of your tax return

• the SA Helpline on 0300 200 3310

• the SA Orderline on 0300 200 3610 for helpsheets

or go to hmrc.gov.uk/sa

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If you are not the controlling partner, you do not include the partnership turnover when working out if your other, separate, trading activities can use the cash basis.

If two partners own a partnership equally, there is no controlling partner.

Example 1

Jayne and Chris are joint (50/50) partners in a landscape gardening partnership.

The partnership’s turnover is £76,000 for the year ended 5 April 2014.

Jayne has a separate business dealing in rare orchids; the turnover for this business is

£45,000 for the same period.

Chris also has a separate business as a florist; his turnover for the same period is £160,000.

Jayne and Chris do not claim Universal Credit.

The landscape gardening partnership can use the cash basis, because the partnership turnover is below the £79,000 threshold for the tax year.

Jayne and Chris do not need to include any turnover from their separate businesses in the partnerships cash basis calculation, because there is no controlling partner.

Jayne’s rare orchids business can use the cash basis if she chooses, because the business turnover is below the £79,000 threshold.

Chris’s separate florist business must use traditional accounting to work out his business profits, because his turnover (for this business) exceeds the cash basis limits.

Income and expenses under the cash basis

Income

With cash basis, you only count money received in the tax year. You do not count money owed to you until you receive it.

Money received in any form counts, such as; cash, by card, cheque and payment in kind or any other method.

Expenses

If you use the cash basis you only claim expenses you actually paid out in the tax year. You do not count money you owe, until you pay it.

Records you must keep under the cash basis You must keep records of:

• money received (income)

• money paid out (expenses).

See Allowable business expenses, on page 6, for a full list of allowable and non-allowable business expenses.

Traditional accounting (accruals basis)

Traditional accounting is not the same as cash basis accounting. Cash basis records money when it actually comes in and goes out of your business, traditional accounting records income and expenses when you invoice your customers or receive a bill.

The following notes explain traditional accounting, but they are not a complete guide. If you need more information contact your tax adviser.

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Contacts

Please phone:

• the number printed on page TR 1 of your tax return

• the SA Helpline on 0300 200 3310

• the SA Orderline on 0300 200 3610 for helpsheets

or go to hmrc.gov.uk/sa

Records you must keep under traditional accounting

Records must include:

• all your sales and takings (income)

• all your purchases and expenses.

This might include:

• business assets you’ve bought (for example, stock or equipment)

• value of stock and work in progress at the end of your accounting period

• details of payments to employees (for example, wages, expenses or benefits)

• business vehicle and travel costs

• interest from any bank or building society accounts

• other money coming in, such as; money you invest in your business.

If you are using traditional accounting, only include business expenses in your accounts if they belong to that accounting period. If you make a payment which covers more than one accounting period, you need to spread that cost over the periods that they belong to. For example, if you pay 12 months’ rent in advance halfway through a year; only include half of the payment in that year’s accounts. Include the other half in the next accounting period.

See Allowable business expenses, on page 6, for a full list of allowable and non-allowable business expenses.

Cost of sales

This is the cost of any raw materials and goods bought for resale which you used during your accounting period. Use the Working Sheet below to help you work out how much you can claim. Don’t include:

• items received in your last accounting period, that you paid for in this accounting period

• the value of stock on hand and uncompleted work in progress at the end of the accounting period.

Working Sheet

Goods and raw materials you bought this period

(include items you still need to pay for) A £

Stock on hand and work in progress at the start of the period

(the closing figure used in your last accounts) B £

Box A plus box B C £

Stock on hand and work in progress at the end of this period D £

Box C minus box D (box E is the amount you can claim) E £

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Allowable business expenses

Use the table below to find out what you can claim. You can use Simplified expenses (flat rates) instead of actual business expenses, to work out business costs for vehicles, business use of your home or private use of business premises as a home (not both).

Category Allowable expenses Non-allowable expenses

Accountancy, legal and other professional fees.

Accountants, solicitors, surveyors, architects and other professional indemnity insurance premiums.

Legal costs of buying property and large items of equipment; costs of settling tax disputes and fines for breaking the law.

Advertising and business entertainment costs.

Advertising in newspapers, directories and so on mailshots, free samples, website costs.

Entertaining clients, suppliers and customers, hospitality at events.

