Taxable income for previous years

Taxable income for previous years

Didn't find your answer?

Hi

I am dealing with one of my new client' tax inquiry. He did not file any tax return since 2000. I finalised his 2014 SA tax return and tax inspector agreed with my proposal to go back and calculate his net taxalbe income on the basis of 2014 results.

His taxable income for 2014 is around £10k.

Could someone please guide me how can I estimate his last 13 years taxable income? either on CPI or RPI basis ? I do not know how these index work?

Any thoughts please.

Thanks

Replies (8)

Please login or register to join the discussion.

By johngroganjga
27th Jul 2015 13:25

Why did you propose this method if you are not able to perform the required calculations?

Thanks (2)
Replying to DJKL:
avatar
By sukuho
27th Jul 2015 13:33

I did not propose any method. I am looking for any method to calculate or estimate his taxable income for the last 13years.

Would you please recommend any method to calculate or estimate his last years taxable income please?

 

Thanks (0)
By johngroganjga
27th Jul 2015 13:37

Yes - index back using RPI or CPI.

Thanks (2)
avatar
By DMGbus
27th Jul 2015 14:01

RPI indexation

I can see the logic for using RPI to index back to compute past profits - a saving in fees / costs (which could be considerable with incomplete or non-existant records).  The only proviso is being satisfied that the result is a fair one and considering one-off adjustments if circumstances warrant this for particular circumstances in particular years (eg. if several weeks ill in a particular year time-scale down the results).

Here's how it could work (using RPI):

£10,000 = profits 2013/14, RPI for March 2014 = 254.8

RPI for March 2013 = 248.7, so 2012/13 profits = 248.7/254.8 x 10,000 = £ 9,760

and repeat the exercise for each year using RPI figures for same month of each year.

There is an argument for using mid-year RPI (ie. 2013/14 using Sept 2013 RPI) then Sept RPI for each year indexed back.

If CPI gave better results (= lower profits) then use CPI, but I don't hold CPI figures, I only ever work on RPI figures.

Thanks (1)
avatar
By Discountants
27th Jul 2015 14:54

CPI will not give better results

Use RPI - CPI uses a different algorithm which assumes that a good with a rapidly rising prices is displaced by a similar product and also it excludes all housing costs.

The practical upshot is that RPI usually rises by up to 1% a year more than CPI - a difference of 14.9% over the period you are looking at

CPI is probably a better measure (if it included housing costs), but RPI rises faster and you should therefore use this one :)

Probably the most comprehensive price measure for consumers is the consumption expenditure deflator which is used in the national accounts, however this is only published quarterly and I would not expect many people other than econogeeks like myself to know about it :)

Thanks (0)
avatar
By Vaughan Blake1
27th Jul 2015 17:08

Or

PAs and profits will thus have gone up sort of equally, in view of the small amounts come at it from the other side.

2014 profit is £560 more than the PA for that year.  Tax at 20% is £112.  Multiply by 13 and you get £1,456.

Watch out for blips though, like purchases of new vans, tools etc.  If you have some, knock 20% of the purchase price off the £1,456.

I suspect the tax inspector will accept any reasonable offer on this and be glad to get it off his desk!

Thanks (0)
avatar
By ver1tate
27th Jul 2015 20:39

Careful

If your client is claiming for use of a room in his house, interest rates on mortgage payments were not included in RPI until recently and were much higher 13 years ago.

 

Google

.ons.gov.uk/ons/taxonomy/index.html?nscl=Consumer+Price+Indices

Thanks (0)
David Winch
By David Winch
28th Jul 2015 00:39

RIP - RPI

RPI is effectively 'dead' & is no longer described as a 'national statistic' by the Office for National Statistics.  This is because it is based on arithmetic means rather than geometric means.  The effect is that inflation is overstated by RPI in times of rising prices.

However that flaw in RPI may favour your client in this instance.

A close substitute for RPI is RPIJ which is based on the same 'basket' of goods & services as RPI but the calculations are performed in a statistically more correct manner.  RPIJ is recognised as a 'national statistic'.

Alternatively you could use CPI, which is also recognised as a 'national statistic' but does not include housing costs.

There is another index, CPIH which is CPI with an added element of housing costs.  But that is still somewhat experimental and is therefore not recognised as a 'national statistic'.

All these indices are published monthly by the ONS.

David

Thanks (0)