Chapter 7 - Income from Self Employment Flashcards
(27 cards)
What is a tax year basis?
When the accounting year end is different to the tax year end, the profits will be time apportioned to tax profits that arise IN THAT TAX YEAR. Basically accruals from A levels
What is the treatment of transition profits?
Add them to the trading income to create net/total income.
What are Badges of Trade used for?
To determine whether an individual is trading or not. Defines trade in a deeper level providing a “criteria”
Cash basis
Cash basis is the default method of calculating trading profits unless otherwise told.
Trading profits under cash basis
Trading receipts - allowable expenses - Captial allowances.
What is disallowable expenditure
Non-deductible expenditure
- Expenses that may not be deducted in tax law.
What are the two reasons we can disallow expenditure?
Remoteness test
Duality principle
What is the remoteness test?
An expenditure is regarded as being too remote from the trade when incurred in some capacity other than that of trading.
What is the duality principle
When expenditure is for both non-trading and trading, it must be identifiable as separate to justify the business portion of the expenditure.
What are appropriations? (Cash basis)
NOT ALLOWABLE, when funds are withdrawn rather than an expense being incurred. E.g. Drawings.
Is excessive salary for family members allowable? (Cash basis)
No. it must be at the commercial rate for the work performed.
Is interest payable allowable? (Cash basis)
Yes. interest on borrowings such as an overdraft is allowable.
Interest charged by HMRC is not allowable.
Are subscriptions allowable? (Cash basis)
Yes. Trade or professional subscriptions are allowable.
Are donations allowable? (Cash basis)
Must be:
- Wholly and exclusively for trading purposes.
- Local and reasonable in size in relation to business.
- Made to a registered charity.
NO subscriptions or donations to political parties.
Is entertainment allowable? (Cash basis)
Entertainment expenditure is not allowable unless it is to an employee.
Are gifts to customers allowable? (Cash basis)
yes IF:
- They cost less than £50 per person per year
- The gift is not food drink tobacco or vouchers
- The gift carries conspicuous branding.
Is land and buildings allowable? (Cash basis)
No it is not allowable.
Legal and professional charges general rules
(Cash basis)
If incurred for the purpose of the trade, expenditure is allowable. If it’s of a capital nature it is disallowable unless it is the expense of renewing a short lease.
Are fines allowable? (Cash basis)
No. unless parking fines incurred on business by employee but not the owner.
How is pre-trading expenditure treated?
(Cash basis)
Any revenue expenditure incurredin the seven years before a business starts to trade is treated as an expense on the day it begins.
Accruals basis four adjustments
Disallowable Expenditure = Add
Taxable Income = Add
Allowable Expenditure = Deduct
Untaxable Income = Deduct
Essentially reversing what went through the statement of profit and loss.
Treatment of Capital expenditure (Accrual Basis)
Expenditure on capital assets is DISALLOWABLE. (Revenue expenditure which is allowable.)
Car leasing treatment (Accrual Basis)
If CO2 emissions < 50g/km = ALLOWABLE
If exceeds, 15% is DISALLOWED
If leased car is used for private use, disallow that portion
Is a trade debt write off allowable?
Yes however the recovery is taxable. A non-trade write off is DISALLOWABLE
