HS222 How to calculate your taxable profits (2016)
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Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. This publication is available at https: For more information on cash basis accounting see Cash basis. You must keep records of your business transactions. Whatever basis you use, your records must include:. Some businesses can use can use a flat rate simplified expenses instead of the actual expenses to work out:.
Your accounting period is the period your accounts cover. If you are not a new business your accounting period starts on the day after the end of your previous accounting period. For example, if you made your accounts up to 5 Aprilyour new accounting period starts 6 April Your accounting date is the last day of your accounting period.
You choose your accounting date. Normally you make your accounts up to the same date each year. If you change your accounting date special rules apply. You will find information on change of accounting date below. If you have an existing business and you are switching over to cash basis, you might have to make some one-off adjustments to your tax in this period. The table below shows if you need to make an adjustment, and if so, how to make it.
If this is your first tax period with self-employment income, you will not need to make any adjustments. If you have an existing business and you are switching over from cash basis to traditional accounting you need to work out an overall adjustment. This can be either:. Working sheet 1 tells you how to work out the adjustment and what to do with it.
If you need more information on traditional accounting contact your tax adviser. Only include business expenses in your accounts if they belong to that accounting period. Include the other half in your accounts for next year. This is the cost of any raw materials and goods bought for resale which you used during your accounting trading profits basis of assessment. Use Working sheet 2 to help you work out how much you can claim.
The table below lists the main categories of expenses that businesses have. Not all expenses are allowed for tax. If you include all of the expense when you work out your profit you must add the non-allowable expenses or part expenses to the profit.
After the first year or two in business, your basis period is the month period you use for your accounts except if you change your accounting date or ceased. Use the following rules to help you work out your basis period.
Partnerships do not trading profits basis of assessment basis periods. If you started the business during the period 6 April to 5 April trading profits basis of assessment, your basis period is from the date trading profits basis of assessment started to 5 April For example, if you started the business on 1 July trading profits basis of assessment, your basis period is 1 July to 5 April If your businesses started in the period 1 to 5 April, we will treat the profit for year 1 as nil.
If your business ceased during toyour basis period is between the end of the basis period for to and the date on which your business ceased. For example, if your basis period for to ended on 30 April and you stopped trading on 31 Decemberyour to basis period is 1 May to 31 December If your business started and ceased in to your basis period is the period of your business. If your accounting date in to is more than 12 months after the end of the basis period for toyour basis period is the period between the end of the basis period for to and the new accounting date.
If your new accounting date 31 March or 1, 2, 3 or 4 April, see Accounting dates in the period 31 March to 4 April below. For example, your business started on 6 April and your basis trading profits basis of assessment is the 12 months to 5 April Your basis period covers 3 months of your accounts and 9 months of your accounts.
You must use the same basis consistently for the trade. The basis period for the tax year in which a business starts year 1 usually ends on 5 April. However, if a new business chooses an accounting date of 31 March or 1, 2, 3 or 4 April, the accounts are treated unless you elect otherwise as being made up to 5 April and there is no need to add in any profits from the next accounting period if those profits are taxed in the following year.
There is no overlap profit see below and no overlap period. You may also treat a change of accounting date where the new date is 31 March or 1, 2, 3 or 4 April as though it was a change to 5 April. All overlap profits are deductible in the year that the change takes effect. Talk to your tax adviser if you need more help.
You may find that your basis period for to overlaps with the basis period for to Overlaps can happen in the first 3 years after a business starts up or in a year in which there is a change of basis period because of a change of accounting date. For example, if your business started on 1 January and your first accounts are for the 12 months to 31 Decemberyour basis periods are:. The period of overlap is 1 January to 5 April If your basis periods overlap, keep a record of the overlap profit and the overlap period.
You must take off as Trading profits basis of assessment Relief overlap profits which arose in earlier years when working out your taxable business profits for to if:. You change your accounting date. Your basis period is 14 months. The relief trading profits basis of assessment in proportion to the number of months by which the basis period exceeds 12 months that is, 2 months and the length of the overlap period that is, 5 months.
Trading profits basis of assessment can claim this as Overlap Relief in a later year. Instead, you can claim tax allowances called capital allowances. You take off the allowances from trading profits basis of assessment profit to find your taxable profits, or add them to your losses to get your allowable loss.
Usually, anything you use that has a useful economic life of trading profits basis of assessment least 2 years may qualify for capital allowances. Capital allowances do not apply to items that you buy and sell as part of your trade; these items are included in business expenses.
If you have claimed capital allowances, an adjustment, known as a balancing charge, may arise when you sell an asset, give it away or stop using it in your business.
We add the balancing charge to your taxable profits, or take them off your losses, in the year they occur. If you are using cash basis, you can only claim capital allowances on cars. The cost of all other equipment and vehicles is an allowable expense in working out your business profits. For more information see Capital allowances and balancing charges: HS Self Assessment helpsheet.
If your business ceased in to and you made a loss in your final 12 months of trading, you can claim terminal loss relief against your profits from the same business. Your terminal loss must be set against any profits after deducting losses brought forward from the same business taxed in to If any terminal loss remains it must be set against the profits of the same business trading profits basis of assessment in the 3 prior years. Start with the latest year. This is in addition to any other losses you are bringing forward from earlier years.
For more information on terminal losses and how to calculate your terminal loss see Losses: The partnership started trading on 1 October and makes up its account to 30 September. You stopped being a partner on 31 December If the partnership carried on a trade or profession in to the basis period depends on whether the partnership income had tax taken off.
Online forms, phone numbers and addresses for advice trading profits basis of assessment Self Assessment. To help us improve GOV. It will take only 2 minutes to fill in. Skip to main content. Home How to calculate your taxable profits: Contents Records Accounting periods period of account Entering cash basis Leaving cash basis Traditional accounting accruals basis Records Expenses Cost of Sales Allowable business expenses: You must work out your taxable profits using: Records You must keep records of your business transactions.
Whatever basis you use, your records must include: Some businesses can use can use a flat rate simplified expenses instead of the actual expenses to work out: Accounting periods period of account Your accounting period is the period your accounts cover.
Entering cash basis If trading profits basis of assessment have an existing business and you are switching over to cash basis, you might have to make some one-off adjustments to your tax in this period. When you need to make an adjustment How to do the one-off adjustment If your customers owed you money at your accounting date last year, and you paid tax on that amount in that tax year, and your customers have paid you in this accounting period.
Take away the amounts owed to you from your total trading profits basis of assessment basis turnover for this trading profits basis of assessment period. If you owed money to your suppliers at your accounting date last year, and you received tax relief on that amount in that tax year, but you did not pay your supplier until this accounting period.
Take away the amounts owed to your suppliers trading profits basis of assessment your total cash basis expenses for this accounting period. If you had a stock of items at your accounting date last year, but you did not get tax relief for the cost. Add the cost of those items of stock to your cash basis expenses for this accounting period.