Seminar 4 Continued

Question 1

list some badges of trade

Answer 1

• frequency of transaction
• profit motive
• source of finance
• period of ownership
• reason for sale
• supplementary work
• subject method of the transaction
• method of acquisition

Question 2

what must happen to accounting when calculating trading profits?

Answer 2

accounting profits must undergo tax adjustments

Question 3

deductible/allowable expenses are…

Answer 3

deducted from net profit

Question 4

disallowable expenses are…

Answer 4

added back to net profit

Question 5

how does adjusting tax profit computation look?

Answer 5

net profit
+ disallowable expenditure
+ trading income not shown in accounts

• expenditure not shown in accounts
• non-trading income in accounts
• capital allowances

= tax adjusted profit after capital allowances

Question 6

is depreciation an allowable expense?

Answer 6

no depreciation is disallowable, and must be added back to profit

Question 7

what is the alternative to depreciation of a fixed asset?

Answer 7

capital allowances

this allows plant & machinery to be written off from period-to-period

Question 8

what is the trading allowance?

Answer 8

£1,000 trading allowance

Question 9

what happens if one earns less than £1,000 from trading?

Answer 9

the earnings are exempt

Question 10

what happens if one earns more than £1,000 from trading?

Answer 10

they can choose:
- trading income - allowable expenses
or
- trading income - £1,000 allowance

Question 11

an expenditure is allowable when wholly used for ___ purposes

Answer 11

‘trading’

trading purposes make an expenditure allowable (deductible from profits)

Question 12

if an expenditure is incurred for both trading and private purposes, is it deductible?

Answer 12

no, it’s disallowable

Question 13

are capital expenditures on non-current assets allowed?

Answer 13

no, capital expenditures on non-current assets are disallowed

Question 14

are expenses associated with non-current assets allowable or disallowable?

Answer 14

disallowable

these include:
- legal/professional charges involved
- depreciation/amortisation
- losses on disposal of asset
- repairs associated with asset

Question 15

are appropriations of profit allowed or disallowed?

Answer 15

disallowed

(e.g., salary to partner unnecesarily, owner drawings)

Question 16

customer entertaining costs are…

Answer 16

disallowed

Question 17

gifts to employees are…

Answer 17

allowed, though employees may receive a taxable benefit

Question 18

gifts to customers are…

Answer 18

disallowed when they cost more than £50 per customer per tax year

disallowed when they’re food/drink/tobacco

disallowed when they don’t have the business’s branding on it

Question 19

increase in general provision for bad debts are…?

Answer 19

disallowable

Question 20

increase in general provision is…
decrease in general provision is…

Answer 20

increase = added to profit
decrease = deducted from profit

Question 21

are general provisions for specific debts allowable or disallowable?

Answer 21

allowable

Question 22

trade bad debts are…

Answer 22

allowable

Question 23

how are recoverable trade bad debts handled?

Answer 23

there’s no adjustment required

Question 24

non-trade bad debts are…

Answer 24

disallowable (e.g., loans to employees)

Question 25

donations to national charities are…?

Answer 25

disallowable (added back to profits)

Question 26

donations to local charities/educational establishments are…?

Answer 26

allowable (deducted from profits)

Question 27

gift aid donations are…?

Answer 27

disallowable (added back to profits)

Question 28

gifts of stock or used plant & machinery are …?

Answer 28

allowable (deducted from profit)

Question 29

political donations are…?

Answer 29

disallowable

Question 30

subscriptions are…?

Answer 30

allowable (if they relate to trade)

Question 31

fines/penalties are…?

Answer 31

generally disallowed unless they relate to business activity

Question 32

legal/professional fees relating to trade are…?

Answer 32

allowable

Question 33

fees relating to HMRC are…?

Answer 33

disallowable

Question 34

fees relating to capital expenditure are…?

Answer 34

generally disallowable

Question 35

legal costs on renewal of a lease are…?

Answer 35

allowable if the lease is short term (less than 50 years)

Question 36

costs of registering a patent are…?

Answer 36

allowable

Question 37

how are employee salaries handled?

Answer 37

if they haven’t been paid 9 months within the end of the period, it’s only allowable within the period in which it is paid

Question 38

redundancy payments/job loss compensation is …?

Answer 38

allowable (deducted from profit)

Question 39

educational courses and pension contributions are…?

Answer 39

allowable (deducted from profit)

Question 40

are cars disallowed or allowed?

Answer 40

disallowance of 15% is applied to the lease payments of the car

Question 41

what are some other allowable expenditures?

Answer 41

• interest payable (if incurred for trade purposes)
• non-recoverable VAT
• patent royalties (for trade purposes)
• pre-trading expenditure (incurred 7 years prior to trading commencement)

Question 42

stock taken from the business for the trader’s private use is…

Answer 42

treated as a sale made at normal selling price

Question 43

non-trading income is…

Answer 43

deducted from trading profit

e.g., rental income, profit on the sale of a fixed asset

Question 44

expenditures not shown in accounts are…?

Answer 44

allowable, and should be deducted from profit

e.g., business expenditure paid personally by the owner