Osborne 6 - Income tax: trading profits

Question 1

The badges of trade (tests)

Answer 1

1. Profit motive
   (If profit driving force - indicates trading)
2. Subject matter of the activity.
   (If no personal use - indicates trading esp if person works in situation where these items are traded)
   (If items are used or can provide pleasure - indicates not trading)
3. Length of ownership
   (Short-trading, long - not trading)
4. Frequency of transactions
   Series of similar transactions - indicates trading.
   One - off indicates not trading
5. Supplementary work
   Carries out work eg. repairs to make more saleable - indicates trading
6. Reasons for acquisition and sale
   Intentional purchase and planned sale indicates trading.
   Item given to person or sold quickly to pay debts less likely to be trading
7. Source of finance
   If bought with money borrowed short term, may be evidence if the item needs sold to repay the loan

Question 2

Employed or self-employed

Contract of service
Contract for services

Risk is:
Told to Substitute One Set of Equipment

Answer 2

1. Need to do work yourself /
   Can employ helper or SUBSTITUTE.
2. TOLD how, where & when to do work
   Decide yourself h,w,w
3. Work SET hours, paid reg. w/ sick & hols.
   Choose hours & involice for work done
4. No RISK of capital or losses
   Risk own cap. & bear loss from sub-std wk
5. Employer provides EQUIPMENT
   Provide own equipment
6. Work for ONE employer (s’times more)
   Work for several ppl or orgs

Question 3

What is the object of adjusting financial accounts?

Answer 3

Make sure:
Only trading income is credited
Only allowable trading expenditure is debited

Question 4

Notifiy HMRC started trading - deadline?

Answer 4

6 months from end of TY

so by 5th October

Question 5

Tax-free “trading allowance” up to £1000

Only for individuals not Companies or Partnerships.

(Equivalent to property allowance)

Answer 5

This is automatic deduction from turnover which is an alternative to normal allowable expenses

Where gross trading income is over £1K the allowance can still be used INSTEAD of normal allowable expenses if they are less than £1000… thus reducing taxable amount.

But if gross trading income is less than £1000 but allowable expenses are more than income it would be better to ELECT not to claim the trading allowance… to establish loss.

Question 6

Where a person would normally be classed as employee but charges for work through an ‘intermediary’ - special rules, known as IR35 can apply.

The rules ensures there is no tax saving through the use of intermediaries when used to DISGUISE employment

(Intermediaries are often known as ‘personal service companies’)

How does it work?
Under IR35 rules an intermediary could be?

Answer 6

When IR35 legislation applies a comparison is made between:

• The amount of IT & NI that the PSC pays on behalf of person
• The amount of IT & NI that that ‘employer’ WOULD have paid

Where first amount lower the DIFFERENCE will form a DEEMED EMPLOYMENT INCOME TAX CHARGE (or Deemed employment payment) that will be levied on the PSC

Under IR35 rules an intermediary could be:

1. A ltd company in which worker of family controls at least 5%
2. A Partnership in which worker or family is entitled to at least 60% profits

Question 7

General rule for expenditure to be allowable in a trading income computation is

Answer 7

• Revenue rather than capital in nature
• ‘Wholly and exclusively’ for the purpose of trade

But expenditure that has dual purpose but can be divided into a part that was wholly biz and and a part wholly private can be split

Question 8

Research & development rules apply to Sole Traders or Partnerships?

Answer 8

NO

Question 9

To deal with own use

If told CoS (or Purchases) was adjusted … this will have INCREASED profits already so you only need to add back the profit amount.

If told CoS (or Purchases) was NOT adjusted … you need to add back the full sale price amount

Answer 9

Take time to think it through!

Question 10

AIA - same for STs & Companies?

Answer 10

Yes CALENDAR years and applies to both types

2 years 2016 - 2018 - £200K
3 years 2019 - 2021 - £1M

any earlier I think they’d give in question

Question 11

Small pool allowance applies to both ST & Co.?

