TRADING INCOME

Advance Taxation

Finance Act 2021122

Tutor : Owais Mirchawala

TRADING INCOME
 Basis Period
Trading income it is income
generated from business Calculations

made
0=12
trading activity .
-
Accounts
of
a business are
for be
its
tax to paid
Income tax 4
Trading accounting gear has
Me income
✓ 1
,
on whereas
,

Badges of Trade
for fiscal year
✓ 2
> .

Basis Period calculations Fiscal 6

April ( 1 April) to 5
April
from
✓ 3, is

year
-

4, capital Allowances studied in later Part ( 31 March)

of
→ .

Trading losses the Basis Period calculation to

5)
Objective
course is
Of
.
-
.

&
Income tax
align accounting fiscal 70,000
Es NK on
Trading income

gear year
.

Income tax
-
is
paid on
trading income under
Eff . 1.1.2010 31.12.2010 =

head (20%140%1451)
of
Non
saving income .

09/10 010/11
,
National Insurance Contribution ( Nlc) is
paid C
of
-

Class G Class 4 1- radin

category
2 on income .
313010
1.1.10 31.12.10

Period calculations divided set

Basis
your
-
are in

Badges of Trade of
rules

threshold
-

Badges of Trade are indicators ,

which show that 1,
Ongoing rule

If
-

trading income is less than small

Profit an
activity is a
trading activity . 2s
Opening year
rule
asset
£6475 Class
payable it
Closing year rule
then 2 NK will be whenever sells 3)
of 20 person an can be
-

a
.

, ,

Eg .

Trading income = 70.000 . Calculate tax & Nic .

regarded
as a
capital transaction 0¥ as a
trading 4,
Change year
in end rule .

Income tax return transaction .

is
If a transaction is
regarded as capital transaction
Ongoing rule :
Ongoing rule
followedhas in a
-

then it business not started

payable normal
CGT will be on in which
year
.

, ,

not end
IF transaction is

regarded
as
trading ittransaction closed
changed itsnor
yearassumed
-
.

G tax
then income tax E. Nic will be
payable Accounting year year
are as
-
.

trade Fiscal
Badges of identified through
include
following factors be will
: same
year
- .

↳
Frequency oj Transaction end date
accounting gear
of 3112-10=70,000
.

4) Planned 012 Unplanned

-

High frequency
→ Trade
E¥ .
1.1.10

One >
capital Planned Trade 10111
off
→
-
-

Ownership period Unplanned capital → 1.7.10 30-6.11 80,000

=
3
-

short Trade 5s Nature Assets ↳ 11112

of
>
-

capital
Long Gold Shares
-
> -

, ,

3)
Complimentary work Land
,
oil →
capital
-

Performed
> Trade -

Paper ,
Table ,
→ Trade

performed capital etc

→ chair
-

not ,
.
Opening year rules These rules ⑤ first year
__ -
*

-7
-

followed E¥
: 1.1.10 are .
31--1*0=1 -

- -

business ( start solution business

- -

first Firstaccounting of of
in
year of
-

"^"D
- -

" 3m
tax made 091110 120,000×3=30.005
period from
l, is 1.1.10 31310 =

12m£ 318.018T 120.0¥

-

nearest
start datebusiness to ✓ 1.9.17 first
12 →

of
.

year
a-

"m 12m

] Ongoing
✓
31 March .
10/11 1^1.10 < 31.12.10 = 120,000 ✓ 1.9.18 31-8.019 = 80,000
12m
IF 30.000 1.9.19 31.8.20 75.000
of first accounting
2) all months 3 months ✓ =

year months 120.000

are

assessment
riot covered
31
taxin

March
first then make
12

15 months 150,000 17/18 1.9.17

7mV
31.3-18 = 120.000 7=70.005
of ,
✗

second tax assessment ( 12 months) ( 120.000) 12

by going 3 months
'
120.005
back 12 months
from end date
of
30.000
Overlapping profits 18119 1.9.17 t 31.8.018 =

accounting year .

