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How HMRC works out total income for self employed

How HMRC works out total income and trading profits for the Self-employment Income Support Scheme
Find out how HMRC will work out your income and profits if you’re self-employed or a member of a partnership in the UK and have lost profits due to coronavirus (COVID-19).
Published 14 April 2020

HMRC will assess your eligibility for the grant based on your total income and trading profits. This guide details how we do this.
You can use this guide to find out if you’re eligible and how much you may get.
Trading profits
We will use the figures on your tax returns for your total trading income (turnover), then deduct any allowable business expenses and capital expenditure.
Allowable expenses include:
• office costs, for example stationery or phone bills
• travel costs, for example fuel, parking, train or bus fares
• clothing expenses, for example uniforms
• staff costs, for example salaries or subcontractor costs
• things you buy to sell on, for example stock or raw materials
• financial costs, for example insurance or bank charges
• costs of your business premises, for example heating, lighting, business rates
• advertising or marketing, for example website costs
• training courses related to your business, for example refresher courses

It also includes:
• any business expenses deducted through the trading allowance
• capital allowances, used to buy assets used in your business
• qualifying care relief
• flat rate expenses

We will not deduct from your trading profits:
• any losses carried forward from previous years
• your personal allowance

Example 1
If your total trading income (turnover) in each of the tax years 2016 to 2017, 2017 to 2018 and 2018 to 2019 was £20,000, and you claimed the £1,000 trading allowance each year.
This is worked out as:
1. £20,000 deduct the trading allowance of £1,000 = £19,000
2. Multiply £19,000 by 3 = £57,000
3. Divide £57,000 by 3 = £19,000
Your average trading profit would be £19,000.
If you have more than one trade in the same tax year
We will add together all profits and losses for all these trades to work out your trading profit.

Example 2
If you only traded in the tax year 2018 to 2019, and made a £60,000 profit for your first trade, and then a £20,000 loss for your second trade, your trading profit for that year would be:
Trade 1 £60,000 profit deduct trade 2 £20,000 loss = £40,000
If you traded for more than one year
To work out your average trading profit we will add together all profits and losses for all tax years you’ve had continuous trade.

Example 3
If you made:
• £60,000 profit in tax year 2016 to 2017
• £60,000 profit in tax year 2017 to 2018
• £30,000 loss in tax year 2018 to 2019
1. Add £60,000 and £60,000 then deduct £30,000 loss = £90,000
2. Then divide £90,000 by 3
Your average trading profit for the 3 tax years would be £30,000.

Example 4
If you did not trade in tax year 2016 to 2017 but made:
• £25,000 of profit in tax year 2017 to 2018
• £45,000 of profit in tax year 2018 to 2019
1. Add £25,000 and £45,000 = £70,000
2. Then divide £70,000 by 2
Your average trading profit for the 2 tax years would be £35,000.

Total income
Your total income is the total of all your:
• income from earnings
• trading profits
• property income
• dividends
• savings income
• pension income
• miscellaneous income (including social security income)

Eligibility
Your trading profits must be no more than £50,000 and more than half of your total income for either:
• the tax year 2018 to 2019
• the average of the tax years 2016 to 2017, 2017 to 2018, and 2018 to 2019

Example 5
If profits for the following years are as follow: 2016 to 2017; 2017 to 2018; 2018 to 2019

Average for the 3 tax years
Trading profit £50,000 ;£50,000; -£10,000 – Average £30,000
Pension income £15,000; £15,000; £15,000 – Average £15,000
Total income £65,000; £65,000; £5,000 – Average £45,000

Trading profit are more than half of your total income Yes Yes No Yes
So even if you made a loss in the tax year 2018 to 2019, you would still be eligible for the grant because your average trading profit for the 3 tax years:
• is £30,000 – which is less than £50,000
• is more than half of your total income of £45,000

Published by HMRC 14 April 2020
Click here to go to HMRC web page

 

Rob Lamey

Rob Lamey

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