PoT Revision 2023 Bu I 2 - HV

INCOME TAX
TRADING PROFIT
(Income from self employment)
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BADGES OF TRADE
Test Consider
S Subject matter Personal use? Investment? Trade?
O Ownership period Brief period of ownership indicates trading
F Frequency of transactions Repeated similar transactions indicate trading
Work carried out to make asset more marketable may indicate

I Improvements
trading
R Reason for sale Forced sale to raise cash indicates not trading
M Motive Profit motive indicates trading

BADGES OF TRADE
Test Consider
Was a loan taken out to finance the purchase which will need to be
F Finance
repaid on sale?
A Acquisition method Asset acquired via gift or inheritance indicates not trading
Existence of Similar
ST Similarities to an existing trade indicate trading
Trading transactions

ADJUSTMENT OF PROFITS
Computing taxable trading profit
Net profit per financial accounts X
Add disallowable expenditure/income not shown in accounts X
Less non – trade income in accounts/expenditure not in (X)

accounts.
Tax adjusted profits before capital allowance X
Less capital allowances (X)
Tax- adjusted profit/ (loss) after capital allowances X
Trading allowance: If trading receipt for individual < £1,000 those receipts are not taxable. If >£1,000 choose
between normal way or deducting £1,000 as deemed expenses.

DISALLOWABLE EXPENDITURE – ADDED BACK
Appropriations of Private items

profit
Salary, bonus, NIC payment for proprietor
Capital Depreciation replaced by capital allowances

expenditure
Car leasing costs CO2 emissions > 50 from 6/4/2021; >110 g/km from 6/4/2018-
5/4/2021 and before 2018>130g/km :15% of leasing costs disallowed.
Private using also deducted
Legal costs Cost of renewing short lease

relating to capital
expenditure, Cost of registration of patent or copyright
except: Incidental cost of raising long term loan finance
Other items include
Gifts to customer (except
< £50, or trade samples, &
Fines /penalties (except Donations (except small
not food/drink/tobacco Entertaining (except staff)
employee parking) amount to local charities)
or vouchers exchangeable
for goods)
General provision for

Interest on late payment Deduct a proportion
Non-trade debts inventory, trade debt, loan
of tax related to private uses
to employee written off.
Political donation

Other items include
An amount not
paid to
Redundancy
employees
over 3 times of
after nine
statutory
months from
end of POA
Unpaid
Irrecoverable
employers’
VAT not for
contribution to
trading
pension
purpose
scheme

OTHER ADJUSTMENTS
Taxable trading income not included in P/L:

• Goods for own use
• If no adjustment made in the accounts
– add back selling price
• If correct entries made in the accounts
– only add back profit element
Any non-trading income in the accounts must be deducted
Expenditure not show in the accounts is business expenditure paid

personally by the owners should be deducted

TRADING PROFITS
Confirm your learning
1. Can you describe and explain at least four of the badges of trade?
2. Can you correctly reproduce the pro-forma computation for the adjustment of profits?
3. Do you understand why a trader would use the trading allowance rather than actual
expenses?
4. Can you remember the main categories of disallowed expenses, and the exceptions?
5. Do you understand the different adjustments that may be required when a trader
removes goods from their business for personal use?

Income Tax
CAPITAL ALLOWANCES

CAPITAL ALLOWANCES PRO-FORMA
Main pool Private use of Private use

FYA Allowances
asset of asset
TWDV b/f X X X
Additional (Acquisition) X X
FYA – 100% (X) X
Acquisition AIA limit X
200,000 (X) X
Disposal (X)
Acquisition cars X
WDA 18% (X) X
TWDV c/f X X X
WDV: time apportion if not 12 months period
Main pool
• All machinery, ﬁxtures and ﬁttings and equipment
• Vans, forklift trucks, lorries, motorcycles
• Cars with CO2 emissions of not more than 50 g/km purchased on or after 6 April 2021 (1 April
for companies). The limit was previously 110 g/km for cars purchased on or after 6 April 2018 (1
April for companies) and 130 g/km purchased since 6 April 2013.

