Trading income and expenses

By Tolley

The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Trading income and expenses
  • Simplification of adjusted trading profit calculation from 6 April 2013
  • Trading income
  • Allowable expenditure ― summary
  • Wholly and exclusively
  • Capital expenditure
  • Provisions
  • Potential future changes ― simplified business reporting

The basic rules determining the calculation of trade profits and losses for income tax purposes are found in ITTOIA 2005. Statutory provisions determining the required adjustments to trading profits are brief, supplemented by a substantial body of case law.

In practice, this is an area where often the correct treatment is not obvious. It is essential in instances of doubt to fully document the reasons for treating items as allowable or disallowable. This aids a reviewer in understanding why items have been treated a certain way, assists in explaining the approach taken to the client and is essential to be able to respond in the event of an HMRC compliance check.

Simplification of adjusted trading profit calculation from 6 April 2013

The calculation of profits for the self-employed and those in partnership was simplified from 6 April 2013. There are two elements to the provisions:

  • simplified cash basis (rather than the accruals basis under generally accepted accounting practice (GAAP))
  • fixed rate deductions for certain expenses rather than calculate the actual amounts (eg business use of car, business use of home, subsistence)

The first provision is only available to those with a turnover of less than £150,000 or £300,000 if the individual claims universal credit (under thresholds which apply from 2017/18 onwards). The second provision is available to all unincorporated businesses. Businesses are able to adopt one or both of the provisions on a voluntary business from 6 April 2013. For more information, see the Simplified cash basis for small unincorporated businesses and Fixed rate deductions for expenses of unincorporated businesses guidance notes.

The rest of this guidance note discusses the default rules if the unincorporated business is not eligible for the simplified cash basis or is eligible but chooses not

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