Bank, credit card and other financial charges.

Bank, overdraft and credit card charges; hire purchase interest and leasing payments.

Alternative finance payments.

Repayment of the loans, overdrafts or finance arrangements.

Car, van and travel expenses.

Car and van insurance, repairs, servicing, fuel, parking, hire charges, vehicle licence fees, AA/RAC membership; train, bus, air and taxi fares; hotel room costs, meals on overnight business trips.

Non-business motoring costs (private use proportions); fines; costs of buying vehicles; travel costs between home and business; other meals.

Phone, fax, stationery and other office costs.

Phone, mobile, internet, email and fax running costs;

postage, stationery, printing and small office equipment costs; software.

If there is only insignificant private use of phone and internet, the whole cost of these services is allowable.

Non-business or private use proportion of expenses;

new phone, fax computer hardware or other equipment costs.

Construction industry – payments to subcontractors.

Construction industry subcontractor’s payments (before taking off any tax).

Payments for non-business work.

Cost of goods that you are going to sell or use in providing a service.

Cost of goods bought for resale, cost of raw materials used, direct cost of producing goods.

Cost of goods or materials bought for private use;

depreciation of equipment.

Depreciation and loss/profit on sale of assets.

See Capital allowances and balancing charges, on page 13.

Depreciation of equipment, cars and so on.

Losses on sales of assets (minus any profits on sales).

Insurance policy. Costs of any business specific policy.

Recoverable costs.

Interest on bank and other business loans (maximum

£500 interest for cash basis users).

Interest on bank and other business loans. Alternative finance payments. For cash basis users, the maximum amount you can claim is £500.

Repayment of the loans or overdrafts, or finance arrangements.

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Contacts

Please phone:

• the number printed on page TR 1 of your tax return

• the SA Helpline on 0300 200 3310

• the SA Orderline on 0300 200 3610 for helpsheets

or go to hmrc.gov.uk/sa

Category Allowable expenses Non-allowable expenses

Irrecoverable debts written off.

Amounts included in turnover but unpaid and written off (due to being unrecoverable). Not relevant if using the cash basis.

Debts not included in turnover; debts relating to fixed assets; general bad debts.

Other business expenses.

Trade or professional journals and subscriptions;

other sundry business running expenses not included elsewhere.

Payments to clubs, charities, political parties and so on;

non-business part of any expenses; cost of ordinary clothing.

Rent, rates, power and insurance costs.

Rent for business premises, business and water rates, light, heat, power, property insurance, security; use of house as office (business proportion only).

Costs of any non-business part of premises; costs of buying business premises.

Repairs and renewals for property and equipment.

Repairs and maintenance of business premises and equipment; renewals of small tools.

Repairs of non-business parts of premises or equipment; costs of improving or altering premises and equipment.

Wages, salaries and other staff costs.

Salaries, wages, bonuses, pensions, benefits for staff or employees; agency fees, subcontract labour costs;

employers’ NICs and so on.

Own wages and drawings, pension payments or NICs; payments for non-business work.

Simplified expenses

From 2013–14, you can start using simplified expenses if you are a sole trader or business partnership (including limited liability partnerships).

You do not need to be using cash basis to use simplified expenses.

Limited companies and partnerships that include a limited company cannot use the simplified expenses scheme.

Simplified expenses use flat rates, instead of actual business expenses, to calculate:

• business costs for vehicles

• business use of your home or private use of business premises as a home (not both).

All other expenses you have to calculate in the usual way.

You do not have to use simplified expenses. You can decide if it suits your business.

To find out if the simplified expenses scheme suits your business, go to www.gov.uk/simplified-expenses-checker

Records you must keep for simplified expenses

Depending on which flat rate(s) you choose to use, you need to record:

• business miles for vehicles

• hours you work at home

• how many people live on your business premises over the year.

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Business costs for vehicles (flat rate)

Simplified expenses allow you to work out your vehicle expenses, using a flat rate for mileage instead of the actual costs you paid for buying and maintaining your vehicle.

Vehicle 2013–14

flat rate per mile with simplified expenses

What you can claim if you don’t use simplified expenses

Cars and goods vehicles first 10,000 miles

45p Traditional accounting: Capital allowances and running costs.

