Trading Income Flashcards
(42 cards)
pre trading expenditure rules?
expenditure incurred before trade commenced is deductible if…
- was incurred within 7 years before trade commenced
- would’ve been deductible if trader had been trading
fixed rate expenses?
unincorporated businesses may make deductions for certain expenses on a fixed rate basis rather than the actual expenditure
this is to simplify the sole trader’s tax affairs
are fixed rate expenses optional?
yes
if exam does not disclose basis for expenses, assume deductions are made in usual way
fixed rate deductions are used for…
- motor vehicles
- use of traders’ home for business purposes
- business premises partly used as trader’s home
if a trader incurs expenditure on acquisition/lease of a car/motorcycle…
trader can calculate the allowable expense in two ways
- calculate business portion of expenses
- claim a fixed rate deduction using the approved mileage allowance rates
when can fixed rate deduction not be made for motor vehicles?
when the trader has previously claimed capital allowances or other deductions under the cash basis when acquiring the goods vehicle
once a trader has adopted the fixed rate method in respect of an asset…
they must continue to use the fixed rate method
if a trader uses part of their home for trade…
the trader can calculate the allowable expense in either of two ways
- calculate business portion of expenses
- claim a fixed monthly deduction
monthly deduction rates for allowable expenses for use of home for business purposes are based on…
number of hours spent working for the business from home
no deduction is available if this is fewer than 25hrs per month
if trader works from home less than 25hrs per month…
no deduction is allowable
fixed rate deductions for vehicles?
cars/vans = 45p per mile (for first 10,000 miles), 25p per mile (thereafter)
motorcycle = 24p per mile
fixed rate deductions for use of home for business?
25-50hrs per month = £10 per month
51-100hrs per month = £18 per month
101+hrs per month = £26 per month
fixed rate deductions for premises used as home and business premises?
disallowance for personal element of expenses
one occupant using premises as home = £350 per month
two occupants using premises as home = £500 per month
three or more occupants using premises as home = £650 per month
business premises partly used as trader’s home?
if the trader uses part of the business premises as their home, they can calculate the allowable expense by either:
- calculating the business portion of expenses
- deduct a fixed monthly amount
how is the fixed rate deduction applied to premises partly used as trader’s home?
based on the number of people living there, the fixed rate is deducted from the living expenses - the rest is allowable
what are the 3 steps to tax a sole trader?
- adjust profits for the accounting period
- deduct capital allowances for the period
- apply the basis of assessment rules
accounting profits xxx
less: capital allowances (xxx)
equals: tax adjusted profits xxx
basis of assessment in first year of trade for a sole trader?
taxed from start date to end of tax year
e.g., 1Dec (start) to 5Apr (end of tax year)
basis of assessment for an ongoing business of a sole trader?
tax year basis (TYB)
taxed on profits that fall within the tax year
e.g., tax year ends 30Jun, profits y/e 30Jun25 are 78k, profits y/e 30Jun26 are 82k
3/1278k + 9/1282k = taxable profits for 25/26 tax year
transition year?
2023/24 was a transition year in which profits had to be calculated to move the basis period from current year basis to tax year basis
transition profits are taxable over…
five years, with 23/24 being the first year (unless a business elects to have them assessed in one tax year only)
how do you handle transition profits?
you divide the transition profits by 5 and include the relevant amount in net income for the current tax year
transition profits are taxable?
this means transition profits are added to the profits for the current tax year
what effect does transition profits have on income tax computation?
only trading profit is included in net income part of the income tax computation
transition profits is NOT included
how do you calculate the income tax liability when there are transition profits?
- calculate the IT liability (excluding transition profits)
- calculate the IT liability (including transition profits)
- subtract both IT liabilities from each other to calculate the income tax liability on the transition profits (which is added to the IT liability)
- add IT on transition profits to IT on regular profits to get total IT for trading income