In situations that months 19120 1.9.18 31819 80.000

going
back 12
Overlapping
=
3) some means some are

not possible end assessed twice due to Basis Period 20121 1.9.19 31.8.20 75.000
from
=
months is

date .
In that case tax assessment rules .
Tax department gives relief of
be made
by going forward overlapping profits closing G
will in in
year
*

situation
start date
change year end
7m
of accounting
70.000
from year
.

4 , IF whole lies 12m 120.000

fiscal then first
in

year tax that ( 12m) (120.0007

accounting year ,
fiscal
It addition to 7m 70.000
Overlap
year separately
is in
.

above rules .
 .mn/. . . . . | . . . . .
③¥① I
-

E- → imonths ② 7-
-

First
- -

→ first year ✓ -5€ period

-

Entre
ongoing 12-month -
-
#__ -
lbmonths →
first Year
ongoing
✓
-
-
-
- -

ongoing
-

12min14s
-
•

12 months →
ongoing months
✓ - -
-

12
ongoing
←. -
-

→
12 months
- _

ongoing
- - -

✓ •
-
-

✓ 3ns 2in
5mF
9 months :/ 20.00%
9M 24°'°°°
70.0%0 2nF 6875£
16/17 1.7.16 31.3.17 = ✗ 17/18 1.11.17 313.18 = 55,000 + 90.000×2 = 15116 1.2.16 31.3.16 = 55,000 ✗ 2 :

☒months
- e- a-

12 16
✓
12mi
17/18 1.1.17 (
12m
31.12.17 =
2401000
✗ /
Zmonthei 160.00% 18/19 I. 2-18
12m
311.19 = 90,000 16117 1.4.16 31.3.17 = 55.000 ✗ 12=41,250
✓

☒months
19120 -12M 175,000 16
1.2.19 31.1.20 =

12m ' ✓
18/19 1.1.18 31.12.18 = 80.000 V 17/18 1.6.16 < 31.5.17 = 55.000 ✗ 12 = 41,250
12m
191201.1^19 31.12.19 = 75.000 5m 70.000 16

(3m) (5-5.000) 18/19 1.6.17 315.18 =

160.000

9m 120,000
Overlap .
2m 15,000 19120 1.6.18 31519 =
57,000

12m 160,000

( 18m) (240.000) L

40.000
3m
Overlapping 2m 6875
12m 41,250
12m 41,250
* ⇐
34,375
10m
Overlap .

.. ..
,..*,
. .

IF
first accounting year is ended on 0=12 due to it
single profits gets taxed twice
problems and
major capital allowances in
first year
-
. .

tax If end
before
31 March then
overlapping profits will However a
planning that
exist
if first profits
first year because then are low
April year 30
-
-

, ,

tax
be
accounting year profits low then
preferred low it create
overlapping profits
will
are
paying
minimum .
is
, ,

that tax This tax second

Year end
of
31 March means twice on them can
delay on
high on
first year profits delays
-

.
on
,

second
accounting year aligned year high profits
It
budgeting of
with also
improves
fiscal profits of
will be
year
.
.
a

year
and : no extra
periods will be
E¥l 1.4-15 31*3-16=1--100 -

first year business .

31317=4-100.000 However
high then
1.4.16
① first yearbe profits
created . ✓
-

are 31 March

IF ended 313.16=1--100
first accounting period solution 15116 end should
followed to avoid
overlapping
is on 1.4.15
year
-
=
-8

16117 31317=1--100.000
30
April 0¥
after
it then
overlapping profit '3
1.4.16
Of high profile
.

will be 30.416=1--100
maximum
EFI 1.4.15
first year
-

---_

First tax made till 15-16 304^17 £100.000

period will be
- =
✓

31 March . Due to month

of April a solution 15116 1.4.15
CHM
313-16=1--1,300-1112--92
second tax period will 16117 1.5.15 30.4.16 12--92
=t
whole new be ✗

created .
17118 1.516 30.4.17 : 100.000
 •_I?%
"

losses
Overlapping Partnership business
-
- - - -

✓
•
→
ongoing
✓ -0 12min14s Individuals do business either
Losses overlapped department
→
-
are not . Tax -
-

ongoing -
can as a
-
② - 2 months → ceasation
time sole Trader 01=2 Partnership
-

relief
losses
-

gives
on
only one as a
. .