Cash basis: Capital allowances and running costs (cars) or purchase costs and running costs (goods vehicles).

Cars and goods vehicles after 10,000 miles

25p Traditional accounting: Capital allowances and running costs.

Cash basis: Capital allowances and running costs (cars) or purchase costs and running costs (goods vehicles).

Motorcycles 24p Traditional accounting: Capital

allowances and running costs.

Cash basis: Purchase costs and running costs (goods vehicles).

Example 2

If you have driven 11,000 business miles over the year.

• 10,000 miles x 45p = £4,500

• 1,000 miles x 25p = £250

• Total you can claim = £4,750

You need to keep a record of the number of miles you travelled for business, but you do not need to keep track of your vehicle running and repair costs.

If you have used flat rates for a vehicle, you must stick with this as long as you use that vehicle for your business.

If you have already claimed capital allowances for a vehicle, you cannot use the mileage rate for it.

See Capital allowances and balancing charges, on page 13.

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Contacts

Please phone:

• the number printed on page TR 1 of your tax return

• the SA Helpline on 0300 200 3310

• the SA Orderline on 0300 200 3610 for helpsheets

or go to hmrc.gov.uk/sa

Business use of your home (flat rate)

Simplified expenses allow you to work out allowable expenses on using your home for business using a flat rate based on the hours you work from home each month (must be 25 hours or more).

Hours of business use per month 2013–14 flat rate per month

25 to 50 £10

51 to 100 £18

101 or more £26

You use your home for business if you are:

• providing the goods and/or service you supply from your home (this doesn’t include time when working at someone else’s premises)

• maintaining your business records at home

• marketing and time spent getting new business at home

Example 3

If you worked 40 hours from home for 10 months, and 60 hours for the other two months.

• 10 months x £10 = £100

• 2 months x £18 = £36

• Total you can claim = £136

Private use of business premises (flat rate)

A small number of businesses use their business premises also as their home, for example; if you run a guest house, bed and breakfast (B&B) or small care home. In this case, some of your business premise expenses will be for your own personal use.

Simplified expenses allow you to take off a monthly flat rate (for private use) for utilities, household goods and services, food, non-alcoholic drinks, and rent, from your total expenses. The flat rate depends on how many people (including non-paying guests) use the business premises each month, or part month, as a private home. The flat rate does not cover mortgage interest, council tax or rates. You need to work out the business proportion of these separately.

Number of people per month 2013–14 flat rate per month

1 £350

2 £500

3+ £650

Example 4

You and your partner run a B&B and live there the entire year. Your overall business premises expenses (utilities, food, household goods and so on) are £15,000.

• 12 months x £500 per month = £6,000

• Total you can claim is £15,000 – £6,000 = £9,000

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Example 5

You and your partner run a B&B and live there the entire year. Your child is at university for 9 months a year but comes back to live at home for 3 months in the summer.

• 9 months x £500 per month = £4,500

• 3 months x £650 per month = £1,950

• Total = £6,450

• Total you can claim is £15,000 – £6,450 = £8,550

Your basis period for 2013–14

You pay tax for 2013–14 based on the profits or losses for your basis period. After the first year or two in business, your basis period is the 12-month period you use for your accounts (except if you change your accounting date).

Your accounting period is the period your accounts cover and your

accounting date is the last day of your accounts. For example, if you make up accounts each year to 31 December, your accounting period for the 2013–14 tax year is 1 January 2013 to 31 December 2013 and your accounting date is 31 December 2013.

Use the following rules to help you work out your basis period (partnerships do not have basis periods).

General rules for businesses started in 2011–12 or earlier

If you started in business before 6 April 2012 and were still in business at 5 April 2014, your basis period is the 12 months to your accounting date in 2013–14 (unless you have changed accounting date during 2013–14, see Changes of basis period, on page 11. For example, you start your business on 1 January 2012 and you make up your accounts to

31 December 2012 and 31 December 2013, your basis period for 2013–14 is 1 January 2013 to 31 December 2013.

Commencement (business started in 2012–13)

If you started in business during the period 6 April 2012 to 5 April 2013, your basis period is (unless you have changed accounting date during 2013–14):

• the 12 months to your accounting date, if your accounting date in 2013–14 is 12 months or more after the date on which you started in business

• the 12 months beginning on the date you started, if your accounting date in 2013–14 is less than 12 months after the date on which you started in business

• 6 April 2013 to 5 April 2014, if you do not have an accounting date in 2013–14.

