Unincorporated businesses
A new business must register with HMRC within three months of commencing to trade. Income tax is paid on the profits of the business. The amount that the proprietor, or a partner in a partnership, draws out of the business (referred to as ‘drawings’) is irrelevant.
Profits are taxed on a current year basis as shown by the example, although a new business will be subject to special rules, which we can outline for you.
Example
If the accounting period (or ‘year’) end is 31 March then, in the tax year 2009/10, the profits for the year ended 31 March 2010 will be taxed.
If the year end was 31 August then, in the tax year 2009/10, the profits for the year ended 31 August 2009 will be taxed.
Practical Tip
The choice of accounting date on a business start up can affect
- how profits are taxed
- when tax is payable
- when losses are relieved
So do contact us to discuss the options available for your circumstances.
Working out profits
Profits are calculated using generally accepted accounting practices and crucially this means that profit is not necessarily simply receipts less payments. Instead it is income earned less expenses incurred.
Not all of the expenses that a business incurs are allowed to be deducted from income for tax purposes but most are. It is important that you keep proper and comprehensive business records so that relief may be claimed.
Tax Tip
Try to incur expenditure just before rather than just after the accounting year end, as this will accelerate the tax relief. Examples of the type of expenditure to consider bringing forward include building repairs and redecorating, advertising and marketing campaigns and expenditure on plant and machinery.
