How to calculate your taxable profits correctly

Whilst we would always recommend that you obtain professional advice when preparing your accounts and calculating your taxes, we understand that there are occasions when this isn’t always possible, and you may complete these yourself.

You may also have used an accountant in the past that you thought was going to provide a professional service but unfortunately didn’t understand the financial trading transactions that you had undertaken.

As you may have discovered, when you are calculating your taxable profits, it is important that this calculation is approached in the correct manner to ensure that your income is correctly calculated, and an accurate computation is submitted to HMRC to avoid a tax enquiry being opened by HMRC’s specialist trader unit.  

In our dealings with financial traders over the years, we’ve come across various circumstances where income has been understated and a tax enquiry opened into the returns submitted by either the trader themselves or their previous advisers. 
In each case, the income being understated has come about for one of the following reasons:

  • Only income that has been drawn down from the trading account by the individual in question in that period has been declared
  • Income that is held back by the trading arcade and held in a reserve account has not been declared
  • Profits on trades that have been completed by the end of the trading period but not received from trading arcades/accounts before the end of the period are omitted
  • Commissions paid have been offset against net trading gains, which means that commission charges have been double-counted and taxable profits are understated
  • Omitting one or more sources of income such as different trading accounts
  • Failing to account for exchange rate movements or convert the trading transactions back into sterling correctly

If HMRC open an enquiry into your affairs and establish that there is a tax liability to pay, they will charge interest on any late paid tax. In addition, penalties on any understatement of the tax liability may be imposed of up to 100% of the amount that was underdeclared (although higher penalty levels are unlikely in all but the most severe cases).

To ensure that your trading profits are correctly recorded, it is necessary to declare all the profits made but not necessarily received in the period and this can usually be calculated by a detailed review of your trading statements. 

Depending upon which trading account provider/arcade you are working with, your trading statements may or may not provide monthly, quarterly or annual summaries of your trading results and any figures shown in any other currency other than sterling would need to be converted to sterling using appropriate spot rates during the year.

Of course, should you have any difficulty in preparing your accounts or tax return, our specialists will be happy to prepare the relevant documents. Please contact us on 01474 853 856 or email enquiries@accountantsfortraders.co.uk for further advice or to arrange a suitable time to discuss your requirements in more detail.