#3202 - Taxation For Soletraders & Partnerships

Business Accounts

1. Taxation: Sole traders

Income Tax / Capital Gains

Tax year calendar: 6^th April 2010 – 5^th April 2011 = Tax year 10/11

Often businesses choose accounting period on Calendar basis: 1^st January – 31^st December

Current year rule	Wherever the ‘accounting period’ end date is [i.e. 31^st December 2011], profit generated in the previous 12 months are subject to tax year in which the end date falls. Accounting period 1^st Jan 11 31^st Dec 11 (10,000) ---I------------------I----------------------------------I-----------------I---------------- 6 April 11 5^th April 12 Tax Year 11/12 Dec 31^st: profits = 10,000 = Tax year 11/12 = 10,000 (December 31^st 11 ends in Tax year 11/12)
Opening year rule	FIRST YEAR Profits are taxed from the date of commencement to the next 5^th April Tax Year which commencement date falls within 1^st Jan 11 31^st Dec 11 (10,000) ---I----------------------------------I-----------------------I 5 April 11 Commencement date = 1^st January 2011 Tax year 10/11 1^st Jan – 31^st Dec = 10,000 profit 10,000 /12 = 833 profit each month 833 X 3 = 2,500 profit for January / Feb / March (3 months) Tax 10/11 = 2500. SECOND YEAR RULE: Either: Profits of first 12 months are taxed [therefore overlap relief]; or Where a full accounting period can be allocated to the second tax year, the profits from that accounting period. Accounting period 1^st Jan 11 31^st Dec 11 (10,000) ---I------------------I----------------------------------I-----------------I---------------- 6 April 11 5^th April 12 Tax Year 11/12 Tax year 11/12 – profits of first 12 months are taxed (so profit from 1^st January 11 – 5^th April 11 are taxed for a second time) Overlap profit = 2,500 (available when business ends)
Closing year rule	Notional accounting period running from the day AFTER the end of the last accounting period [i.e. 1^st Jan] to be assessed up to the date of cessation [30^th June]. Overlap relief is deducted from final accounting period Accounting period 1^st Jan 11 30^th June - bus closes (36,000) ---I------------------I-----------------+-----------------------------I-----------------I------- 6 April 11 5^th April 12 Tax Year 11/12 Business closes on 30^th June 2011. Makes 36,000 profit from Jan - June Tax Year 11/12 = 36,000 – 2500 = 29,500.

Current year rule

Wherever the ‘accounting period’ end date is [i.e. 31^st December 2011], profit generated in the previous 12 months are subject to tax year in which the end date falls.

Accounting period

1^st Jan 11 31^st Dec 11

(10,000)

---I------------------I----------------------------------I-----------------I----------------

6 April 11 5^th April 12

Tax Year 11/12

Dec 31^st: profits = 10,000
= Tax year 11/12 = 10,000 (December 31^st 11 ends in Tax year 11/12)

Opening year rule

FIRST YEAR

Profits are taxed from the date of commencement to the next 5^th April

Tax Year which commencement date falls within

1^st Jan 11 31^st Dec 11

(10,000)

---I----------------------------------I-----------------------I

5 April 11

Commencement date = 1^st January 2011 Tax year 10/11
1^st Jan – 31^st Dec = 10,000 profit
10,000 /12 = 833 profit each month
833 X 3 = 2,500 profit for January / Feb / March (3 months)
Tax 10/11 = 2500.

SECOND YEAR

RULE: Either:

Profits of first 12 months are taxed [therefore overlap relief]; or
Where a full accounting period can be allocated to the second tax year, the profits from that accounting period.

Accounting period

1^st Jan 11 31^st Dec 11

(10,000)

---I------------------I----------------------------------I-----------------I----------------

6 April 11 5^th April 12

Tax Year 11/12

Tax year 11/12 – profits of first 12 months are taxed (so profit from 1^st January 11 – 5^th April 11 are taxed for a second time)
Overlap profit = 2,500 (available when business ends)

Closing year rule

Notional accounting period running from the day AFTER the end of the last accounting period [i.e. 1^st Jan] to be assessed up to the date of cessation [30^th June].

Overlap relief is deducted from final accounting period

Accounting period

1^st Jan 11 30^th June - bus closes

(36,000)

---I------------------I-----------------+-----------------------------I-----------------I-------

6 April 11 5^th April 12

Tax Year 11/12

Business closes on 30^th June 2011. Makes 36,000 profit from Jan - June
Tax Year 11/12 = 36,000 – 2500 = 29,500.

2. Taxation: Partnerships

Treated as sole traders for tax purposes

LOSS RELIEFS

INCOME: S.64 Income Tax Act 2007

Carry across	A loss can be set off against any other income of the current year
Carry back	A loss can be set off against any other income of the previous year

S.83 ITA: loss may be set off against income of the SAME trade in future years to the extent that is has not been relieved under S.64 ITA

CAPITAL GAINS

S.71 ITA 2007 / Ss.261B and S.261C of TCHA 1992: If there is still loss available after income is set off [S.64 claim must be exhausted] set income loss off against capital gains loss in current year or IMMEDIATE previous year

Final and early years of trading

Early years	S.72 ITA: losses made during first FOUR years of trade to be set off against any income from the THREE tax years before the loss.
Final Year	S.89 ITA: a loss can be set off against income from the previous THREE years of the SAME trade

Ratios

If partners share profits 3:2 – in each tax year divide amount by 5 then...

#3202 - Taxation For Soletraders & Partnerships - Business Accounts

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