Sole Trader - Repayment of Captial Tax Deductible?

[Smarty]

Hi

Can somebody please advise/remind me if repayment of capital is taxable?

A sole trader initally paid out £5,000 to establish his business and has just repaid £1,000 back to himself as repayment of the initial capital. He expects to also repay the remaining £4000 at some point. Is this classed as taxable income? I assume not as it was already taxed from his employment earnings at the time he earnt it and is literally a loan to his business.

Thanks

S

[hollers]

Hi Smarty

You are quite right in that the 'repayment' is not taxable. The monies paid into the business will be treated as capital introduced and the withdrawals of capital as drawings.

Sharon :)

[Smarty]

Hi Sharon

I thought that drawings were taxable? When he completes his self assessement and complete the amount of income he's drawn from the business (ie his wages) the capital repayments will be included and he'll be taxed on it?

It just doesn't seem right that he should be taxed on income which is actually only repaying his initial capital?

[paulb]

Drawings are not taxable, as they are posted to the Balance Sheet and not the P&L account. A sole-trader is taxed on the difference between his business income and his business expenses. Drawings are amounts drawn from the capital in the business and as such are not taxable. Sharon has outlined the scenario correctly above.

[Smarty]

Hi

Thanks very much for your explanations.

S