Tax and Trading Profits
TAXATION OF TRADING PROFITS
Trading income comprises profits from a trade, profession or vocation. Subject to some minor differences in the manner of calculating the tax, trading income and income from a vocation or profession are taxed under the trading income rules.
Trading Income Rules
The rules that apply to sole traders also apply to partnerships as for other forms of unincorporated business structure. Some of the trading and property income rules apply to companies, though there are some differences in their application. Sole traders and partners are assessed on their profits that arise in the accounting period for the business. This period ends in the tax year being assessed and could be facilitated with professional capital allowances consultants.
Before any taxable profit under the trading income rules can be calculated, what has to be established is that trading is actually taking place. To determine this consideration should be given to what is known as the “badges of trade”. Once trading is established, it is necessary to take two steps to arrive at the trading income for a tax year:
(a) the first step is to decide which of the trader’s accounts that will form the basis period for the tax year; and (b) the next step is to carry out adjustments to the accounting profits to arrive at the tax adjusted trading profits.
These two steps once completed will produce the final trading income assessment for the sole trader. This can then be added to the tax computation as part of the aggregated income. In respect to capital expenditure it is important to educate oneself on capital allowances special rate pool here.
Income from Trade or Business
The term “trade” is defined to include an “adventure in the nature of trade”.[216] However, “business” is considered to have a wider meaning, but in relation to transactions in immovable property there does not appear to be any distinction.
Whether a particular transaction of buying and selling property or any other article amounts to a “trade” is basically a question of fact and law: all circumstances are to be taken into account. However, rents and other income derived from the exploitation of proprietary interests in land are charged to income tax as property income, not as income from a trade.[217] The leading House of Lords’ case on this is Salisbury House Estate Ltd v Fry.[218]
Trading involves something of a commercial nature; it includes not only regular buying and selling or rendering of services, but also an isolated commercial transaction. In Erichsen v Last[219] the Master of the Rolls observed:
“There is not, I think, any principle of law which lays down what carrying on a trade is. There are multitude of things which together make up the carrying on of a trade, but I know no one distinguishing incident, for it is a compound fact made up of a variety of things.”
Lord Atkin in Fry v Burma Corporation Ltd [220] said that “trade refers to various activities of commerce....” Whether a given activity is a trade is a mixed question of law and fact.
Profits from trading are subject to income tax but not profits from realisation of investments before 1965.
What is considered here is the taxation of sole traders. The trading income rules are used to determine the taxable income of sole traders from their business activities. For commerical property building, investment or improvement it is important to consider integral features capital allowances.
Tax Law Rewrite Project
The aim of HMRC’s Tax Law Rewrite Project was to rewrite the UK’s primary direct tax legislation to make it clearer and easier to use, without changing the law. The project has resulted in income tax legislation being divorced from corporation tax. The statutes which contain the main rules for income tax are:
(a) Income Tax (Pay as You Earn) Regulations 2003 (SI 2003 No 2682) effective from April 2004;
(b) Income Tax (Earnings and Pensions) Act (ITEPA) 2003 effective from April 2003;
(c) Income Tax (Trading and Other Income) Act (ITTOIA) 2005 effective from April 2005; and
(d) Income Tax Act (ITA) 2007 effective from 6 April 2007. ITEPA 2003 imposes charges to income tax on employment income (parts 2 to 7); pension income (part 9); and social security income (part 10). This replaces Schedule E.
ITTOIA 2005 imposes charges to income tax on trading income (part 2); property income (part 3); savings and investment income (party 4); and certain miscellaneous income (part 5). This replaces Schedule F and for income tax purposes only, Schedules A and D.
ITA 2007 covers a miscellany of provisions. The “administrative” self-assessment rules in the Taxes Management Act 1970 are unchanged by the reform carried out.
If you require more information then click capital allowances property.
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