NET PROFIT CALCULATION FOR SOLE TRADERS(AFTER 1 APRIL 2012)

shahmir · Post by **shahmir** » Wed Sep 12, 2012 1:24 am

OK. I have just checked that Guidance notes of 6 April 2012 also have these two paragraphs 92 and 93, same as they are now in the current 'August 2012' one. This means anyone who applied after 6 April 2012 can help in this matter.

However, if you click on the help icon of income section of current points calculator, it states as follows:

Points-based calculator - help
Enter the total amount you were paid in this period before tax. The points calculator will then work out how many points your previous earnings score.

But this help section of points calculator might not be updated yet.

By the way guys, if its really the net income after tax for self employed businesses, I wonder how it could be in place without parliamentary approval, this is not a minor thing.

But it is definetly not for all self employed business persons. Because paragraph 93 states:

If an applicant is self-employed 'and'
has chosen to retain the profits within the
business

Concentrate on this 'and'.

If I add word 'not' in Paragraph 93, it will state as below:

If an applicant is self-employed 'and'
has chosen 'not' to retain the profits within the
business

Then what guys????????

I think first we need to understand Paragraph 93. We need to know what is 'retaining profits'?

http://wiki.answers.com/Q/What_the_adva ... ned_profit

http://www.altiusdirectory.com/Finance/ ... rofit.html

http://www.blurtit.com/q4404571.html

http://smallbusiness.chron.com/advantag ... 13164.html

http://www.estevesfordistrict3superviso ... inance.htm

From above few articles I got the feeling that if a company makes 100k profit and distributes only 60k among shareholders, and keeps the rest of the 40k within business, this 40k will be called retained profit.

Now we need to know what is retaining profits as a sole trader?

http://www.cleardocs.com/clearlaw/busin ... aders.html

This last link states:

Sole traders cannot retain profits

shahmir · Post by **shahmir** » Wed Sep 12, 2012 4:40 am

IMPORTANT

Please go to the below link and read Page 2, this has been issued just last week.

http://www.ukba.homeoffice.gov.uk/sitec ... iew=Binary

It states

The UK Supreme Court’s judgement in Alvi, given on 18 July 2012, established the following general principle:

‘Any requirement which, if not satisfied by the migrant, will lead to an application for leave to enter or remain being refused is a rule within the meaning of section 3(2) [of the 1971 Immigration Act]’.

This means any requirements must be agreed by Parliament. This agreement is gained by putting the requirements into the Immigration Rules. After the Alvi judgement, it is unlawful to refuse an application on the basis of requirements not included in the Immigration Rules

Now go to the immigration rules

http://www.ukba.homeoffice.gov.uk/polic ... es/part6a/

It states

Tier 1 (General) Migrants
245C. Purpose

This route is for highly skilled migrants who wish to work, or become self-employed, to extend their stay in the UK.

245CA. Requirements for leave to remain

To qualify for leave to remain as a Tier 1 (General) Migrant, an applicant must meet the requirements listed below. If the applicant meets these requirements, leave to remain will be granted. If the applicant does not meet these requirements, the application will be refused.

Requirements:

(a) The applicant must not fall for refusal under the general grounds for refusal, and must not be an illegal entrant.

(b) if the applicant has, or has had, leave as a Highly Skilled Migrant, as a Writer, Composer or Artist, Self-Employed Lawyer, or as a Tier 1 (General) Migrant under the Rules in place before 19 July 2010, and has not been granted leave in any categories other than these under the Rules in place since 19 July 2010, the applicant must have 75 points under paragraphs 7 to 34 of Appendix A.

(c) in all cases other than those referred to in (b) above, the applicant must have 80 points under paragraphs 7 to 34 of Appendix A.

(d) The applicant must have 10 points under paragraphs 1 to 15 of Appendix B.

(e) The applicant must have 10 points under paragraphs 1 to 3 of appendix C.

(f) The applicant must have, or have last been granted, entry clearance, leave to enter or remain:

(i) as a Tier 1 (General) Migrant,

(ii) as a Highly Skilled Migrant,

(iii) as a Writer, Composer or Artist, or

(iv) as a self-employed lawyer.

So we should check now what is Appendix A

Here it goes

http://www.ukba.homeoffice.gov.uk/polic ... appendixa/

24. Where the earnings take the form of a salary or wages, they will be assessed before tax (i.e. gross salary).

25. Where the earnings are the profits of a business derived through self-employment or other business activities:

(a) the earnings that will be assessed are the profits of the business before tax. Where the applicant only has a share of the business, the earnings that will be assessed are the profits of the business before tax to which the applicant is entitled, and

(b) the applicant must be registered as self-employed in the UK, and must provide the specified evidence.

But we still need to find out what is Paragraph 93 and why is it there

scorpio_besal · Post by **scorpio_besal** » Wed Sep 12, 2012 10:02 am

Shahmir, Thank you for sharing your findings.
You have done a lot of research to gather all that information, hats off to you.

catalyst · Post by **catalyst** » Wed Sep 12, 2012 10:53 am

Hi All,

Main difference is:

As an employee you are working yourself individually and getting paid so whatever gross salary you are entitled is your actual income and then whatever you pay are your (individual) expenses which includes everything tax, VAT, etc..