In trader
On
overlapping period of
losses amount sole whole
profile belongs to
single
- -

no
,
" m
is assessed .
18119 1.6.17 315.18 = 60.000 owner .

""" " "

19120 1.6.18 31719 75.0001-12.000--87.000 In
Partnership structures
profit
needs to be
=
-

-
- - -
-

12 months → First year

partners
-

a-

distributed
-
a-

mÉI
✓ lzmonths
ongoing among
-
→ .
-
-

19120
-

>
HMRC
3m
- - -
- -
-
treats each
partner as a sole Trader
( 40.000) (10.000) ✓ →
ongoing
of profit
17118 1.1.18 his
having share
31.3.18 ✗ 3 own
I
= .
= .

•
✓ -
-
12 months →
ongoing
12m -0 3 months → ceasation Partner 's
salary
- -
-

"m
18119 1.1.18 < 31.12.18 =
(40,000-10.000)=130.000) -
Interest on capital
11m
Residual
19120 1.1.19 3112^19 72.000 17118 1.2.17 31.1.18 86.000 Share in
Profit
-
= = .

12m
18119 1.2.18 31.1.19 = 79.000
3m
1^2.19 30.4.19 43.000 Each partner has to do Basis
Closing Year Rule 19120 his
=
own
-

period calculation
-

Closing year means last accounting period of on his share

of profitit
9

business then has to tax G

pay
. income NK on
.

Year ceasation
of
-
.

If last
accounting period ends in same
fiscal
When a
partner joins firm
he has to
apply
-
-
a

year
as that
of previous accounting year opening year rules on his share
of profit
.

then partner to
both
of them and
file single
when ceases be
partner
-
a
merge
a a ,

then he to
tax assessment . has
apply closing year rules on

last period
If accounting ends in
different fiscal his share
of profit
-
.

that
year of previous accounting year
as

then last
accounting period will be filed
assessment
as a
separate .

Overlapping profits can be

adjusted in last

tax assessment .
 7m
D-
-

55.650
opening year
-

→ - - -
1.6.19 31.12-19
a-
=
.

"m
___@ ①
-
-

1.1.20
-

31-12-20 119,400
Ongoing
=

- -
- -
-
-

7m 3m
-0
-

10M
-

19/1/20
-

___ -
-

1.6.19 31.3.20 = 55.650 t 119.400×3=85,500

-⑦
- --
e- -
__ - - __ ____ -
__

_- -
-
12
- # -

20121 1.1.20 3112^20 =

119,400

Class 4 Tetra
for
NK

joined
7m
4 Tetra 19120
opening year class
for for
1.6.19 31-12-19 → NIC

firm
=

12m
Trading Profit
1. 1- 20 311220 = 19120--85.500

of Profit
share Tetra
7M 175,000
1.6.19 3112^19 = 300,000 ✗ 7 =

12

Partner 's ( 14.000 )

Salary Fore 24,000 ✗ 7
- =
: =

12

Tetra : 18.000×7 =
(10.5-00) > 10,500

12

Residual Profit 150.500

Tetra 's share 301 .

> 45,150

7m
1.6.19 31.12.19 = 55,650

"m
1.1.20 31-12.20 = 380,000

Partner fore ( 24.000)

salary
-
=

Tetra = (18.000) > 18.000

Residual
Profit 338.000

Tetra 's share = 301 .

> 101,400

12m
1.1.20 31-12.20 = 119,400
 201-21 ①
12m
✓ 1.10.19
Change end
E¥ 309.20=120.000
rules
Ongoing
- -

in
year
-

#_ 7- months
opening
.