Annual The AIA of £1,000,000 is given for expenditure from 1 January 2019 to 31 March
2023
investment After 31 March 2023, the AIA limit is due to reduce to £200,000 pa
allowance
(AIA) Pro-rate if period not 12 months
Any balance of expenditure which AIA is not given is eligible for WDA
All assets except cars
First year 0 g/km of CO2 for cars purchased on or after 1 April 2021
50 g/km of CO2 for cars purchased between 1 April 2018 and 31 March 2021
allowances 75 g/km of CO2 for cars purchased before 1 April 2018
100% on new and unused zero emissions goods vehicles

100% on new and unused low emission cars: electrically propelled or with zero CO2
emissions
100% on electric vehicle charging points
•Never time apportion FYA
CAR
Cars are not eligible for the annual investment allowance

WRITING DOWN ALLOWANCE
18% on reducing balance basis
Pro-rate if period not 12 months for the first period
Small pool WDA – can write off balance of £1,000 or less before
any WDA. Limit £1,000 for 12 months period
Restrict for private use: Asset written down by full AIA, FYA, WDA
but allowance claimed = restricted to business use

BALANCING ADJUSTMENTS
Proceeds
(restricted to original cost)
> Balance on ‘pool’ < Balance on ‘pool’
Balancing charge Balancing allowance
Note: only related to business purpose

CAPITAL ALLOWANCES

1. Do you understand what makes an asset’s plan and machinery’ for capital allowance
purposes?
2. Can you calculate writing down allowances on the main pool?
3. Could you identify an asset that qualified for 100% first year allowances?
4. Are you able to apply the AIA correctly to expenditure incurred?
5. Do you understand the adjustments required for private use of an asset, and that
these restrictions do not apply to companies?

Income Tax
TRADING PROFITS
Basis of assessment

CURRENT YEAR BASIC
Current year basis (CYB): The basic rule is called the current year basis (CYB).
Under the CYB, the basis period for the tax year is the taxable trading profits for the 12-month period of
account ending in that tax year.
Example
Three self – employed persons, A, B and C, have each adopted different accounting dates as follows
A: Year ended 5 April
B: Year ended 31 December
C: Year ended 30 April
The basis periods under the CYB for the year 2022-23 are as follows
A: Year ended 5 April 2023. This would have been the same under the actual basis as the accounting period = the tax year
2022-23.
B: Year ended 31 December 2022. The Whole profit of this accounting period is assessed in the tax year 2022-23 although
only nine months of the profits actually accrue in the tax year beginning 6 April 2022. CYB means that the whole of the
profits of the year ended 31 December 2022 will be assessed in the tax year 2022-23.
C: Year ended 30 April 2022. The whole profit of this accounting period is assessed in the tax year 2022- 23 although only
one month of the profits actually accrue in the tax year beginning 6 April 2022. CYB means that the whole of the year
ended 30 April 2023 will be assessed in the tax year 2023-24.

BASIS PERIOD RULES
3 scenarios
Commencement of Ongoing Cessation of trade

trade business
Assessed using Assessed on 12 Assessed using

‘opening year rules’ month a/c period ‘closing year rules’
ending in tax year

OPENING YEAR RULES
year in which
First tax year
business
commences trade
Assessed on profits from date of commencement

to following 5 April

OPENING YEAR RULES
Year 2
Is there an accounting period ending in the tax year?
Yes No
Is it 12 months long? Assess on an actual basis
from 6 April
to 5 April
Yes No
Assess profits of
those 12 months =
normal current Is it < 12 months? Is it > 12 months?
year basis Assess profits of first Assess profits of 12 months
12 months up to accounting date
of trade (i.e. last 12 months of long
period)

TAX YEAR RULES
Third tax year
• Assess 12 m/e on accounting date in the third tax year
• Usually CYB
• But if long period = last 12 months of that long period
Overlap profits
Get relief for overlap profits on cessation

TAX YEAR RULES
Final tax year = year in which actually cease to trade
The basis period for the final tax year is from the end of the basis
period for the penultimate tax year to the date of cessation
Assessed on any profits not previously assessed less any overlap

profits from commencement

TAX YEAR RULES
Ernest started trading on 1 January 2022. He decided to make up accounts to 31 December. His
taxable trading profit for the period of account for the year ended 31 December 2022 is £12,000
The first tax year (TY1 = 2021/22)

1/1/2022 - 5/4/2022
Profit = £12,000 x 3/12 = £3,000
The second tax year TY2 = 2022/23

12-month period of account ending in 2nd tax year
Basis period 1 January 2022 to 31 December 2022, y/e 31 December 2022: £12,000

TAX YEAR RULES
Illustration 1 - ≥ 12 months long
Peter starts to trade on 1 January 2022 making up accounts to 31 March 2023

He made profit of £15,000 for the year ended 31/03/2023

1/1/2022 - 5/4/2022
Profit = £15,000 x 3/15 = £3,000
The second tax year TY2 = 2022/23 (06/04/2022 – 05/04/2023)