As a self-employed you can employ others too, you can engage machines, monies and other humans work for you. So whatever you earn as a company needs to pay to all of them (which will come under expenses). Which you will pay to get your net profit (YOUR INCOME AS INDIVIDUAL) so you need to pay tax on it to be considered as income.

Case which Shahmir is referring to is also very important but it could be only one example which might not happen again.

Thanks All

rpsarangi · Post by **rpsarangi** » Wed Sep 12, 2012 10:59 am

Thanks shahmir..
great work...

ursamyn · Post by **ursamyn** » Wed Sep 12, 2012 11:39 am

Gr8 Job Shahmir.....Thank you.

rpsarangi · Post by **rpsarangi** » Fri Sep 21, 2012 1:41 am

I am puzzled after reading another post from one of member

http://www.immigrationboards.com/viewto ... 629f6f1f00

could anybody please comment what the case worker means??

thanks all..

rpsarangi · Post by **rpsarangi** » Fri Sep 21, 2012 1:59 am

I totally appreciate the information shared by shahmir but,
One more point I want to make.
In the PDF guidance UKBA have described the self employment under point 92 and 93.

As said if the you draw salary from your self employment they will consider the net income which is after expenditure .. fair enough..

most of the sole traders dont draw salary from their self employment.. so they dont fall under point 92 then obviously they fall under point 93 as there us no other description provided.. so then the net will be considered as net = gross-(expenditure+tax)

any views on that ?

rpsarangi · Post by **rpsarangi** » Fri Sep 21, 2012 10:41 am

Only views no replies ..

Post by **geriatrix** » Fri Sep 21, 2012 10:46 am

rpsarangi wrote:I am presenting a case , please if any body have some experience or views

Being a sole trader self employment.. if my account letter says both my net income 1 after expenditure and net income2 after expenditure and tax in the letters ..

and the case worker thinks that he should consider the net income2 after expenditure and tax its OK as the letter will have the figure.

but if the case worker thinks that he should consider the net income1 before tax then will be add the tax figure to my net income 2 to boost my income and consider the net income1 as my net..or will he reject the case saying that wrong letter from accountant.

thanks all

rpsarangi · Post by **rpsarangi** » Fri Sep 21, 2012 10:53 am

@sushdmehta
Could you please share your views on my question ?
There is 2 things I wanted to ask as seen above ..
Please reply
Thanks

Post by **geriatrix** » Fri Sep 21, 2012 11:00 am

If the caseworker knows what the policy prescribes, then the letter from accountant certifying "net income = profit - business expenditures" will be rejected as being inaccurate.

I am not a finance expert, but I have always been taught that "net = gross - expenditure - tax". And the policy guidance (at least the current one) follows the same principle.

Post by **geriatrix** » Fri Sep 21, 2012 11:06 am

One may ask why, for a salaried applicant, earned income = gross - expenses, but for a sole trader, earned income = profit - tax - expenses?

The way I understand it as a person with no financial expertise, it is so because a salaried employee pays tax from what he has earned but for a sole trader the profit belongs to the business and it does not become a personal income unless business tax is paid out from the business profit.

rpsarangi · Post by **rpsarangi** » Fri Sep 21, 2012 11:08 am

@sushdmehta
Thanks for the reply ..
One more thing I want to ask , if he letter from account will have both the things mentioned that is net before tax and net after tax .. Will that document be ok and case worker can take what ever figure he things ok or will he reject the document telling inaccurate document.

Post by **geriatrix** » Fri Sep 21, 2012 11:13 am

Neither I nor anyone else can tell you how intelligent or stupid your caseworker will be!

It is always suggested that documentary evidences should be as precise as can be, to make things simple for the caseworker, and I second that. The more your application confuses the caseworker, greater are the chances of errors he/she will make to come to a decision.

rpsarangi · Post by **rpsarangi** » Fri Sep 21, 2012 11:30 am

The confusion have arisen on this net profit because when we see the PDF point 92 and 93 we don't understand why point 93 is there unlike the last last PDF of September 2010.. And the sole trader doesn't retain profit in business.. And point 93 is not clear in broad terms.

Further more when we go to ukba website and see the evidence we need under immigration law appendix a it just clearly say that they will consider net income before tax ..

So both the guidance doesn't match ..

I though the best way of doing is add another Line in the account letters along with the net taxable income the net income after tax and outgoing .. So that the case worker could pick what ever he things is right according to his consideration ..

Please comment ..

Post by **geriatrix** » Fri Sep 21, 2012 12:14 pm

If you stop considering business income as your person income, the confusion will cease. And then you will realize that the policy guidance and Appendix A of the immigration rules mean the same thing about the matter in question.

My understanding based on stated circumstances:
Sole traders run a business (though solely). What a business earns is a business income. This business income cannot become personal income unless business tax is paid.

ferri · Post by **ferri** » Fri Sep 21, 2012 1:04 pm

Hi! I have just joined the forum.

Just like to give a perspective on your discussion.I have no read the UKBA rules but I will give you my view on it.