- → → -
3m 20121
II 18--1>9-1
-

✓ ☒ months
-

IF business its end its 3112-20=-30.000 ✓ ongoing

changes change
→
1.10.20
a
year
-
- -

18-19-1>-2 months
,

f- →
change
-

"m -e

fiscal
-

affected
31-1221
year may get
80.000
alignment with 12 months
ongoing
→
.

1.1.21 =
• ←
→
-
.

Basis period calculation will be required solution

12+3=15
120,000+30.000=150.000
for 1.10.19 31-12^20
re
alignment 20/21 7m 2m
=
- .

9m NI
12m
B IF period than 21122 31-12-21 80.000 17118 1.7.17 70.000+40.000×2--76.667
change less 1.1.21 31-3.18
of
is = =

it ends
fiscal
12 months and in same 12

20121 18119
12m
+2=1431.3-19 40,0001-20.000=60.000
that
of previous accounting year E¥ 1.2.18 =

year
as -

12m
then it with
previous accounting 1.1.20 31-1220 =
50.000 -

Ongoing Excess months (6667)

merge
✓
5M 21/22 14-12=2
and tax ✓ 1.1>20 31-5-21
file single assessment 25.000
change
-

year
a . -

"m
2, IF change period is

of
less than ✓ 1.6.21 31^5-22 = 60.000 -

ongoing
53.333
12
12 months but it ends in
different solution 19120 1.4.19 31.3.20 87.000
=

"m
then tax period will 20121 31.12-20--50.000
fiscal year
a new 1.1.20
7m_
④
,
5m
be made 12 months 21/22 < 50.000×7=54.166
by going back 1.6.20 31-5-21 =
25.000 1-
"m
end date 60,000
from of change period
12
.
1.6.21 31.5.21 =

3) IF period than
change is
of
more
"m
12 months then 30^6^21 76,667 9m
Ongoing rule
E¥ 1.7.20 70.000
Ongoing
is
NI
-

year
.
=

90.000 ( 70,000) (Tm)

followed 1.7.21 30.9.22
change
. = -

12m
IF tax than 6667
any
assessment
of
12 months 1.10.22 30.9-23 60.000
ongoing Overlap 2m
-

- is more
= .

✓
then a business can
adjust its
overlapping 12
21/22
against those 1.7.20 30-6.21 70.000
profits months =
excess .

15
22123 1.7.21 30.9.22 = 90.000
12
4, 23124 60.000
IF
change period is
og
more than 1.10.22 30.9.23 =

and it
D- months
skips a
complete
in it two tax
fiscal year ,
then
will be made
by going
assessment

12 months twice end date

back
from
.
 t② 48.333 5
@
-

✓
open¥g✓
-

→ →
>
←

YI ③ 013min14s Ongoing 12 months -

171-18>12-7
-

ongoing
←_
→
✓ 105.250 12
ch.cn#-o----i%B0--m----@--
-
- →
-

✓
change
←

✓ -
→ 12m →
-

ongoing
-
153,583 17 ✓ - -
-
12 months I -

Ongoing
187.000) (9)
5Ñ 87.000 1dm
15/16 1.11.15 31.3.16
=

✗ 5=48,333 66,583 8 16/17 I -4.16 31.3.17 = 24,000

-

17118 ?
Bm
-

"m
-
q_m9 3m_ -
>
46,167 12
18/19 1.4.17 30.4.18 = 72,000

16/17 1.11.15 > 31-10-16 = 87.000 t 73,000×3=105,250 (34,000) ( lo)

12 78,750 10 →
Overlap .

