Self-employment income

Question 1

current year basis of assessment

Answer 1

Whichever tax year that ending date falls into, the profits of that entire year will be assessed in that tax year.

Question 2

Badges of Trade

Answer 2

These are used to help differentiate whether a person is

a. trading (Income Tax and NIC)

b. selling their capital assets. (CGT)

1. Subject Matter
2. Length of OWnership
3. Frequency of operations
4. Subsequent Work
5. Circumstances
6. Motive

Question 3

Badges of Trade 1
Subject matter

Answer 3

anything can be trading stock but some items are more likely to be so than others.

For example, the purchase and resale of a substantial number of toilet rolls is considered trading.

Question 4

Badges of Trade 2
Length of ownership

Answer 4

normally, trading stock is held for a short period of time.

For example an item that is held for less than 12 months will be considered trading stock, but an item that is held for more than 12 months is likely to be considered a capital asset.

Question 5

Badges of Trade 4
**Subsequent work **

Answer 5

Change of character of an asset to make it more saleable is likely to be indicative of trading.

Bulk to Smaller bundles?
Advertising?
Marketing?

Question 6

Badges of Trade 3
Frequency of similar operations

Answer 6

the more often a deal takes place, the greater the assumption that it is a disposal of trading stock.

Multiple Cars sold? - Trading. One Car - Capital

Question 7

Badges of Trade
Circumstances

Answer 7

sudden emergency, for example the urgent need of cash can negate the presumption of trading.

Question 8

Badges of Trade
Motive

Answer 8

intention of making a profit is necessary for trading.

Question 9

Capital expenditure including depreciation

Answer 9

Not Allowable

Repair to an asset is revenue expenditure and is allowable

Improvement to an asset is capital expenditure and is not allowable

Question 10

Is Qualifying Loan Interest a relief?

Answer 10

• such as qualifying loan interest payments are not allowable as they are dealt with as a deduction from total income.

For example, paying interest on a loan used to purchase inventory is known as a qualifying loan interest, this is already deducted under a different heading in the income tax computation, therefore it cannot be deducted again.

Question 11

Entertaining and gifts

Answer 11

Entertaining is disallowed

Entertaining employees is allowed

Gifts to Customers must cost less than £50 per person per year AND must not be food, drink, tobacco, vouchers exchangeable for services AND must be advertising for company

Question 12

Subscriptions and donations

Answer 12

National Charity donations DISALLOWED

Charitable donations (made under Gift Aid) these are not allowable as tax relief is given by extending the tax bands when calculating income tax.

Political donations DISALLOWED

Trade or professional association subscriptions are allowable

Charitable donation (Not made under Gift Aid)

If it is wholly and exclusively for trading purposes (e.g promoting business’ name), and it is to a local charity then it is allowable

Question 13

Fines and penalties

Answer 13

Fines of employee while on business - ** ALLOWED**

Other fines are not allowed.

Question 14

owner’s salary, or drawings or interest on capital invested

Answer 14

Disallowed

the owner of the business pays himself 10% interest on the capital that he has invested of £200,000 - this £20,000 interest is disallowed and cannot be deducted.

Question 15

Interest paid on overdue tax
Interest received on overpaid tax

Answer 15

Not deductible or taxable

Question 16

Irrecoverable Debts (Trade debt write offs & allowances)

Answer 16

These are allowable; the tax treatment follows the accounting treatment

However non trade write offs are not allowable and so the expense is added back.

Question 17

Legal and professional charges

Answer 17

Allowable if connected with the trade and are not related to capital items specifically allowed by statute:

• costs of obtaining loan finance
• costs of renewing a short lease (50 years or less)

Question 18

Interest payable

Question 19

Premium paid for the grant of a lease

Question 20

Any salary paid to the family of the owner

Answer 20

Only salary at the commercial rate for the work done is allowable.

Question 21

Pre-trading expenditure

Answer 21

allowable if it is expenditure incurred in the seven years before a business commences to trade then it is treated as an expense incurred on the day the business starts trading and follows the above rules.

Question 22

CASH BASIS

Answer 22

If the business’ turnover does not exceed £150,000

Use until turnover exceeds £300,000

Question 23

CASH BASIS
Calculation of Profit

Answer 23

Total cash receipts of the business plus the sale of capital items are included.

Total cash expenses of the business including purchase of capital items used for business are deducted.

Motor Vans are allowed but other vehicles excluded

Question 24

Relief for pre-trading expenditure

Answer 24

Trading commences on the first day on which a trader makes a sale.

Pre-trading expenditure qulification:

It is incurred within 7 years of the commencement of the trade

It is an allowable expense

Question 25

The first tax year (TY1)

Answer 25

The first tax year is the year during which the trade commences.

Question 26

The second tax year (TY2)

Does the accounting date fall in Tax Y2?

YES

Answer 26

How long is this accounting period?

< 12 months long

Calculate profits for the first 12 months of trading

≥ 12 months long

Calculate profits for the 12 months to the accounting date ending in Y2

Question 27

The second tax year (TY2)

Does the accounting date fall in Tax Y2?

NO

Answer 27

Assess the profit for TY2

April 6 - April 5

Question 28

Overlap Profits

Answer 28

Trading Profit
less Profit Assessed

Question 29

Cessation of a business

Answer 29

Actual trading profits from the end of the previous accounting period to the date of cessation.

Deduct any overlap profits to find the trading profit assessment of the final year.

Question 30

WDA - Main Pool 12%

Answer 30

Computers, equipment, shelving, vans and lorries

Movable office partitioning

Alterations to building incidental to the installation of plant and machinery

Tables and chairs

Fire regulation expenditure

Question 31

WDA - Special Pool 6%

Answer 31

Long life assets

Integral features of a building

Question 32

First Year Allowances

Answer 32

new motor cars with zero CO2 emissions

The F.Y.A. is not time apportioned for a period of less than 12 months