Seminar 4

Question 1

are capital contributions reduced from the list price of the car when being taxed?

Answer 1

yes

Question 2

how are monthly payments towards a car reduced?

Answer 2

reduced off the end total

Question 3

trade = ?

Answer 3

its not always obvious whether or not a person is carrying out a trade, it could be mistaken for capital gains

Question 4

how is discernment practiced with regards to whether or not financial activity is trading?

Answer 4

it’s left to case law decisions

Question 5

what are the ‘badges of trade’

Answer 5

criteria used to identify trading activities

Question 6

examples of the badges of trade

Answer 6

• subject matter of the transaction
• length of the period of ownership
• frequency of transactions
• supplementary work
• way it was carried out
• reason for sale
• profit motive
• source of finance
• existence of similar transactions

Question 7

allowable = ?

Answer 7

not taxed, exempt

Question 8

disallowable = ?

Answer 8

taxed, not exempt

Question 9

how are profits of a self-employed person taxed?

Answer 9

charged to income tax by ITTOIA2005

Question 10

what does a self employed person do?

Answer 10

conducts a trade, profession, or vocation

Question 11

how do you calculate trading profits?

Answer 11

begin with net profit from income statement

make adjustments to comply with tax law

deduct deductible expenses

Question 12

how is accounting profit adjusted for tax purposes?

Answer 12

net profit from accounts + disallowables - expenditures not shown in accounts = tax adjusted profit before capital allowances

tax adjusted profit before capital allowances - capital allowances = tax-adjusted profit after capital allowances

Question 13

how does trading allowance work?

Answer 13

allowance is 1,000 per tax year

if trading income <= 1,000, it’s exempt

if trading income >= 1,000, choose: trading income - expenses, or trading income - 1,000

Question 14

if an expenditure is incurred purely for trading purposes, it is…

Answer 14

allowable / deductible

Question 15

if an expenditure is incurred for both trading & private purposes it is…

Answer 15

disallowable / not deductible

Question 16

capital expenditures on non-current assets which bring an enduring benefit to the business is…

Answer 16

disallowed (still taxed)

Question 17

what are examples of capital-related expenses that are disallowed?

Answer 17

legal/professional charges incurred on the acquisition of a fixed asset

depreciation/amortisation

losses on the disposal of a fixed asset

repairs to a newly-acquired fixed asset

Question 18

are appropriations of profit allowed or disallowed?

Answer 18

disallowed

this includes owner’s withdrawals/salary

appropriations of profit include owner’s personal income tax/NICs

salary payment to family members unnecesarily is disallowable

Question 19

appropriation of profit = ?

Answer 19

deductions from revenue

Question 20

are customer entertaining costs allowed/disallowed?

Answer 20

customer entertaining costs are disallowed

staff entertaining costs are allowed (though employees may incur a tax liability)

Question 21

are gifts to employees allowable?

Answer 21

yes

Question 22

costs of gifts to customers is allowed/disallowed?

Answer 22

disallowed unless the gifts cost less than £50 per customer per year

Question 23

increases in general provisions for bad debts/stock provision are…

Answer 23

disallowable (still taxable)

Question 24

decrease in general provision must be…?

Answer 24

decreased from net profit

Question 25

general provisions = ?

Answer 25

general provisions are balance sheet items representing funds set aside by a company as assets to pay for anticipated future losses

Question 26

trade bad debts are …?

Answer 26

allowable (not taxed)

Question 27

non-trade bad debts are…?

Answer 27

disallowable

e.g., loans to employees

Question 28

donations to national/local charities & gift aid donations?

Answer 28

national charity donations are disallowable

donations to small local charities are allowable if they increase business reputation

gift aid donations are disallowable

Question 29

political donations & gifts of stock to UK charities are…?

Answer 29

political donations are disallowable

gifts of stock to UK charities is allowable

Question 30

fines & penalties are…?

Answer 30

disallowable unless they’re incurred as a result of doing business

Question 31

legal & professional fees are…?

Answer 31

allowable if they relate to income (e.g., collecting bad debts, suing)

Question 32

professional fees relating to HMRC = ?

Answer 32

disallowable

Question 33

fees relating to capital expenditures = ?

Answer 33

disallowable (e.g., cost of acquiring capital assets)

Question 34

registering a patent & legal costs for lease renewal = ?

Answer 34

allowable

Question 35

if earnings for employees are charged in accounts, but not yet paid within 9 months of the end of the period, the cost is…?

Answer 35

allowable only in the period in which they’re paid

Question 36

redundancy payments/compensation

educational courses for trade purposes

employer’s pension contributions…?

Answer 36

allowable

Question 37

what calculation applies to polluting cars?

Answer 37

disallowance of 15% * the lease payment

further adjustment if the car’s isn’t wholly used for business purposes to disallow the private use

Question 38

what are other allowable expenditures?

Answer 38

interest payable (if incurred for trade purposes)

non-recoverable VAT

patent royalties paid for trade purposes

pre-trading expenditure incurred 7 years before starting to trade

Question 39

stock/inventory taken from the business for traders’ private use is treated as..

Answer 39

a sale at normal selling price

if nothing is shown in the accounts for this, add back the selling price

if treated as drawings at cost, add back to profit

Question 40

non-trading income must be…

Answer 40

deducted

e.g., rental income, profit on disposal of fixed assets, investment income

Question 41

expenditures not shown in the accounts may include…?

Answer 41

business expenditure paid personally by the owner

this is allowable (not taxed)