12
17118 1.8.16
"m
31-7.17 = 73,000 16/17 1.4.16 7 =
24,000
1--24100×11=27,538
☐m 72
10m 17/18 1.5.16 <
30.4.17 ✗ I
Ñ
2m

73.000×2=46.16/7
" "m
18119 1.6.17 < 31.5-18 = 34.000 t 18119 1517 C 30.4.18 = 72,000 ✗ 12=66,461
12 13
12m 12
19120 1.6.18 315.19 = 97.000 19/20 1.5.18 30.4^19 =
92.000

☒
✓ → 12m →
ongoing ✓

→
- -

change
-
→ 12m

[
- a-
e-
27,538
12m →
ongoing
-
→ ✓
-

66.461 12m

(72,000) (13m)
12m
17/18 98.000
1.8.16 31-7.17 =
17-12=521 22,000
Overlap .
11m

> 18119 1.8.17 31^12-18 = 146.000 -

✗ ✗✗ =/ 46.000
"m
19120 1.1.19 31^12-19 = 76.000
?⃝
 end conditions end
Change in
year Planning for change
in
year
-
IF a business has
rising profits then it 1
,
Year end can
only be
changed once in
5years.

its ☒ months
should change end in such
Change period can be
of
a 2> maximum
year ,

way that its old

profits get taxed
again 3) HMRC should be
notified about
change
in
.

In this old end nearest 31

January end
way profits which were lesser
year on
after
will be taxed
again
E.
higher profits of change period .

current will
get taxed one
year
later .

12 months
IF than
-

change period is
of less

and ends in
different fiscal year ,
then

tax assessment includes old months as tax

,

months made back 12min14s

by going
in .

IF period than lzmonths

change of
-
is more

and it skips whole

a
fiscal year
then

old be taxed
also
profits will
again
as

assessment
tax will be made
by going
back 12 months twice .

-
This also
approves budgeting as business

knows its tax

already because it will

apply on old
profits .

business their end

Why change year
↳ It involves tax
planning in times
of
rising profits .

to
2) Due
change in owners .

3, Due to business months .

 PAGE 176

- -
- - -
-

- -

- - - -

-
- - - -

III.
-
-

- -
-

o
2 -
"

÷:÷:
-

→→--_ - - -

-
-

C- f- I

- -
 PAGE 177

✓
0*-0-5--7 -5€
 Meg E Laurie

E) I
12m
I. 1.2020 31-12.2020 = 17,000
"m
1.1.2021 313^2022 =
9000
As
period than Demonths
change is
of
more
-

therefore ongoing rule will be

followed
.

12
20/21 1.1.2020 3112^2020 = 17,000 NI
15
21/22 1.1.2021 31.3.2022 = 9000 - 7400 = 1600

As tax assessment b- months 4 exceeds

og
is
NI
-

months
limit
overlapping profit of
:
12 months •
3
=

can be adjusted .
 PAGE 25

ADVANCED TAXATION – 2020 / 21

Mr. J was provided with furniture costing £70,000 on 1st August 2017. On 1st Sep 2020 Employer gifted
furniture to Mr. J when its MV was £25,000. Mr. J paid £3,500 for furniture
Required: Benefit for 2020/21

OWAIS MIRCHAWALA
Mr. Y has been provided with an interest free loan of 34,000. Compute Loan Benefit if the loan is
provided interest free?

Mr. Y has been provided with a loan of 28,000 on 1st May 2020 at 2% interest by his employer. He
repaid 6,000 on 30th September 2020. Compute Loan Benefit for for 2020/21.

Mr. G has been provided with a loan of 19,000 on 1st June 2020 at 1% interest by his employer. He
repaid 2,000 on 31st December 2020. Compute Loan Benefit for 2020/21

Mr. X is using his personal Car for office use on which he is being paid a fixed amount of 30 pence per
mile by his employer. During current year he drove 56,000 miles. His basic Salary is 48,000. Compute
Taxable Employment Income?

Mr. G is using his personal Car for office use on which he is being paid a fixed amount of 26 pence per
mile by his employer. During current year he drove 26,000 miles. His basic Salary is 37,000. Compute
Taxable Employment Income?

Mr. P has a tax adjusted trading Profit of 47,000. Compute total NIC.

