5: Adjustment of profit - General Principles

Question 1

are legal fees relating to the acquisition of a capital asset allowable or disallowable?

Answer 1

disallowable, ‘part and parcel’ to the acquisition of the capital asset therefore disallowed

Question 2

legal fees incurred relating to the renewal of a short lease (<= 50 years), allowable or disallowable?

Answer 2

allowable

Question 3

a general repair, allowable or disallowable?

Answer 3

generally allowable

Question 4

installation of double glazed windows from single glazed - allowable or disallowable?

Answer 4

allowable. although it is an improvement, from HMRC’s pov, it is not classed as an improvement.

Question 5

are initial repairs allowable or disallowable? for example, if a trader purchases an asset and immediately does initial improvements to it

Answer 5

disallowable, as it is classed as part of the cost of the asset. for example, you could not have used the asset unless the initial repairs were made.

Question 6

replacing part of an asset - allowable or disallowable?

Answer 6

allowable as classed as repair

Question 7

replacing the whole asset - allowable or disallowable?

Answer 7

disallowable as classed as capital expenditure

Question 8

are provisions allowable or disallowable?

Answer 8

generally allowable, as long as:

1. the entity has an obligation to make payment
2. it is probable that a transfer of economic benefits will take place.
3. a reliable estimate can be made of the amount

Question 9

purchase of clothing for the staff - allowable or disallowable?

Answer 9

disallowable

Question 10

purchase of a motorcycle jacket for a courier who travels on a motorbike - allowable or disallowable?

Answer 10

allowable, as classed as protective gear

Question 11

where a business pays a private expense for an employee, such as a gym membership, or medical insurance premium?

Answer 11

it is an allowable deduction for the business

FYI this will also show up as a taxable benefit for the employee

Question 12

salaries paid by the business to its employees - allowable or disallowable?

Answer 12

allowable

Question 13

drawings taken from the business profits to the owner? allowable or disallowable?

Answer 13

disallowable.

even if, in the question, it states a salary for the owner, it is still not a salary and is considered drawings.

Question 14

accrued wages, actually paid within 9 months of the end of the accounting date - allowable or disallowable?

Answer 14

allowable

Question 15

goods for own use, for example if the trader takes out his own stock for personal use, what is the adjustment?

Answer 15

assume the trader bought the stock at cost then sold the stock to themselves for retail selling price

Question 16

what is an example of ‘items not taxed as trading income’?

Answer 16

bank interest, rental income, profits on sale of fixed assets, sundry misc income