Business
tax: profits, expenses and capital allowances
In this section we take a quick look
at how to work out what level of profits you will need to include
in your self-assessment tax return and what expenses and
capital allowances you can deduct from those profits.
You can read through this information sheet,
or go directly to the sections you want to read by clicking on
these links:
Starting your own business: registering for tax and national
insurance
You've decided to work for yourself. Firstly you need to
make sure that you are actually going to be self employed for tax
and national insurance contributions (NIC) purposes. HM Revenue and
Customs (HMRC) will need to be happy that this is the case and that
you are not in fact an employee instead. To help you work it out,
have a look at the Low Incomes Tax Reform Group's guide
Employed or self employed? (link opens in a new window).
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Pre-trading expenses
The general rule is that you can deduct trading expenditure from
profits when it is made and so is not allowable if incurred before
trading starts.
The rule is relaxed for some pre-trading
capital expenditure. It is necessary to treat expenditure incurred
before a qualifying business begins as being made on the first day
you carried on the business. So if Fred decides to start trading as
a self employed carpenter and he buys some tools on 1 October 2012
and starts the business on 1 January 2013 - he will be treated as
incurring the expenditure on the tools on 1 January 2013.
There is also some relief available for
expenditure made within the seven years before you start in
business which, had it been incurred on the first day of trading,
would have been deductible in working out your profits. The
expenditure is treated as if you made it on the on the first day of
trading and will be included in your first accounts. Expenditure
which would normally be allowed in your accounts e.g. pre-trading
purchases of stock or advance payments of rent is not within this
special relief.
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How do I work out my taxable profits?
Your accounting date
You can have any day in the year as your accounting date,
although for working out your tax 31 March or 5 April are the
easiest dates.
If your accounting date falls between 31 March and 4 April, you
can treat these dates as if they were instead 5 April as this makes
working out your tax much easier.
You can however choose whatever date is most suitable to your
business. If your business is seasonal, you may want a date in your
low season or when trade is usually slow.
You may have other reasons for the date you choose or you may
just use the anniversary of your start date if you
prefer.
You normally keep the same date each year although you can
change the date if you want. However to make your tax simple it is
better to keep the same date as far as possible.
If you make up your accounts to 31 December each year, this is
your accounting date and the 12 months to December are your
accounting period.
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Your basis period
Apart from your first few years of business and any year in
which you change your accounting date, your basis period for any
tax year is usually the 12 months up to your accounting date ending
in that tax year.
If you have been in business for a few years and your accounting
date is 31 January, your basis period for 2012/2013 (the year to 5
April 2012) will be the twelve months ended on 31 January 2013 as
this is the end of the accounting period falling in the tax
year.
If instead you made up your accounts to 30 September 2012, these
accounts would also form your basis period for 2012/2013 as your
accounting date falls within that tax year.
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In your first year of trading
If you started business during 2012/2013, your basis period for
the first year will be from the date you started to 5 April
2013.
You started business 1 July 2012. Your basis period for
2012/2013 will be 1 July 2012 to 5 April 2013.
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In your second year of trading
If your accounting date falling in this tax year is 12 months or
more after the date you started your business, your basis period
will be the 12 months to your accounting date.
You started business on 1 June 2011. If your accounting date is
31 August - your basis period for 2012/2013 will be 1 September
2011 to 31 August 2012.
If your accounting period ending in 2012/2013 is less than 12
months - your basis period for the year is 12 months beginning on
the date you started.
You started business on 1 June 2011. If your accounting date is
31 March - your basis period for 2012/2013 will be 1 June 2011 to
31 May 2012.
If you do not have an accounting date in
2011/12, your basis period for that tax year is 6 April 2011 to 5
April 2012.
You started business on 1 February 2011. Your first accounts end
on 31 May 2012. There is no accounting date in 2011/12 and so your
basis period for that year will be 6 April 2011 to 5 April
2012.
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In your last year of trading
If you cease your business in 2012/2013 (between 6 April 2012
and 5 April 2013), your basis period will be from the end of the
basis period for 2011/2012 up to the date you finished your
business. This is easier to see in an example.
Your business stopped trading on 31 March 2013. You normally
have an accounting date of 30 September so for the previous tax
year 2011/12 (6 April 2011-5 April 2012) your accounting date would
have been 30 September 2011. For your final year 2012/2013 your
basis period is therefore 1 October 2011 to 31 March 2013.
You may get some overlap relief so that you are only taxed
on 12 months profits in total. There is more information on
overlap relief on the Low Incomes Tax Reform Group's website (link
opens in a new window).
