Income Tax

Schedule D - Case I and II

Scope

Case I: Tax adjusted Profits of a self-employed trader.

Case II: Tax adjusted Profits of a self-employed professional.

Basis of Assessment

Profits from the accounts done in 2005 are taxed in 2005. The accounts must be for a twelve-month period.

Calculating Case I and II Profit

There are three steps to work out a businessperson's taxable Case I and II profit. They are:

1. Start of with the net profit/loss for the profit and loss account.

2. Add back any expenses, which are not allowable.

3. Subtract any incomes that are not taxable under case I and II. E.g. rental income.

Treatment of Expenses

Expense: Add back Do Not Add back

Ё Any expense that is wholly and exclusively for the business P

Ё Expenses not for the business P

Ё Owners drawing/salary - anything owner takes for private use P

Ё Political/charitable donations P

Ё Any expense incurred for the employees P

Ё Capital expenditure - costs associated with buying/improving fixed assets P

Ё Depreciation P

Ё Repairs to fixed assets P

Ё Bad debts P

Ё Increase in general provision P

Ё Increase in specific provision P

Ё Repaying capital sum of loans P

Ё Business entertainment P

Ё Penalties/fines for breaking the law P

Ё Car lease costs P (Some)

Notes:

1. Car Lease Costs:

Write down the total lease costs.

Step 1 - subtract personal percentage of the Owner's car only.

Step 2 - subtract:

Answer after step 1 x (Price of car - Ђ22,000)

Price of the Car

NB: The amounts that you subtract are the amounts that are to be added back.

2. General Provision:

Created a 2% provision - add back as it is only a general provision and is not tax deductible.

Question

Claire is a self-employed florist and has been in business for a number of years. She has prepared accounts for the year ended 30th September 2003 and has asked you to review these with a view to completing her Tax return.

Accounts for the year ended 30th September 2003

Notes Ђ Ђ

Sales 126,181

Opening stock 2,100

Purchases 56,003

58,103

Closing Stock 2,950

Cost of Sales 55,153

Gross profit 71,028

Add:

Rental Income received 3,650

Dividends received 1,220 4,870

75,898

Less:

Bad Debts (1) 1,340

Entertainment Expenses (2) 1,660

Legal Fees (3) 6,450

Accountancy Fees (4) 4,600

Wages and Salaries (5) 34,000

Telephone (6) 1,800

Motor Expenses (7) 10,830

Interest on late payment of VAT 240

Rates 950

Bank Interest and Charges 4,600

Insurance 2,750

Repairs (8) 7,310

Sundry Expenses (9) 4,550

Depreciation 3,600

86,680

Loss 8,782

Notes:

1. Bad Debts:

General Bad Debt Provision Specific Bad Debt Provision Bad Debts Written Off Bad Debts Recovered Net P/L Charge

Ђ Ђ Ђ Ђ Ђ

Opening Provision 500 300

Closing Provision 800 100

Profit and Loss Account 300 (200) 1,800 (560) 1,340

2. Entertainment Expenses: Ђ

Staff Christmas Party 650

Customer entertainment at flower show 450

Christmas gifts to five important clients 560

1,660

3. Legal Fees: Ђ

Pursuing bad debts 1,345

Purchase of shop premises 3,650

Defending unfair dismissal claim of an employee 1,455

6,450

4. Accountancy Fees: Ђ

Preparation