As already mentioned, the starting point is to decide on the accounting date, i.e., the date at the end of the accounting period. Any convenient date can be chosen, e.g., the anniversary when the business commenced or, in a seasonal business, a date when trade is slack and stocks are low. This date can be changed as and when necessary, though whatever date is chosen it is easier to work out the tax payable if the same date is kept each year.
For a new business just commenced it is best to choose 5 April as it keeps one’s tax calculation simple. Even where accounts are not prepared for the business every year, one’s taxable profit should still be worked out using generally accepted accounting practices.
Taxing of Business Profits Profits which arise from carrying on trades, professions and vocations cannot usually be worked out by simply adding together the cash receipts of the business and deducting expenses paid out.
This would show the business’ cash flow, but it would not usually be a proper measure of its profits. To arrive at the profits it is necessary to draw up accounts using the methods which accountants have developed for dealing with income that has been earned but not received, expenses which have been incurred but not paid or paid but not fully used, and so on.
The commercial profits arrived at by using these methods have to be adjusted for tax purposes. This is because in arriving at the commercial profits some items of income or expense may be recognised as not taxable or tax deductible, and other special allowances may reduce the amount of profits which are taxable.
Cost of Raw Materials and Goods Bought for Resale. The cost should be shown in the accounting period when the purchase is made. Creditors should be counted if payment was not made at the end of the period when items were delivered. No items to be counted if paid for during this period if included as creditors in the last accounts.
What are to be included are the value of stock on hand and uncompleted work in progress at the start of the period (this must be the closing figure which was used in the last accounts), but exclude the value of stock and work in progress at the end.
A value of the stocks for resale and work in progress at their cost or, if this happens to be lower, at the net price they will fetch when sold in the normal course of the business. Value consumable stores at their cost to the taxpayer, or if they have deteriorated or become obsolete, at their net realisable value where this is lower.
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Allowable Business Expenses
Broadly speaking, all costs which are incurred for the sole purpose of earning business profits can be deducted from the turnover. But costs incurred for a non-business purpose, such as for personal expenses or drawings cannot be deducted.
But what cannot be deducted are capital costs, i.e., the cost of buying fixed assets or intangibles, such as goodwill, which last for several years (or losses suffered when the business is sold).
However, it may be possible to claim capital allowances for capital costs. Additionally, it is not allowed to deduct costs which are recoverable under an insurance policy.
Business expenditure is allowed in the accounts for a period if it was incurred in earning turnover in that period, even if payment is not due until later.
The amount to deduct is the amount of the expense which was used up during this period. This may not be the amount actually paid. For example, if money is owed at the end of the accounting period to trade creditors, it may be that this should be included in this accounting period rather than later when it is paid.
Tax is paid according to the profits or losses for the basis period.
Basis Period for 2014-15
After the first year or two following the start of the business, the basis period will be the 12-month period that is used for the accounts, except where there is a change in accounting date. However, the following rules which enable the basis period to be worked out should be checked.
One’s accounting period is the period covered by the accounts and the accounting date is the last day of accounts. For example, if accounts are drawn up each year to 31 December, the accounting period for the 2015-16 tax year is the 12-month period 1 January 2015 to 31 December 2015 and the accounting date is 31 December 2015.
Business Started in 2015-16. If one’s business commenced during the period 6 April 2015 to 5 April 2016, the basis period is the period from the date of commencement to 5 April 2016.
Cessation of Business. If one’s business ceased during the period 6 April 2015 to 5 April 2016, the basis period is the period between the end of the basis period for 2014–15 and the date on which the business ceased.
Change in Accounting Date. There is a change if:
(a) the accounts have been drawn up to a date which is not the same as the date used for tax purposes in the previous year; or
(b) it is intended to draw up accounts for more than 12 months and no accounting date falls in the 2011–12 tax year; or
(c) there is a change in the accounting date last year, though this was not accepted by HMRC, and the taxpayer has drawn up his accounts to the same date this year. However, if he has changed back to the old date this is not treated as a change of accounting date.