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Business profits, expenses and
capital allowances
Changing your accounting date
If you want to change your accounting date for
tax purposes, you will need to explain to HM Revenue and
Customs (HMRC) in your tax return why the change is
necessary.
They may not accept your explanation, in which case you will
have to keep your existing date. However if you have a reasonable
argument, it is likely to be accepted, e.g. you have two
businesses and you want the same accounting date for each. You
cannot just keep changing the date each year to suit
yourself.
For the tax year first affected by the change, you will also
need to have sent your tax return to HMRC before the filing date of
31 January following the end of the tax year or the change will not
count.
If you want the change to be temporary, you can ignore it for
tax purposes.
Otherwise you will be treated as having changed your accounting
date if:
- You have made up your accounts to a date different from that
used for your tax last year or;
- You intend to draw up a set of accounts for more than 12 months
so that no accounting date falls into the current tax year or;
- You changed your accounting date last year, but this was
not accepted by HMRC and you are using the same date
again.
There are two rules for working out your new basis
period:
- If your new accounting date in 2012/2013 is more than 12 months
after the end of your basis period for the previous year 2011/2012,
your new basis period will be from the end of that basis period to
your new accounting date.
- You will get some overlap relief so that you are only taxed on
12 months profits in total. For more information on overlap
relief, see the
Low Incomes Tax Reform Group (link opens in a new
window) so that you are only taxed on 12 months profits in
total.
If your basis period for 2012/2013 ended on 30 June 2011 and the
new accounting date is 30 September 2012, your basis period for
2012/2013 is the 15 months, i.e. 1 July 2011 - 30 September
2012.
If your accounting date in 2011/2012 is less than 12 months
after the end of your basis period for the previous year to
2011/2012, your new basis period will be 12 months ended on the new
accounting date.
If your basis period for 2011/2012 ended on 30 September 2011
and the new accounting date is 30 June 2012, your basis period for
2012/2013 is the 12 months to 30 June 2012.
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When you have more than one set of accounts for a tax year
When you start in business you may find you have more than one
set of accounts, which come within your basis period. When this is
the case you need to work out what part of each set of accounts
comes within the basis period and add the figures
together.
For example if you started in business on 6 April 2012, your
basis period is the 12 months to 5 April 2013. Your accounts are
made up for the four months to 31 July 2012 (profit £5,000)
and the 12 months to 31 July 2013 (profit £12,000). You can
therefore work out the profits to be taxed as the basis period for
2012/2013:
4 months to 31 July 2012 5,000
8 months to 5 April 2013 (8/12 x
£12,000) 8,000
= £13,000
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Business profits, expenses and
capital allowances
What business expenses are allowable?
If your annual turnover in your business is less than £77,000
you need only enter the total figure of your business expenses in
the Self-employment short
version Supplementary Pages - SA103S (link opens in a new window
PDF file size 71kb). However make sure you keep details of
the expenses you claim in case HM Revenue and Customs
(HMRC) makes enquiries into your tax return.
You can use the short return
(link opens in a new window PDF file size 111kb) if your
turnover is under the Value Added
Tax (VAT) threshold, which is currently £77,000,
provided certain other circumstances do not apply. Have a look
at the supplementary
notes on the HMRC website (PDF file size 98kb link opens in a
new window) for the full list. Otherwise you will need to
complete the self-employment full
version supplementary pages (link opens in a new window PDF file
size 109kb).
There are two useful tables showing which expenses are allowable
and which are disallowable at pages SEFN 8 and SEFN9 of the
self
assessment self employed pages notes (link opens in a new
window PDF file size 115kb).
The Low Incomes Tax Reform Group website has
general information on business expenses (link opens in a new
window).
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Capital allowances
The Low Income Tax Reform Group's website has
general information on capital allowances (link opens in a new
window).
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Selling items online, through classifieds and at car boot
sales
If you need information about selling items
online on sites such as Ebay, through classified advertisements and
at car boot sales, you may find it useful to look at the HM Revenue
and Customs guide for
people who sell items online, through classified advertisements and
at car boot sales (link opens in a new window) as to
whether or not you will be trading and if so what to do next.
On 14 March 2012 HMRC began a campaign aimed at people who may
be trading on the internet, in particular those selling goods or
services through e-marketplaces, such as Ebay and other online
auction forums. See the article on the Low Incomes Tax
Reform Group website (link opens in a new window).
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Acknowledgement
This information has been reproduced with the kind permission of
the Low Incomes Tax Reform Group (link opens
in a new window), which is an initiative of the Chartered
Institute of Taxation to give a tax voice to the unrepresented.
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Updated: 6 April 2012
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