If you started in business on 1 January 2013, your basis period is:

• 1 April 2013 to 31 March 2014, if your accounting date is 31 March 2014

• 1 January 2013 to 31 December 2013, if your accounting date is 31 October 2013

• 6 April 2013 to 5 April 2014, if your first accounting date is not until 30 April 2014.

If you made up an account to 31 March 2013 but did not make up an account to 31 March 2014, see Changes of basis period, on page 11.

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Contacts

Please phone:

• the number printed on page TR 1 of your tax return

• the SA Helpline on 0300 200 3310

• the SA Orderline on 0300 200 3610 for helpsheets

or go to hmrc.gov.uk/sa

Business started in 2013–14

If you started in business during the period 6 April 2013 to 5 April 2014, your basis period is from the date you started to 5 April 2014. For example, if you started in business on 1 July 2013, your basis period is 1 July 2013 to 5 April 2014.

Cessations

If your business ceased during 6 April 2013 to 5 April 2014, your basis period is between the end of the basis period for 2012–13 and the date on which your business stopped. For example, if you stopped trading on 31 December 2013, your 2012–13 basis period ended on 30 April 2012.

Your basis period is the 20-month period 1 May 2012 to 31 December 2013.

Changes of accounting date

There is a change of accounting date if you:

• made up your accounts to a date different from the date used last year

• are going to make up your accounts for more than 12 months, and no accounting date falls in the 2013–14 tax year

• changed your accounting date last year, but this was not agreed by us, and you have made your accounts up to the same date this year (if you changed back to your old date, this is not a change of accounting date).

Changes of basis period – special rules which apply if you change your accounting date

The following rules will apply.

• If your accounting date in 2013–14 is more than 12 months after the end of the basis period for 2012–13, your basis period is the period between the end of the basis period for 2011–12 and the new accounting date.

For example, the basis period for 2012–13 ended on 31 May 2012 and the new accounting date is 31 August 2013. Your basis period is the 15-month period 1 June 2012 to 31 August 2013.

• If your accounting date in 2013–14 is less than 12 months after the end of the basis period for 2012–13, your basis period is the 12 months ending on the new accounting date. For example, the basis period for 2012–13 ended on 31 December 2012 and the new accounting date is 31 July 2013. Your basis period is the 12-month period 1 August 2012 to 31 July 2013, see Overlap profits, on page 12.

If you are unsure if your accounting date has changed in line with the above rules, contact your tax adviser for help.

Conditions for change of accounting date

The following conditions apply if you want to change your accounting date from year four onwards.

• You must tell us about the change in your tax return, and send it back by the relevant filing date.

• The first accounts, to the new accounting date, must not be more than 18 months, and you must tell us why you made the change.

• If you changed accounting date in any of the previous five tax years, this change must be for a genuine commercial reason (obtaining a tax advantage is not a commercial reason).

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What to do if your basis period is not the same as your period of account

If your basis period for 2013–14 is different from the period, or periods, to which you make your accounts up, you must work out your profit by adding together and/or dividing the periods for which you have accounts.

For example, your business started on 6 April 2013 and your basis period is the 12 months to 5 April 2014. Your accounts are for the three months to 30 June 2013 (profit £4,500) and the 12 months to 30 June 2014 (profit

£24,000). So your basis period covers three months of your 2013 accounts and nine months of your 2014 accounts.

The profit for the basis period will be: £4,500 + (280/365 x £24,000) = £22,910.

Accounting dates between 31 March and 4 April

The basis of assessment for the tax year in which a business starts (year one) is usually the profits arising in that tax year. But if a new business chooses an accounting date between 31 March and 4 April, the accounts for the opening years are looked on (unless you elect otherwise) as being made up to 5 April.

This means that the profits of the account to 31 March or 1, 2, 3 or 4 April each year will be taxed as though they were for the period to the following 5 April.

For businesses which start in the period 1 to 5 April, the taxable profits for year one will be zero. This will not affect anything else which depends upon the date, or tax year your business starts.

You may also treat a change of accounting date where the new date is 31 March or 1, 2, 3 or 4 April as though it was a change to 5 April.