Does the accounting date (31/3/2023) end in TY2?
YES
How long is this accounting period?
≥ 12 months long 1/1/2022 - 31/3/2023
Calculate profits for the 12 months to the accounting date ending in Y2
1/4/2022 - 31/3/2023
Profit = £15,000 x 12/15 = £12,000
TAX YEAR RULES
Illustration 1 - ≥ 12 months long
Peter starts to trade on 1 January 2022 making up accounts to 31 March 2023

The third tax year (TY3 = 2022/24)

Use the current 12 months accounting period
1/4/2023 - 31/3/2024
Profit = £24,000
Overlap profits
Trading profits £15,000 + £24,000 = £39,000
Less profits assessed (£3,000 + £12,000 + £24,000) =
(£39,000)
Overlap profits £Nil

TAX YEAR RULES
Illustration 2 - < 12 months long

Draco commences business on 01/01/2022.
He prepares his accounts to 31/07
Below are the trading profits for the accounting periods:
£10,500 for the 7 months to 31/07/2022
£33,600 for the year ended 31/07/2023
What trading profits will be assessed for 21/22, 22/23 and 23/24?

1/1/2022 - 5/4/2022
Profits 3/7 * £10,500 = £4,500

TAX YEAR RULES
Illustration 2 - < 12 months long
YES
How long is this accounting period? (1/1/2022 - 31/7/2022)
< 12 months long
Calculate profits for the first 12 months of trading - 01/01/2022 - 31/12/2022
Profits £10,500 + (5/12 * £33,600) = £24,500

Use the current 12 months accounting period:
01/08/2022 - 31/07/2023
Profits £33,600
Overlap profits
Trading profits £10,500 + £33,600 = £44,100
Less profits assessed (£4,500 + £24,500 + £33,600) = (£62,600)
Overlap profits £18,500

TAX YEAR RULES
Illustration 3 - when the accounting date doesn't fall in Tax Y2.
Lachmi commenced self employment on 01/01/2021.
She had a profit of £10,000 for the period ending 30/04/2022.
Calculate the tax adjusted trading profit for the period ended 30/04/2022.
Assessed period 01/01/21 - 05/04/21 = 3/16 * £10,000 = £1,875

NO
Therefore, profit will be calculated as follows:
Assessed period 06/04/21 - 05/04/22 = £10,000 * 12/16 = £7,500
YES
How long is this accounting period? (1/1/2021 - 30/4/2022)
> 12 months long therefore tax the last 12 months of the long period
01/05/21 - 30/04/22 = £10,000 * 12/16 = £7,500
Overlap profits
Overlap profits created: £1,875 + £7,500 + £7,500 - £10,000 = £6,875
PARTNERSHIPS – BASIS OF ASSESSMENT
Tax adjusted profits/losses
Share between partners in PSR of accounting period
Partner A Partner B Partner C
Tax each partner as if individual sole trader

BASIS OF ASSESSMENT
1. Do you understand the current year basis and the circumstances in which it
applies?
2. Can you calculate the amount of profit to assess in the first two tax years of
trading, for a range of different accounting reference dates?
3. Do you understand what overlap profit is and how it is calculated?
4. Can you explain what happens to taxable profits in the tax year that a trader
ceases to trade?
5. Do you know how the taxable profits of partners in a partnership are

determined?

Income Tax
NATIONAL INSURANCE CONTRIBUTIONS

NIC: CLASSES OF CONTRIBUTIONS
NIC paid by
Employees Self employed
Employers
Class 1 Primary - Class 2

earning Class 4
Class 1 Secondary - Earnings

Class 1A - Benefits

PAYE CODES
Primary Class 1 contributions
Employee's earnings Primary contributions payable
Not above primary threshold (PT) Nil

From 6 April 2022 to 5 July 2022: £190 per week,
£823 per month or £9,880 per year)
From 6 July 2022 to 5 April 2023: £242 per week,
£1,048 per month, or £12,570 per year
Between PT and upper earnings limit (UEL) (£967 Earnings less PT x 13.25%
per week, £4,189 per month or £50,270 per year)
In excess of UEL UEL less PT x 13.25%

