Sorry...tax credits self employed confusion

bitconfused2012

Hi all, sorry for yet another thread with yet another person failing to understand the ins and outs of tax credits for the self employed!

My partner runs a small business. His profits for last year 2011-2012 was £15000. That is the figure the accounant has come up with as net profits on his accounts.

Now, he did have 'drawings' of £24000.

He has made purchases and has a tax bill of zero due to having capital allowances.

So what is the figure to declare?!

Thanks in advance

Icequeen99

You declare his taxable profit figure off his tax return. If you look on the tax credits renewal form notes it shows you where to get this figure from the tax return.

It is whatever the figure is after capital allowances. The figure that he paid tax on.

The 24,000 drawings are irrelevant.

The £15,000 doesn't sound like it is the right figure either, as presumably that doesn't take account of capital allowances.

if there are any losses, you need to look at form TC825 which tells you what to do with them.

IQ

bitconfused2012

thanks IQ

He made large purchases and therefore had a large allowance causing his tax bill to be zero for the last 3 years as he has purchased something each year...

So whilst a profit has been made, he has had no tax to pay!

does this make sense?

Im very confused!!

keigcf

Makes perfect sense, you need the taxable profit off the Tax Return

Icequeen99

bitconfused2012 wrote: »

thanks IQ

He made large purchases and therefore had a large allowance causing his tax bill to be zero for the last 3 years as he has purchased something each year...

So whilst a profit has been made, he has had no tax to pay!

does this make sense?

Im very confused!!

Yes, therefore his taxable profit must be either a low figure, NIL or a loss taking into account his capital allowances. It is that figure you need to use for TC.

If there are losses you can offset against your income in the same year and carry forward against profits of his trade in later years for tax credit purposes.

IQ

bitconfused2012

So to sum it up, what do i tell tax credits? Zero?!

BigAunty

Working out your income

This is a three-step process:

• Step 1: look at how much profit you made
• Step 2: decide what to take off
• Step 3: then what did you have left?

First work out what profit you made. If you’ve filled in your tax return for the last tax year, tell the Tax Credit Office the profit you included on the return.

When you've worked out the profit, take off:

• the gross cost of any pension payments you made into a scheme registered with HM Revenue & Customs
• any trading losses from the same business you brought forward from a previous year
• the gross amount of any Gift Aid payments

Take the Step 2 total from the Step 1 total to show your Income from self-employment. Put this on your tax credits claim form or Annual Declaration form in the section on income.
If you made a loss in the last tax year, enter 0 in the box.

http://www.hmrc.gov.uk/taxcredits/start/claiming/income-hours/self-employed-income.htm

(The above is a summary of the advice - see the link for full explanation).

bitconfused2012

But the tax return amount determines te tax payable. Tax payable was nil due to having capital allowances

Icequeen99

bitconfused2012 wrote: »

But the tax return amount determines te tax payable. Tax payable was nil due to having capital allowances

On his tax return he will have made a profit or loss (possibly nil but I don't see that often in practice). That is the figure you need.

The tax payable was nil, but that could mean his taxable profit was under his personal allowance, nil or he made a loss.

You then deduct the other allowable items in the previous post (pension contributions etc) and that is the figure you give for tax credits. If it is a negative figure, you declare NIL and offset the loss against your income. if you can't do that or don't use it all up, you can carry it forward against profits from his trade next year.

I'm confused now as to what the problem is. On his tax return he will have a net profit/loss figure that is his profit/loss minus his capital allowances. That is the figure you need.

IQ

Icequeen99

Ok, from the TC600 notes you can find the figure you need on his tax return using the following guide:


Enter your total profit for the year in box 5.5. Copy this amount from one
of the following:
• Short tax return, box 3.10
• Self-employment (short) pages, box 27
• Self-employment (full) pages, box 72, or
• Partnership (short or full) pages, box 14.
Round your profit down to the nearest pound before entering it in box 5.5.
For example, if your total profit was £8,345.64, enter £8345.

If there is other income into the business then you may need other figures. See TC600 notes Pg 15 http://www.hmrc.gov.uk/forms/tc600-notes.pdf

The same info will be in the renewals notes as well.

IQ

bitconfused2012

So whats drawings then? Just out of curiousity! Profit or other income or not?