L3 Employment income - whats allowable?

Question 1

what is the general rule for expenditure to be allowable?

Answer 1

The general rule is that for expenditure to be allowable it must have been incurred wholly and exclusively for the purpose of trade

Question 2

what happens if there is a private element to the business expenditure?

Answer 2

any private use, apportion it to find out the amount that relates to private use, and then add it back to the trading profit.

Question 3

If expenditure is allowable what does this mean?

Answer 3

allowable expenses are allowed to be recognised to calc trading income to get to taxable income. If it is allowable it means it can be left alone (i.e. do nothing). These expenses were already removed to get to trading income, the dissalowable ones have also been removed, so add these back!

If disallowable you “add it back”. so you add it to the trading profit to get to the taxable amount. adding back increases the taxable amount.

Question 4

depreciation charges?

Allowable of not allowable as a trading expense?

Answer 4

not allowable

relief given through capital allowances

Question 5

losses on disposal of fixed assets?

Allowable of not allowable as a trading expense?

Answer 5

not allowable

relief given through capital allowances

Question 6

improvement of an asset?

Allowable of not allowable as a trading expense?

Answer 6

disallowed.

Question 7

wages and salaries paid to an employee?

Allowable of not allowable as a trading expense?

Answer 7

Allowable.

Question 8

wages and salries to family members?

Allowable of not allowable as a trading expense?

Answer 8

Allowable - so long as the payment is reasonable for the work done and payments have actually been made.

Question 9

traders paying their tax and NIC from the business account?

Allowable of not allowable as a trading expense?

Answer 9

These are drawings so dissallowable.

Question 10

pension contributions from the trader?

Allowable of not allowable as a trading expense?

Answer 10

not allowable.

but relief given in personal tax contribution.

Question 11

pension contributions made by the trader for his/her employees?

Allowable of not allowable as a trading expense?

Answer 11

allowable expense

Question 12

general provision? and movement in stocks?

e.g. bad debt, stock obsolescence

Allowable of not allowable as a trading expense?

Answer 12

not allowable

Question 13

specific provisions?

Allowable of not allowable as a trading expense?

Answer 13

allowable - as long as they are related to trading

Question 14

trade bad debts?

Allowable of not allowable as a trading expense?

Answer 14

allowable.

Question 15

staff entertaining?

Allowable of not allowable as a trading expense?

Answer 15

allowable

Question 16

customer entertaining?

Allowable of not allowable as a trading expense?

Answer 16

Not allowable

Question 17

what are the allowable gifts as a trading expense?

Answer 17

1. Gifs to employees
2. Gifts to customers no more than £50 per customer per year. Cannot be F&B and must contain ‘conspicious’ advertising
3. trade samples to customers
4. gifts of trading stock or used P&M to charities, sports clubs, or UK educational establishments.

Question 18

Donations to national charities?

Allowable of not allowable as a trading expense?

Answer 18

not allowable.

Question 19

reasonably small donations to local charities?

Allowable of not allowable as a trading expense?

Answer 19

allowable - so long as the donation enhances the traders image

Question 20

how are donations under gift aid relieved in the personal income tax computation?

what happens to gift aid donations?

Answer 20

it is relieved by extending the Basic rate band. so any donations made by gift aid are added back to trading profits to avoid double counting.

Question 21

political donations?

Allowable of not allowable as a trading expense?

Answer 21

not allowable

Question 22

subscriptions to personal or trade organisations?

Allowable of not allowable as a trading expense?

Answer 22

allowable.

Question 23

fines and penalties? (e.g. speeding and parking fines)

Allowable of not allowable as a trading expense?

Answer 23

disallowable when incurred by trader as its not natural part of the trade to be incurring these costs.

Parking fines (for e.g.) incurred by employee on business activities are allowable however.

Question 24

bank interest on loans for business purposes?

Allowable of not allowable as a trading expense?

Answer 24

allowable

Question 25

credit card interest?