Answer 11

Yes

Question 12

Pick up truck with private use - what CA applies?

Answer 12

AIA

Its a vehicle but not a car

but need to show it separately in AIA mini calc so can show full amount deducted from AIA but only biz portion claimed in CA column

eg:

Acquisitions qualifying for AIA:
computer 5,000
AIA claimed (5,000)
Pickup 10,000
AIA claimed (10,000) * 80%

Question 13

Big diff dealing with TRADING losses between companies & STs is that companies can c/f against TTP whereas STs it’s just against trading profits same trade…. it looks like it used to be the samoe for companies but this changed in 2017… so watch out for where the loss goes on the company CT600… it will NOT be the box under Trading profits because that seems to be for loss B/F from pr 2017…. newer losses go on page 4?…. ie later on in the form

Answer 13

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Question 14

Trading loss sole trader

Answer 14

1. CF against TRADING profit same trade
   Must be used u asap
2. Set against Total taxable INCOME (property, employment, savings & divs) nb: Income not Capital Gain) in CY
   * 2b. Option to extend this to set off Capital gains
3. Whether or not 2 is chosen can CB and set against Total Taxable Income in preceding TY
   * 3b Again option to extend To CG

NB: Can pick and choose and if offsetting CY & PY can choose order..

NB: If you do choose to set off against CG then you can’t ‘save’ AEA

NB: Also the PA cannot be ‘saved’ as the set off is ‘all or nothing’ ie. you can’t choose the amount… so wheeling and dealing is by choosing the years.

NB - Its not mentioned but I assume you cant save dividend allowance either

Question 15

Remember if drawing out column s showing loss relief options its easy to forget that you sketch in the loss in different positions …

Answer 15

CY & C/B you put are setting off low down … against total income…

F/F you are sketching it in at the top… need to remember to only set against Trading income … easy to forget

Question 16

Disallowable to remember for STs (4)

Answer 16

Drawings (incl NICs)

Private expenditure / use

Goods for own use

Overpaid Rellys

Question 17

Prob wont come up but don’t get confused

If building a Capital allowance comp using info from a Profit & loss rather than just being given a list..

Don’t get confused when theres a ‘gain on sale of Vauxhall car sold for £4000’ of £1000 (this was actually shown as a negative amount in a depreciation section) … remember this is just an accounting gain against it’s BOOK value … It does NOT mean the COST of the car was £3000. .

… This would be confusing it with a situation where you were told the ACTUAL cost of an item was less than it sold for in which case you WOULD only put the cost rather than the sale price into the capital allowance comp

Answer 17

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Question 18

Don’t forget Trading Income Assessment is the same as the adjusted accounts ONLY if you’re on CYB … otherwise it’s apportioned …

Answer 18

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Question 19

SA100 - main Self Assessment tax return (not in exam)
SA103 F & S - self employment supplement
SA104 F & S - partnership supplement (not in exam?)

SA800 Partnership return (record profits of p’ship as a whole as well as the profit allocated to each partner)

Answer 19

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Question 20

Trading Allowance £1K - for INDIVIDUALS.
(not rent-a-room

Applied automatically if Receipts are less than £1000
.. but it doesn’t create a loss so:
£800 income, £900 expenses.
It would be auto applied and you would ELECT to disapply it so you could create a loss to c/f

Not applied if receipts are over £1000
so
£1200 income, £500 expenses
You would have to ELECT to use allowance because it wouldn’t have been auto-applied

Answer 20

The relief is not available for partnerships or rent-a-room schemes.

No relief is available if the sole trader receives income from:

An employer or a spouse/civil partner’s employer.
A partnership in which they – or a connected party – are a partner.
A close company in which they – or an associate – are a participator.

Question 21

I THINK

taxable total profit can be a negative (loss)

but

trading income assessment is never negative

Answer 21

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