All previous overlap profits will then be deductible in the year that the change takes effect.

Talk to your tax adviser if you need more help.

Overlap profits

You may find that your basis period for 2013–14 overlaps with the basis period for 2012–13.

Such overlaps can happen in the first three years after a business starts up or in a year in which there is a change of basis period. For example, if

your business started on 1 January 2013 and your first accounts are for the 12 months to 31 December 2013, your basis periods are:

• 2012–13, 1 January 2013 to 5 April 2013

• 2013–14, 1 January 2013 to 31 December 2013.

The period of overlap is 1 January 2013 to 5 April 2013. So, if the profit for the 12 months to 31 December 2013 is £12,000, the overlap profit is (96/365 x £12,000) = £3,156 (over 96 days).

If your basis periods for 2012–13 and 2013–14 overlap, keep a record of both the overlap profit and the overlap period and any overlap profit you have carried forward where you have not yet claimed overlap relief.

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Overlap relief used this year – box 69 on the Self-employment (full) pages (or box 13 of the Partnership pages)

You must take off (as overlap relief) any overlap profits which arose in 2012–13 or earlier years when working out your taxable business profits for 2013–14 if:

• you sold or closed down your business in 2013–14 (put all overlap profits brought forward in box 69 on page SEF 4 (or box 13 if you are filling in the Partnership pages)

• your basis period for 2013–14 is more than 12 months long because you changed your accounting date. The amount of overlap profits allowed as overlap relief is in proportion to the length of your basis period that exceeds 12 months and the length of your overlap period from earlier years.

For example, you have overlap profits of £5,000 (over five months) from an earlier year. You change your accounting date. Your basis period is

14 months. There are five months of overlap profits available. The relief is in proportion to the number of months by which the basis period exceeds 12 months (that is, two months) and the length of the overlap period (that is, five months).

So, the overlap relief is:

2/5 x £5,000 = £2,000.

The balance of overlap profit, £3,000 (over three months), is carried forward. You can claim this as overlap relief in a later year.

Capital allowances and balancing charges

When working out your business profits don’t take off the cost of buying or improving items such as a car, equipment or other tools that you use in your business or the depreciation or any other losses which arise when you sell them. Instead, you can claim tax allowances called capital allowances. You take off the allowances from your profit to find your taxable profits, or add them to your losses to get your allowable loss.

Usually, anything you use that has a useful economic life of at least two years may qualify for capital allowances.

Capital allowances do not apply to items that you buy and sell as part of your trade; these items are included in business expenses.

If you have capital allowances, an adjustment, known as a balancing charge, may arise when you sell an asset, give it away or stop using it in your

business. We add the balancing charge to your taxable profits, or take them off your losses, in the year they occur.

If you are using the cash basis, you can only claim capital allowances on cars. The cost of all other equipment and vehicles is an allowable expense in working out your business profits.

For more information go to Helpsheet 252 Capital allowances and balancing charges.

Losses – terminal relief

If your business stopped in 2013–14 and you made a loss in your final 12 months of trading, you can claim terminal loss relief against your profits from the same trade profession or vocation taxed in 2013–14.

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Contacts

Please phone:

• the number printed on page TR 1 of your tax return

• the SA Helpline on 0300 200 3310

• the SA Orderline on 0300 200 3610 for helpsheets

or go to hmrc.gov.uk/sa

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If any terminal loss remains you can use the balance against your profits from the same trade, profession or vocation for up to three earlier years.

The time limit for your claim is 5 April 2018.

For more information go to Helpsheet 227 Losses.

How to calculate your terminal loss

The amount used for unused overlap relief in the following examples is £2,000.

Twelve month period

The terminal loss is the allowable loss plus any unused overlap relief.

Example 6

Your 2013–14 accounts cover a period of 12 months.

Allowable loss (for 12 months) £4,000

Plus

Unused overlap relief £2,000

Terminal loss to claim £6,000

More than 12 months

The terminal loss is a 12-month proportion of the allowable loss, plus any unused overlap relief.

Example 7

Your 2013–14 accounts cover 15 months, and your allowable loss is £5,000.