Allowable of not allowable as a trading expense?

Answer 25

allowable

Question 26

interest on late payment of tax?

Allowable of not allowable as a trading expense?

Answer 26

dissalowable

Question 27

credit card interest?

Allowable of not allowable as a trading expense?

Answer 27

allowable

Question 28

legal and professional fees?

Allowable of not allowable as a trading expense?

Answer 28

allowable if related to capital transactions

e.g Accountancy, cost of raising finance, legal advice, collection of trade debts, copyright registration, legal costs of renewing a short lease, (<50 years)

Question 29

salaries paid to employees?

Answer 29

allowable (but not to the sole trader

Question 30

redundancy payments?Allowable of not allowable as a trading expense?

what if trade ceases? how much redundancy pay allowable?

Answer 30

allowable

if trade ceases up to 3 times statutory redundancy pay is allowable.

Question 31

education and training for employees?

Allowable of not allowable as a trading expense?

Answer 31

allowable

Question 32

employers contributions to registered pension schemes?

Allowable of not allowable as a trading expense?

Answer 32

allowable in the period paid

Question 33

employers NIC?

Allowable of not allowable as a trading expense?

Answer 33

allowable

Question 34

Unrecoverable VAT?

Allowable of not allowable as a trading expense?

Answer 34

allowable on gross expenditure

Question 35

cost of hiring, leasing and renting plant?

Allowable of not allowable as a trading expense?

Answer 35

allowable.

Question 36

cars?

Allowable of not allowable as a trading expense?

Answer 36

For cars with emmisions > 110g/km and leased for more than 45 days, a flat rate 15% of the rental cost is dissallowed.

Question 37

car rentals?

Allowable of not allowable as a trading expense?

Answer 37

For cars with emmisions > 110g/km and leased for more than 45 days, a flat rate 15% of the rental cost is dissallowed.

Question 38

how should a trader be taxed for goods the trader has taken for his/her own use?

Answer 38

should be taxed on the profit that would have been made if the trader had sold the goods at the market price.

Question 39

how do you adjust for trading profits not shown in the accounts if:

1. if shown as drawing at cost
2. If not recorded at all
3. if shown in drawings at selling price

Answer 39

1. then add back the profit (SP - cost) to the trading income
2. Add back the selling price
3. no adjustment req’d

Question 40

when does trading profits not shown in the account normally occur?

Answer 40

normally when goods are taken for own use by the trader.

N.b. It is very common in small businesses!!!

Question 41

non trading income (e.g. interest rec’d rental income received etc) included in the accounts? what do you do to this in the trading income accounts?

Answer 41

This needs to be removed from the accounts as it is dealt with elsewhere in the tax computation.

Question 42

expenditure not shown in the trading income accounts?

this is most commonly business expenses paid from the traders personal bank account or credit card, including the business proportion of expenses which are part private/part business and paid from personal funds.

Answer 42

deduct from taxable profits.

Question 43

what is the trading income allowance?

Answer 43

gross trading income up to £1000 p.a. can be rec’d without the need to declare this income. i.e. wont need to pay tax on it!

Question 44

businesses with receipts below 150k can do what?

Answer 44

opt to have taxable business profits calculated on a cash basis as apposed to accrual basis.

so taxable profits can be the difference between cash rec’d - cash pai, with no adjustments for payables, receivable or inventory for e.g. needed.

Question 45

in the exam, should you assume a business uses cash or accrual basis unless if you are not told?

Answer 45

assume a business uses the cash basis unless told otherwise.

Question 46

“500£ on a new machine that makes glass screens for mobile phones”

Allowable of not allowable as a trading expense?

Answer 46

Capital:

not allowable so add back!

Question 47

what do you need to be careful of when calculating trading income?

Answer 47

Make sure that you read the question properly so you know what expense have already been accounted for. if there are allowable expenses and they haven’t been included you need to remove these!!!!