Plus
Earning less UEL x 3.25%
PAYE CODES
Secondary class 1 contributions
The secondary Class 1 NICs for 2022/23 for employees aged 21 or over are as follows:
Employee's earnings Secondary contributions payable
The total Not above secondary threshold (ST) (£175 per week, Nil
secondary £758 per month or £9, 100 per year)
Class 1 NICs of
Above ST Earnings less ST × 15.05%
most
employers is Most employers may then deduct an employment allowance - see 2.5 below.
reduced by The secondary Class 1 NICs for 2022/23 for employees aged under 21 years old are as follows:
£5,000 per Employee's earnings Secondary contributions payable
year (2022/23) Not above upper secondary threshold (UST) (£967 per Nil
week, £4,189 per month or £50,270 per year)
Above ST Earnings less ST × 15.05%
The secondary Class 1 NICs for 2022/23 for employees classed as apprentices and aged under 25 years old are as
follows:
Employee's earnings Secondary contributions payable
Not above apprentice upper secondary threshold (AUST) Nil
(£967 per week, £4,189 per month or £50,270 per year)
Above ST
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PAYE CODES
Class 1A NICs
Class 1A contributions are payable by employers on taxable benefits provided to employees at the rate of 15.05%.
Class 2
A self-employed individual aged between 16 and state pension age is required to pay Class 2 contributions
(equivalent of £3.15 per week of self-employment for 2022/23).
No Class 2 contributions are required if the individual’s profits are below the lower profits limit (£11,908 for
2022/23).
If profits are below the lower profits limit, but in excess of the small profits threshold (£6,725 for 2022/23),
payment of Class 2 NIC is treated as having been made, maintaining the taxpayer’s contributions record for the
purpose of contributory state benefits.
Class 4 NICs
Earnings Class 4 contributions payable
Not above lower profits limit (£11,908) Nil
Between lower profits limit and upper profits Earnings less lower profits limit × 10.25%
limit (£50,270)
In excess of upper profits limit Upper profits limit less lower profits limit x 10.25%
plus
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PAYE CODES
The tax code computation is as follows:

Allowances £ Deductions £
Taxable benefits if not

taxed through voluntary
payrolling
Personal allowance X X
Allowable expenses X X
Adjustment for
underpaid tax
Adjustment for overpaid X
tax
X X

PAYE CODES

Income Tax
CAPITAL GAINS TAX: SPECIAL RULES

Chargeable and exempt persons, assets and disposals
Chargeable persons include

• individuals
• business partners, who are each treated as owning a share of partnership assets and taxed
individually on the disposal of that share
• companies, which normally pay corporation tax, not CGT, on their chargeable gains, and which
do not receive an annual exempt amount.
Chargeable disposals include

• the sale of the whole or part of an asset
• the gift of the whole or part of an asset
• the loss or destruction of the whole or part of an asset

COMPUTE GAIN OR LOSS
Disposal consideration X
Less incidental costs of disposal (X)
Net disposal consideration X
Less allowable costs (X)
Chargeable gain/Allowable loss X/(X)

RULES FOR INDIVIDUALS
Disposal on market value included gift, sales, loss or destruction except for death.
Exempt assets include
Chattels which are not

wasting chattels, if
Motor cars (including
Legal tender (ie, cash) Most wasting chattels acquisition cost and gross
vintage and classic cars)
disposal consideration do
not exceed £6,000
Gilt-edged securities National Savings Shares and investments

(such as Exchequer Stock Certificates and premium held in an Individual
or Treasury Stock) bonds Savings Account (ISA)

Allowable costs: Acquisition costs, market price if gifted, probate value of acquired on death
Incidental costs
Enhancement expenditures – still having value at disposal date
Annual Exempt Amount: £12,300 for 2022/23
Rate of 10% is applied fall into any income remaining basic rate band (37,700)
Rate 20% on the excess
Disposal consideration: market value, arm-length transaction

Illustration
Peter sells a chargeable asset on 10 June 2022 for £71,200 before selling costs of £400. He acquired the asset
on 1 May 1996 £10,000 and incurred additional capital expenditure of £3,000 in June 2000 and £2,000 in
May 2008. The assets was not residential property.
The chargeable gain arising in the tax year 2022-23 is:
£ £
Net sales proceeds (June 2022) £(71,200- 400) 70,800
Cost _ Original 10,000
- Enhancement 1 3,000
- Enhancement 2 2,000
(15,000)
Chargeable gain 55,800
Less: Annual exempt amount (12,300)
Taxable amount 43,500

Illustration
Assuming taxable income = 50,000 Assuming taxable income = £20,000
As taxable income > £37,700, the taxable As taxable income ≤ £37,700, the taxable
amount of gains is assessed at 20%. amount of gains is first assessed at 10%
CGT liability = 20% x £43,500 = £8,700 before being assessed at 20% .%
CGT liability = 20% x £43,500= £8,700