As an self-employed your net profit is what your business has earned for a specified period.But tax on that net profit will be taxed not as an business expense but on the individual(self-employed).

So that means that the self-employed person will pay tax from his own drawings and it is an expense for him individually.This will be paid through his self-assessment(Tax return).

So GROSS PROFIT-EXPENSES= NET PROFIT (Tax will be paid on this amount by the proprietor.

So the UKBA should only asess GROSS PROFIT-EXPENSES= NET PROFIT as the other does not make sense as tax liability is payable by the proprietor by his own money(drawings) not the cash of the business.

Post by **geriatrix** » Fri Sep 21, 2012 1:32 pm

Okay!

In such case, the policy guidance makes it absolutely clear what the earned income will be considered as (personal income = gross profit - expenses - tax), when profits are retained within the business.

And the letter from the accountant should clearly outline the details in accordance with what is prescribed in Appendix A of the immigration rules:

Appendix A wrote:19-SD(a)(vi). If the applicant is claiming points for self-employed earnings, a letter from his accountant on headed paper, confirming that the applicant received the exact amount he is claiming, or the net profit to which he is entitled. This is a letter from the applicant's accountant on headed paper confirming the gross and net pay for the period claimed. The letter should give a breakdown of salary, dividends, profits, tax credits and dates of net payments earned. If the applicant's earnings are a share of the net profit of the company, the letter should also explain this;

If any previous version(s) of policy guidance says something different for individuals under same circumstances and is refused, then there may be a scope of having the refusal termed unlawful through appeal / judicial review.

IMHO ...

Post by **geriatrix** » Fri Sep 21, 2012 2:03 pm

rpsarangi wrote:Further more when we go to ukba website and see the evidence we need under immigration law appendix a it just clearly say that they will consider net income before tax ..

Under which paragraphs is this stated in Appendix A? Couldn't find it ....

rpsarangi · Post by **rpsarangi** » Fri Sep 21, 2012 11:06 pm

The link to the page:

http://www.ukba.homeoffice.gov.uk/polic ... appendixa/

I am copying the point as follows:which is the point no 25 in appendix A.

25. Where the earnings are the profits of a business derived through self-employment or other business activities:

(a) the earnings that will be assessed are the profits of the business before tax. Where the applicant only has a share of the business, the earnings that will be assessed are the profits of the business before tax to which the applicant is entitled, and

(b) the applicant must be registered as self-employed in the UK, and must provide the specified evidence.

Further more as you have mentioned under the policy Guidance point no 93.. it says that the profit is retained in business but a sole trader doesn't retain profit in business.. my point is that a sole trader doesn't fall under point 92 as he doesn't draw salary from business and even doesn't fall under point 93 as he doesn't retain profit in business.. and there is no other description about self employment...

Post by **geriatrix** » Sat Sep 22, 2012 12:05 am

Thanks for that! Somehow missed noting it ... even though I browsed through a couple of times.

Being a level higher than an absolute fool in matters for finance, I would rather not comment any further for the fear of giving you inaccurate responses to your queries because of my own ignorance.

That said, I would suggest that you try sending PM to members, working (full-time or part-time) as sole traders and who have had their applications recently approved, requesting their understanding of the matter. e.g. - Doing a search on sole trader, I came across this topic about a PEO approval on 17-May. Am sure there are more cases posted that will come up in search. Hopefully someone will make the effort to respond to your PM.

I see that in one of your recent topics touching on the same issue, member "silverline" has responded to your query.

silverline wrote:Your Net profit BEFORE TAX [i.e. Gross earnings - expenses only] will used for UKBA.

I am Chartered Accountant and hope it helps.. now sleep well.

Regards

Having observed his responses over time, I don't see a reason to doubt the accuracy of his response.

rpsarangi · Post by **rpsarangi** » Sat Sep 22, 2012 12:27 am

yes silverline had answered to the query ..
but I am confused what the point 93 means from policy guidance as that have been added compared to the policy guidance of 2010. as mentioned sole trader doesn't fall under 92 nor under 93 of the guidance..

so trying to get an answer if somebody could help .
..that's why i had mentioned that i am trying to include both in my accountant letter the net income and net income after tax so that ifthe CW is stubbon about taking the net figure after tax he will see that in the letter and consider that else he could award me point on net figure before tax which will also be there in letter.

but i will try to claim point on net figure after tax to avoid risk..

i think so.. extension 1st week next month.

rpsarangi · Post by **rpsarangi** » Sat Sep 22, 2012 12:30 am

@sushdmehta
thanks for prompt replies... thanks a lot..
Just one question ,,, is is wrong to include both the figures in the accountant letter?

it will be like NET( after expenditure) and NET ( after Tax and Expenditure) in the letters.
thanks

Post by **geriatrix** » Sat Sep 22, 2012 12:36 am

I won't say it would be wrong ... but it may confuse a caseworker (depending on his competence).

If he knows for certain what to look for, it won't be an issue. But if he turns out to be like me on the matter, it may be an issue!

I would say - use this option only if you remain "uncertain" till the last moment.

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NET PROFIT CALCULATION FOR SOLE TRADERS(AFTER 1 APRIL 2012)