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LPC - BLP MODULE - TAXATION OF SOLE TRADERS AND PARTNERSHIPS (DISTINCTION)
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NOTES ON THE TAXATION OF SOLE TRADERS AND PARTNERSHIPS. DISTINCTION ACHIEVED WITH THESE NOTES.
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BLP Taxation of Sole Traders/Partnerships.Whether you are running a business as a partnership or a sole trader you will be taxed on
the profits that you make.
For partners, the profit is shared between the partners before it is taxed.
If the profit is income in nature it means that it is recurring.
Capital profit occurs in situations where you have sold something, or made a one off
transaction.
The partnership as a body does not pay tax. The partners are liable for their own individual
taxation. How much tax each partner will pay will vary depending on their own financial
positions.
The division of profits is determined by the partnership agreement.
A partner will not necessarily be taxed on all the profit in the profit and loss account as
there are deductible expenses for tax allowances.
Need to make sure that you only deduct things that are deductible for tax purposes when
deducting deductible expenditure.
Income Receipts.
Need to look for receipts or transactions that are commercial in character.
Need to have an underlying contractual right to the payment.
Gifts etc will not be counted as income receipts.
Deductible expenditure.
Can only deduct expenditure from the income receipts that satisfy particular requirements.
Is income in nature – does it have the same quality of recurrence as the income
does. What wouldn’t be regarded is the purchase of a long term asset. The
expenditure is not recurrent in nature – it is one off spend on a long term asset. Thus
you cannot deduct the cost of purchasing long term assets from income.
Incurred wholly and exclusively for trade
o If it has a dual purpose – then only some proportion can be deducted. Such as
in cases for electricity etc for when working at home.
o The general rule is that no dual purpose/ expenditure will count. HMRC tend
to take a more logical/practical approach.
The deduction is not prohibited by statute.
Capital Allowances.
General rules is that capital expenditure cannot be deducted because it is not of an income
nature. There are, however, capital allowances.
Machinery and plant are object purchased/ long term assets that are required for the
running of the business. If falls into this category, can deduct a certain percentage each year
for relief.
1. Pool all your plant and machinery.
2. Calculate the value. This is the ‘Written Down Value’.
3. Each year you can deduct 18% from the pool.
4. You can then account for this 18% (the figure you get) as a deductible expenditure.
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