Mr. A started business on 1st September 2017. He has following accounting periods
1.9.2017 – 31.8.2018 120,000
1.9.2018 – 31.8.2019 80,000
1.9.2019 – 31.8.2020 75,000
Compute profits for each Taxable Periods?

Mr. A started business on 1st July 2016. He has following accounting periods
1.7.2016 – 31.12.2017 240,000
1.1.2018 – 31.12.2018 80,000
1.1.2019 – 31.12.2019 75,000
Compute profits for each Taxable Periods?

Mr. A started business on 1st November 2017. He has following accounting periods
1.11.2017 – 31.1.2018 55,000
1.2.2018 – 31.1.2019 90,000
1.2.2019 – 31.1.2020 175,000
Compute profits for each Taxable Periods?
 PAGE 26

ADVANCED TAXATION – 2020 / 21

Mr. A started business on 1st February 2016. He has following accounting periods

OWAIS MIRCHAWALA
1.2.2016 – 31.5.2017 55,000
1.6.2017 – 31.5.2018 160,000
1.6.2018 – 31.5.2019 57,000
Compute profits for each Taxable Periods?

Mr. J ceased his business on 31.7 2019. Detail of accounting periods are:
1.6.2017 – 31.5.2018 60,000
1.6.2018 – 31.5.2019 75,000
1.6.2019 – 31.7.2019 12,000
Compute profits for each Taxable Periods?

Mr. J ceased his business on 30.4.2019. Detail of accounting periods are:

1.2.2017 – 31.1.2018 86,000
1.2.2018 – 31.1.2019 79,000
1.2.2019 – 30.4.2019 43,000
Compute profits for each Taxable Periods?

The Winston Partnership has following details:

- Prior to 1 June 2019, there were two partners in the partnership: Zia and Fore.
- Budgeted tax adjusted trading profit of the partnership
o Year ending 31 December 2019 – 300,000
o Year ending 31 December 2020 – 380,000
- Profit sharing arrangement

Up to 31 May 2019- Profit Sharing 60% 40% N/A

From 1st June 2019 - Annual Salary - 24,000 18,000
- Profit Sharing 40% 30% 30%

Mr. A started business on 1st July 2017. He has following accounting periods
1.7.2017 – 31.1.2018 70,000
1.2.2018 – 31.1.2019 40,000
1.2.2019 – 31.3.2019 20,000
1.4.2019 – 31.3.2020 87,000
Compute profits for each Taxable Periods?
 PAGE 27

ADVANCED TAXATION – 2020 / 21

Mr. A started business on 1st November 2015. He has following accounting periods
1.11.2015 – 31.7.2016 87,000
1.8.2016 – 31.7.2017 73,000

OWAIS MIRCHAWALA
1.8.2017 – 31.5.2018 34,000
1.6.2018 – 31.5.2019 97,000
Compute profits for each Taxable Periods?

Mr. X has following accounting periods

1.8.2016 – 31.7.2017 98,000
1.8.2017 – 31.12.2018 146,000
1.1.2019– 31.12.2019 76,000
Compute profits for each Taxable Periods?

Mr. Y has following accounting periods

1.4.2016 – 31.3.2017 24,000
1.4.2017 – 30.4.2018 72,000
1.5.2018 – 30.4.2019 92,000
Compute profits for each Taxable Periods?

Mr. Y started trade on 1st January 2018 and has following accounting periods
1.1.2018 – 31.12.2018 (40,000)
1.1.2019 – 31.12.2019 72,000
Calculate Taxable Profits.

Mr. J has let a commercial property which has following details:

- Rent is 2,400 per month
- Water taxes are 30 per month
- Local Tax is 25 per month
- Repair Expenses were 40 per month
- Insurance charges were 45 per month
This property was let on 1stAugust 2020 and the tenant left the property on 31 January 2021. Property
was available for letting from 1st June 2020. Advertising charges of 2,300 were incurred during year.
Property is let out furnished.
Taxable Property Income?