Trading and Income - Income from Self Employment - Tax Computations Flashcards
(23 cards)
What do Badges of Trade assess
Badges of Trade assess whether an individual is trading
Who developed badges of trade
Badges of trade were developed by the Royal Commission in 1955
What are the 9 badges of trade
The 9 badges of trade are:
- Profit-seeking motive
- Number of transactions
- Nature of the asset
- Existence of similar transactions
- Changes to the asset
- Method of sale
- Source of finance
- Interval between purchase and sale
- Method of acquisition
What is income tax charged on
Income tax is charged on adjusted trading profits
Why are adjustments made to trading profits
Adjustments are made to remove non-tax-deductible items and include any omitted taxable items
What adjustments should you add to accounting profit
Adjustments to add to accounting profits are:
- Disallowed expenses (e.g. depreciation, fines, private expenses)
- Trading income omitted from accounts (e.g. inventory used personally)
What adjustments should you less to accounting profit
Adjustments to less from trading profits are:
- Allowable expenses not in accounts (e.g. capital allowances)
- Non-trading income included in accounts (e.g. rental income or bank interest)
What must expenses be to be deductible against trading income
Expenses must satisfy specific criteria to be deductible against trading income
What’s the “Wholly and exclusively” rule (ITTOIA 2005)
“Wholly and exclusively” rule (ITTOIA 2005): Expense must be incurred solely for the purpose of the trade
What is the Remoteness test
Remoteness test: Expense with no connection to the business is disallowed
What is the Duality test
Duality test: If an expense has both business and personal use, it must be apportioned
What happens if an expense cannot be separated
If an expense cannot be separated, it’s disallowed altogether
What’s an example of a duality product
An example of a duality product is mobile phones
What are disallowed expenses
Disallowed expenses are:
- Capital expenditure
- Depreciation
- Private use/drawings
- Entertainment and gifts
- Political donations
- Fines and penalties
- Criminal payments
What are allowable expenses
Allowable expenses are:
- Rent, utilities for business premises
- Interest on business loans
- Salaries and staff costs
- Trade subscriptions
- Travel
- Professional fees
- Irrecoverable VAT
- Pre-trading expenses
When are pre-trading expenses allowable
If pre-trading expenses are incurred within 7 years before trading begins and would be deductible if incurred after start
What did Sharkey v Wernher (1955) establish
Sharkey v Wernher (1955) established that stock transferred for personal use must be valued at market price, not cost
What are examples of non-trading income shown in accounts
Examples of non-trading income shown in accounts are:
- Rental income (should be taxed under property income rules)
- Investment income (e.g., bank interest)
- Gains on disposal of capital assets
Why must non-trading income show in accounts be excluded from the trading profit
Non-trading income shown in accounts must be excluded from the trading profit calculation to avoid incorrect taxation under the wrong income category
What items still have tax consequences after a business ceases trading
After a business ceases trading, certain items can still have tax consequences like:
- Receipts
- Expenses
How are receipts taxed if they relate to the former trade
If a receipt relates to a former trade, they are taxed as post-cessation trading receipts
When can expenses be claimed as post-cessation expenses
If expenses would have been deductible had the business continued, they may be claimed as post-cessation expenses
What is covered under ITTOIA 2005 ensure
ITTOIA 2005, ensure that tax obligations don’t vanish simply because trading ceases
