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HS220 HS222 HS223 HS224 HS227 HS229 HS231 HS232 HS234 HS236 HS238
The definitions of trades (schedule D case I), professions and vocations (schedule D case II) are not relevant to the computation of tax.
To access this screen, Income
| Trade,Profession or Vocation
| Sole Trade or Partnership
The classification that matters is the type of business.
A sole trade will require a lot of accounts information to complete the tax return whereas the partnership return forms part of the Business Tax software and the only data needed for the individual return is the partner's share of the profits or losses.
Income from businesses is derived from the accounts. Accounting periods are usually 12 months long. IRIS requires the entry of the account period end date. The start of the account period is taken to be one day after the end of the preceding account period end date or the trading start date (if no preceding account date has been entered).
The taxable profit or loss is not usually the same as the profit shown in the accounts. IRIS Business Tax takes the figures from the accounts and adjusts them for tax purposes, adding back disallowed expenses and so forth.
There are options to transfer the figures from Business Tax to Personal Tax, which will fill in all the data fields required to produce the self-employment and/or partnership pages.
Since 6/4/96 all trade income has been taxed under the current year basis rules. This replaced the prior year basis rules which are now irrelevant, but see transition to current year basis, below. In essence the current year rules are quite simple. The taxable income is the profit for the 12 month period ending in the fiscal year.
What happens when there the account period is not twelve months long or in the first year of trading?
There are special rules for the opening and closing years and for change of accounting date to arrive at the basis period. In the first and last year's of trading the basis period is not usually 12 months long.
Unless there is a change of accounting date, a 12 month period will be used in all other years of trading. If there is a change of accounting period, the basis period will either be a 12 month period constructed from two account periods or it will be a long accounting basis period made up of one or two accounting periods.
Overlap profit arises when the profits from an accounting period are taxed twice. This always happens in the second year of trading unless an accounting period end date of 31/3 or 5/4 has been chosen. An overlap may also occur when there is a change of accounting period that results in the construction of a 12 month basis period from 2 accounting periods.
Overlap profits are stored until they can be used. There are two factors: the number of days from an accounting period that have been taxed twice and the amount of profits taxed twice.
Overlap relief is given when the trade ceases or when there is a change in the accounting date that results in the basis period being longer than 12 months. All the profits that have accrued are deducted on cessation. On the change of an accounting date, the relief given is in proportion to the number of extra days in the basis period (the number over 365).
The basis period is computed in the same way when there is a loss but where there is an overlap (the basis period overlaps an account period that formed part of the previous year's basis period), the loss in the overlap period is ignored. This is to prevent a loss being claimed twice. Overlap profits are not affected and do not apply when the overlap covers a loss making account period. However, overlap relief may be given (if available) and will augment the loss.
Losses will be rolled forward to use against future profits from the same trade (TA88 s385). It is possible to claim to use the loss against other income (TA88 s380). To make this claim an entry is required in the data entry field Loss offset against other income.
In 1996-97 businesses that had been taxed under the old prior year basis of taxation, switched to the current year basis. Special transitional rules covered the calculation of the basis period and the taxable income for the 1996-97 year. Trades that commenced on or after 6/4/94 were automatically under the current year basis rules.
In 1997-98 a special transitional overlap profit was computed for trades that had gone through the transition to the current year basis. This applied to all trades except those with a 5/4 account period end date.
The self-employed have to pay class 2 and class 4 national insurance contributions (NICs). Employee's pay class 1 NICs. These are no longer payable when the person reaches retirement age (60 for women, 65 for men) by the start of the fiscal year (6th April). This includes people with a birthday on the 6th. Class 4 NICs form part of the tax computation because they are based on the taxable profits of the business.
Class 1 and 2 NICs are not included in the tax computation. If the person pays class 1 NICs and also runs a business, all or part of the class 4 NIC liability may be deferred depending on the amount of earned income that has been subject to class 1 NICs.
Class 4 NICs are calculated as follows:
Taxable profit n
Less trading losses (n)
Less adjustments (n)
----
Profits assessable n
The class 4 NIC due is based on the profit assessable, by 'taxing' the amount that falls between a lower earnings limit (LEL) and an upper earnings limit (UEL).
Click here to view the rates applicable for Class 4 nic
For example if the profits assessable are £20,000 in 1999-2000 the class 4 NIC due would be £761.40 (20,000 - 7,530 = 12,470 x 6% = 748.20). The maximum payable is the maximum class 4 NIC that could be paid, where the profits assessable exceed the UEL.