Trading Profits

Question 1

What are the Badges of Trade?

Answer 1

Intention to make a profit

Number of similar transactions

Connection with existing trade

Change to the asset

Reasons for sale

Source of finance

Period of ownership

Method of acquisition

Question 2

How are taxable trading profits computed?

Answer 2

Net profits per financial accounts (accounting profits)
Add disallowable income/expenditure not shown in accounts
(non-trade income not in accounts)
= Tax adjusted profits before capital allowances
(Capital allowances)
= Tax adjusted profit/loss after capital allowances

Question 3

How much is the annual trading allowance?

Answer 3

£1000 tax free if trading profits exceed £1k

Question 4

What defines an allowable expenditure?

Answer 4

Wholly and exclusively for the purposes of the trade

Question 5

What are some allowable expenditures?

Answer 5

Trade bad debt

Staff entertaining

Gifts to employees

Gifts of trade samples

Gifts to customers if they don’t exceed £50 and serve as conspicuous advertising

Small donations to local charities

Subscriptions to trade and professional associations

Interest on sums borrowed for the business

Legal and professional fees related to trade

Irrecoverable VAT of an allowable item

Employment payments

Pension Scheme

Business use of an asset

Question 6

What are some disallowable expenditures?

Answer 6

Capital expenditures - add back

Depreciation - add back

Appropriation of profit - add back

Goods ford own use - add back

General provision - add back

Non-trade bad debts - add back

Non-staff entertaining - add back

All gifts over £50 - add back

Donations to national charities - add back

Political donations - add back

Gift aid - add back

Fines and penalties (unless incurred during business) - add back

Interest paid on late paid tax - add back

Legal and professional fees related to capital - add back

Private use - add back

Car lease if >50g/km - add back 15% of lease cost

Question 7

What is the golden rule on trading profits not shown in accounts?

Answer 7

Owner must be taxed on the profit he would’ve made if the goods had been sold at market value.

Question 8

How are disallowable expenses treated?

Answer 8

Add back if not already included

Deduct if included

Question 9

How are allowable expenses treated?

Answer 9

Left alone if already included

Deduct if not included

Question 10

What assumption should be made regarding the trading allowance?

Answer 10

Assume trading allowance applies if receipts <1000.

If more, assume no election has been made

Question 11

How are capital expenditures treated?

Answer 11

Disallowable

Maintenance e.g. redecorating - allowable

Repairs returning assets to original condition - allowable

Depreciation - disallowable

Question 12

What are appropriations of profit and are they allowable?

Answer 12

Withdrawls from a business after tax

Disallowable

Question 13

How are general provisions treated?

Answer 13

Creation/increase in general provision - disallowable

Decrease - deduct from accounting profit

Creation/increase in a specific provision - allowable

Question 14

How are bad debts treated?

Answer 14

Trade bad debts - allowable

Non-trade bad debts (loans to employees) - disallowable

Question 15

How is entertainment treated?

Answer 15

Expenditure on entertaining staff - allowable

All other entertaining expenditure - disallowable

Question 16

What gifts are allowable?

Answer 16

Gifts of trade samples

Gifts to customers (not food/drink and <£50)

Gift to employees

All other disallowable

Question 17

How are donations and subscriptions treated?

Answer 17

Small donations to charity - allowable

Donations to national charities - disallowable

Gift aid - disallowable in arriving at TTP, added back to net profits

Gifts of trading stock/used plant+machinery to charities - allowable

Political donations - disallowable

Subscriptions to trade and professional associations - allowable

Question 18

How are fines and penalties treated?

Answer 18

Generally disallowable

Parking fines incurred by employees on business - allowable

Question 19

How is interest treated?

Answer 19

Interest paid on money borrowed for business purposes - allowable

Interest on late tax payment - disallowable

Question 20

How are legal and professional fees handled?

Answer 20

Fees relating to income - allowable

Fees incurred dealing with HMRC - disallowable

Fees relating to capital expenditure - generally disallowable

Renewal of short lease (<50 years) - allowable

Costs of registration of a patent/ copyright for trade use - allowable

Incidental costs of raising long term finance - allowable

Question 21

How is irrecoverable VAT treated?

Answer 21

Allowable for trading purposes if the item of expenditure to which it relates is allowable

Question 22

How are employment payments and pensions treated?

Answer 22

Earning paid to employees - allowable

Redundancy- allowable

Training - allowable

Employer contributions to pension - allowable if not accrued

NIC contributions - allowable

Question 23

How is car leasing and rental costs handled?

Answer 23

Plant and equipment costs - allowable

Car leases - flat rate disallowance of 15% of lease payments

Polluting car lease taken out from 6th April 2021 and CO2 above 50g/km

Question 24

How are trading profits not shown in accounts handled?

Answer 24

If nothing recorded - add back selling price

If treated as drawings at cost - add back profit

Question 25

How is non trading income treated?

Answer 25

Must be deducted

Question 26

How is expenditure not shown in accounts handled?

Answer 26

Allowable and should be deducted

Question 27

When a family member is overpaid what happens?

Answer 27

Excess pay is added back

Question 28

What expenses are disallowable for sole traders?

Answer 28

Salary
NIC
Pension contributions