Allowable loss £5,000 divided by 15 months x 12 months = £4,000

Allowable loss (for 12 months) £4,000

Plus

Unused overlap relief £2,000

Terminal loss to claim £6,000

Less than 12 months

The terminal loss is the loss from 6 April 2013 to the date the business ceased trading, plus any unused overlap relief, and loss for the 12 months up to 5 April 2013.

Example 8

Your accounts cover the eight months: 6 April 2013 to the date the business ceased

30 September 2013 (six months), and 1 February 2013 to 5 April 2013 (three months trading) from the previous accounting period.

Allowable loss: 1 February 2013 to 5 April 2013 £2,000 Allowable loss: 6 April 2013 to 30 September 2013 £6,000 Plus

Unused overlap relief £2,000

Terminal loss to claim £10,000

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If you have already claimed relief for any part of the losses, then you must reduce the terminal loss by the amount of relief already claimed. This is because you can only claim relief once for each £1 of loss.

Your terminal loss must be set against any profits (after deducting losses brought forward) from the same business taxed in 2013–14. If these are zero, it must be set against profits from the same business taxed in 2012–13.

Once reduced to zero, any balance of the terminal loss must be set against the profits of the same business taxed in 2011–12. Finally, if there is still

a balance, this must be set against the profits of the same business taxed in 2010–11.

Put the amount of terminal loss relief you are claiming against your 2013–14 profits in box 74 on page SEF 4 or box 17 on the Partnership pages. This is in addition to any other losses you are bringing forward from earlier years;

don’t count the same loss twice.

Put the total amount of terminal loss relief for 2010–11, 2011–12, or 2012–13 in box 79 on page SEF 4 or box 23 on the Partnership pages.

Give details of the amount carried back to each year in box 103 ‘Any other information’, on your Self-employment (full) pages or in box 19 ‘Any other information’, on your tax return.

Partners’ trading or professional profits

The basis period and overlap rules are set against your share of the

partnership’s trading and professional profits (or losses) as if that income had arisen from a trade you carried on as a sole trader.

This starts on the date you became a partner (unless you had carried on the same business yourself), and stops on the date when you ceased being a partner (unless you had carried on the same business yourself, afterwards).

Example 9

The partnership started trading on 1 October 2011 and makes up its account to 30 September. You stopped being a partner on 31 December 2013.

Your share of trading profits will be:

year ended 30 September 2012 £12,000

year ended 30 September 2012 (A) £18,000

year ended 30 September 2013 (B) £7,000

Your basis periods for each fiscal year and the overlap relief to which you are entitled are as follows.

2011–12: 1 October 2011 to 5 April 2012 profits £6,000 2012–13: 1 October 2011 to 30 September 2012 profits £12,000 (Overlap period 6 months: overlap profits) (C) £6,000 2013-14: 1 October 2012 to 31 December 2013 profits (A + B) £25,000 Minus

Overlap relief (C) £6,000

Taxable profit (D) £19,000

In the Partnership pages, enter

• £18,000 in box 8

• £7,000 in box 9

• £6,000 in box 13, and

• £19,000 in boxes 16, 18 and 20.

If you are unsure how the basis rules apply to you as a partner, ask your

A

Contacts

Please phone:

• the number printed on page TR 1 of your tax return

• the SA Helpline on 0300 200 3310

• the SA Orderline on 0300 200 3610 for helpsheets

or go to hmrc.gov.uk/sa

(16)

Other partnership income

If the partnership carried on a trade or profession in 2013–14 the basis period depends on whether the partnership income had tax taken off.

You are treated as a ‘notional’ business (sole trader) for any untaxed

partnership income. The same basis period and overlap rules applied to your share of the partnership’s trading or professional profits are applied to the

‘notional’ business.

For this purpose you treat the ‘notional’ business as commencing on the date you became a partner and ceasing on the date you stopped being a partner.

If you are entitled to overlap relief from your ‘notional’ business, it is first set against any other untaxed income (regardless of the source it came from) and any balance given as a deduction against any other income of that year.

For your share of the partnership’s ‘taxed income’, your basis period is the period 6 April 2013 to 5 April 2014.

If the partnership did not carry on a trade or profession in 2013–14, the basis period for both ‘untaxed’ and ‘taxed’ income is 6 April 2013 to 5 April 2014.

These notes are for guidance only and reflect the position at the time of writing. They do not affect the right of appeal.

Figure

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References

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