Working out profits Profits are calculated using accepted accounting practices and crucially this means that profit is not necessarily simply receipts less payments. Instead it is income earned less expenses incurred. However, see details of the optional cash basis for smaller unincorporated businesses. Not all of the expenses that a business incurs are allowed to be deducted from income for tax purposes but most are. It is important that you keep proper and comprehensive business records so that relief may be claimed. Due to COVID-19 many unincorporated businesses have claimed under the Self-Employed Income Support Scheme. The grant payments are taxable in the tax year in which they are received.
Tax Tip Try to incur expenditure just before rather than just after the year end, as this will accelerate the tax relief. Examples of the type of expenditure to consider bringing forward include building repairs and redecorating, advertising, marketing campaigns and expenditure on plant andmachinery. Trading and property income allowances Trading and property income allowances of £1,000 per annum are available. Individuals with trading or property income below £1,000 do not need to declare or pay tax on that income. Those with income above the allowance are able to calculate their taxable profit either by deducting their expenses in the normal way or by simply deducting the relevant allowance.
Cash basis for smaller unincorporated businesses An optional basis for calculating taxable profits is available to small unincorporated businesses. If an owner of a business decides to use the cash basis, the business profits would be taxed on cash receipts less cash payments of allowable expenses subject to a number of tax adjustments. The optional scheme requires an election by the business owner and is only available where the business receipts are less than £150,000. Businesses can stay in the scheme up to a total business turnover of £300,000 per year. Further details about the scheme: • Cash receipts include all amounts received in connection with the business including those from the disposal of plant and machinery. The good news is that if a customer has not paid what is owed by the year end, the amount due is not taxable until next year. • Allowable payments include paid expenses but these still need to meet the existing tax rule of being wholly and exclusively incurred for the purposes of the trade. • Payments include most purchases of plant and machinery, when paid, rather than claiming capital allowances. The bad news is that if a supplier is not paid by the year end, the amount is not relievable until next year. • Interest payments are only allowed up to a limit of £500.
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Running a Business
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