CHATTELS
Wasting (expected life ≤ 50 yrs)  exempt

Non-wasting (> 50 yrs) = see below
Cost £6,000 or less More than £6,000
Sale proceeds
£6,000 Exempt Allowable loss based on deemed proceeds of
or less £6,000
Sale proceeds Normal gain computation but gain

restricted to Normal gain computation
More than 5/3 × (Gross proceeds – £6,000)
£6,000
If the chattel cost more than £6,000, is sold for less than £6,000 and the disposal would result in
a loss, the loss is restricted by assuming that the gross disposal proceeds were £6,000.
CHATTELS
Cost Proceeds Treatment
<= £ 6,000 <= £ 6,000 Exempt
<= £6,000 >= £ 6,000 Normal calculation but the gain is

restricted to 5/3* ( Gross proceeds -
£6,000)
> £6,000 < £6,000 Deemed gross proceeds= £6,000
> £6,000 > £6,000 Normal calculation

CHATTELS
Set of non wasting chattels
When a disposal is made out of a set of chattels, this is referred to as a ‘part disposal’.
It is necessary to allocate a proportion of the cost of the set, to the part being disposed of.
Where A is the value of the part disposed of and B is the current market value of the part retained.
The £6,000 chattels threshold is then compared to the proceeds and the apportioned part of the cost.
The remaining cost is then used against future disposal(s) of the rest of the set.
There is a special rule where two or more assets forming part of a set of chattels which was owned by the same
person are disposed of to:
• The same person;
• Persons acting in concert; or
• Persons connected with each other Persons are considered connected with their relatives (including in-
laws) and business partners.
Treated as one disposal for the purpose of the £6,000 exemption and marginal relief. The loss rules also apply in
a similar way. If the disposals are in different tax years an apportionment of the total gain (or allowable loss)
will be required. This is made on the basis of disposal proceeds.
CHATTELS
Illustration
Maria sold the following assets in December:
1.An antique table which had cost £3,000 and was sold for £5,000
2.A painting which had cost £2,000 and was sold for £10,000
3.An antique vase which had cost £8,000 and was sold for £3,000
4.A set of china which had cost £7,000 and was sold for £8,000.
1. Table 3. The vase

The table is exempt as it was bought and sold for Deemed proceeds £6,000
less than £6,000 Cost (£8,000)
Capital loss (£2,000)
2. The painting The proceeds are deemed to be £6,000 as it was bought for
Proceeds £10,000 more than £6,000 and sold for less than £6,000.
Cost (£2,000)
Capital gain £8,000 4. The china
Maximum gain assessable = 5/3*(£10,000- Proceeds £8,000
£6,000) = £6,667 Cost (£7,000)
Capital gain £1,000
This is the normal calculation as the set of china had been
bought and sold for more than £6,000.
CHATTELS

1. Can you identify a chargeable person, a chargeable asset, and a chargeable
disposal?
2. Can you determine the correct disposal consideration and allowable costs
in computing a chargeable gain?
3. Do you understand how the CGT rate for individuals is determined?
4. Can you identify an item as a chattel, or a group of items as a set of

chattels?
5. Do you know what the “Five- thirds” rule is and how to apply it?

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INCOME TAX

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O Ownership period Brief period of ownership indicates trading

F Frequency of transactions Repeated similar transactions indicate trading

Work carried out to make asset more marketable may indicate

M Motive Profit motive indicates trading

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Net profit per financial accounts X

Add disallowable expenditure/income not shown in accounts X

Less non – trade income in accounts/expenditure not in (X)

Tax adjusted profits before capital allowance X

Less capital allowances (X)

Tax- adjusted profit/ (loss) after capital allowances X

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Appropriations of Private items

Capital Depreciation replaced by capital allowances

Legal costs Cost of renewing short lease

General provision for

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Taxable trading income not included in P/L:

Any non-trading income in the accounts must be deducted

Expenditure not show in the accounts is business expenditure paid

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Main pool Private use of Private use

• All machinery, ﬁxtures and ﬁttings and equipment

• Vans, forklift trucks, lorries, motorcycles

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100% on new and unused zero emissions goods vehicles

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18% on reducing balance basis

Pro-rate if period not 12 months for the first period

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> Balance on ‘pool’ < Balance on ‘pool’

Balancing charge Balancing allowance

Note: only related to business purpose

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Confirm your learning

2. Can you calculate writing down allowances on the main pool?

4. Are you able to apply the AIA correctly to expenditure incurred?

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Commencement of Ongoing Cessation of trade

Assessed using Assessed on 12 Assessed using

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Assessed on profits from date of commencement

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Third tax year

• Assess 12 m/e on accounting date in the third tax year

• But if long period = last 12 months of that long period

Get relief for overlap profits on cessation

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Final tax year = year in which actually cease to trade

Assessed on any profits not previously assessed less any overlap

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The first tax year (TY1 = 2021/22)

The second tax year TY2 = 2022/23

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