CH 3 - Common Adjustments

Question 1

Pre-Trading Expenditure
what is the rule & tax section

Answer 1

Expenses incurred 7 years before commencement of trade are treated as incurred on the first day.

Provided they are allowable under normal rulles, will be deduction from profits in the first accounting period.

ITTOIA 2005 s.57

Question 2

Entertainment & Gift

Business exp. / enter. of staff/ business gift / gift of trade samples

Answer 2

Business expenses are disallowed - ITTOIA 2005 s.45

Entertainment for member of staff is allowed - ITTOIA 2005 s.46

Business gifts;
- allowed up to £50 (all assets gifted to the same person in the same basis period)
- gifts include business name, logo or a clear advertisement
- food, drink or tabacco is disallowed - ITTOIA 2005 s.47(3)

Gift of e.g. Trade samples wich is the taxpayer’s trade are allowed ITTOIA 2005 s.47(2)

Question 3

High Emmission Cars
Leasing Costs

& when it doesn’t apply (4 points)

Answer 3

ITTOIA 2005 s48 - relief must be restricted by a flat rate of 15% to car with CO2 >50g/km

The restriction does not apply;
- the leasing of cars which are either electrically propelled or low emission; or
- the leasing of motorcycles.
- where the car is only avialable to the taxpayer up to 45 days
- doesn’t apply for maintenance costs

Question 4

Termination payments

when its allowed / restrictions / tax ref.

Answer 4

Allowed is deduction for statutory redunandancy of staff on cessation - ITTOIA 2005 s.77

Relief is limited to 3x the statutory redundancy level - ITTOIA 2005 s.79

When business is ceasing it can (in total) obtain deduction for termination payments up to 4 x the statutory amount
(under s. 77 & 79 of ITTOIA 2005)

Where its direct link to a sale of shares, this is likely to be a dual purpose behind the payment and will not therefore be allwable
James Snook & Co Ltd v Blasdale

Question 5

When Post-Cessation receipts can be taxed?

Answer 5

Tax in year of receipt

unless

Elect to tax in year of cessation (receipts up to 6 years following cessation) (ITTOIA 2005 s257)

Ellection is made within 1 year of 31 january following the tax year.

Question 6

Order of Post-cessation qualifying payments

Answer 6

1. Set against post-cessation receipts (ITTOIA 2005 s254)
2. Set against net income in tax year of payment (subject to cap on relief against net income of £50k or if greater 25% of individual adj income) (ITA 2007 s96)
3. Treat as capital loss and set against chargeable gains in tax year of payment (ITA 2007 s101)
4. Carry forward any excess expenses against post-cessation receipts (ITTOIA 2005 s254)

Question 7

Are Removal expenses allowable?

Answer 7

Yes, unless the move is ‘expansionary’

£8k limit only applyis to employees for taxable benefit purposes

Question 8

Premiums on Leases
- what is a “short lease”
- under what rules is landlord chargeable and on what
- Formula

Answer 8

The grant of a lease by a landlord to a tenant for a period of 50 years or less **is the grant of a ‘short’ lease.

The landlord is chargeable to income tax under property income rules.

The part of the premium which is not charged to income tax will instead be charged to capital gains tax

Formula for premium chargable to porperty income
2% x Premium x (n-1)
n = number of years in the lease

Question 9

Lease premium allowed for trade

define calculation

Answer 9

1. caluclate premium chargable to property income
   Premium less;
   2% x Premium x (n-1)
   n = number of years in the lease
2. amount chargable to prop income / period of lease

the tenant receives tax relief over the life of the lease

Question 10

When is repair & maintenance allowable

Answer 10

When they restore an asset to its original condition and don’t improve the asset.

Replacing part of an asset is a repair but replacing the whole of an asset is capital expenditure.

Question 11

Is patent allowable revenue expenditure
under trading profits?

Answer 11

Yes, cost of registration of a patent is allowable

Question 12

Duality of purpose

explain

Answer 12

if an item of expenditure has duality of purpose (ie an element of both business and private expenditure of the proprietor),

disallow the whole amount unless you are told the private element to disallow.

Question 13

How is stock valued

Answer 13

lower of : cost & NRV

NRV = estimated selling price less costs to complete and sell

Question 14

How is stock valued on cessation
or transfer of trade if;
sold to a NON-UK Trader

Answer 14

must be valued at its market value

Question 15

How is stock valued on cessation
or transfer of trade if;
sold to an unconnected UK trader

Answer 15

must be valued at the actual sales consideration

Where stock is transferred along with other assets, the value placed on the stock has to be ‘just and reasonable’.

Question 16

How is stock valued on cessation
or transfer of trade if;
stock is transferred between ‘connected’ UK traders

Answer 16

the transfer takes place at market value for trading income purposes

joint ellection - substitute the > of either cost or actual consid.

However, in this instance, a joint election can be made by the buyer and the seller to substitute the higher of either cost or actual consideration in place of market value. You will often see this election on the incorporation of a business.

Question 17

When joint ellection should be made between buyer and seller

Answer 17

When there is transfer of stock between ‘connected’ UK traders.

and the joint ellection can be made by the buyer and the seller **to substitute the higher of either cost or actual consideration in place of market value. **

ITTOIA 2005 s178

happens mainly on incorporation of a business