Trading income

Question 1

Badges of trade determine whether a sale by an individual has resulted in:

Answer 1

Trading profits (subject to income tax + NI)
A capital gain (subject to CGT)

Question 2

Badges of trade

Answer 2

Intention to make a profit
Similar transactions
Nature of the asset
Connection with existing trade
Changes to the asset
Reasons for sale
Source of finance
Period of ownership
Method of acquisition

Question 3

Taxable trading profit calculation methods

Answer 3

Trading allowance method
Adjustment to profit method

Question 4

Trading allowance method

Answer 4

£1k allowance available to sole traders
Applies if trading receipts are under £1k
If trading receipts are over £1k, the sole trader calculates taxable trading income including all cash receipts
Usually used with side businesses

Question 5

Allowable expenditure

Answer 5

Must be wholly and exclusively for the purposes of trad

Question 6

Taxable trading profits pro forma

Answer 6

Net profit / (loss) per accounts
Disallowed expenditure
(Interest receivable)

Question 7

Allowable items of expenditure

Answer 7

Deducted from trading profits if they are wholly and exclusively for the purposes of trade

Question 8

Disallowable items of expenditure

Answer 8

Must be added back to the profit / loss
Private use is disallowed

Question 9

Allowable expenses

Answer 9

Cost in accounts x business use % x months / 12

Question 10

Disallowable expenses

Answer 10

Cost in accounts - allowable expenses

Question 11

Examples of disallowable expenditure

Answer 11

Drawings
New appliances
Political donations
Any private use
Income tax
Non-trade debt written off
Increase in bad debt provision
Fees re acquisition of capital asset
Depreciation
Lease rental on car
Interest on overdue tax
Entertaining customers

Question 12

Fixed rate expenses

Answer 12

Unincorporated businesses can elect to deduct business expenses at a fixed rate in respect of:
Expenditure on motor vehicles
Use of home for business purposes
Business premises partly used as trader’s home

Question 13

Businesses continuing trade

Answer 13

Tax year basis rules
If accounting period aligns with tax year, assessable amount = profits from period
Otherwise, split profits so that only profits arising in tax year are taxed

Question 14

Businesses starting trade

Answer 14

Taxed on profits arising from the start of trading to the end of the tax year

Question 15

Businesses ceasing to trade

Answer 15

Profits from the start of the tax year until the date of cessation are taxed in the tax year of cessation

Question 16

2023/24 transitional rules

Answer 16

20% of profits taxed from 2023/24 to 2027/28

Question 17

Taxing transitional profit steps

Answer 17

Work out income tax liability both including and excluding transition profits
Specify the amount due to transitional profits

Question 18

Tax year basis for new businesses

Answer 18

Tax on profit arising from the start of trading to the end of the tax year

Question 19

Tax year basis for ceasing trades

Answer 19

Profits from start of last tax year through to date of cessation (and any untaxed transitional profits) are taxed in the tax year of cessation

Question 20

Late accounting date rules

Answer 20

If the accounting date falls between 31 March and 4 April, the profits for the days after the accounting date up to and including 5 April are treated as nil for the tax year and treated as arising in
the following tax year.
Does not apply at the end of the year of cessation
If accounts run to 31 March but cessation is on 3 April then the profits taxed in the final year are from 1 April to 3 April

Question 21

Capital allowances

Answer 21

A form of tax allowable depreciation
Deducted from adjusted trading profits
Calculated for each accounting period
Must be claimed by the taxpayer

Question 22

Cash basis

Answer 22

Can only claim capital allowances on cars
Deduct trade-related capital expenditure from trade profits

Question 23

Capital allowances on P&M

Answer 23

Applies to assets which perform a function in a business, rather than merely form part of the setting
WDA / AIA / FYA

Question 24

Structures and buildings allowance

Answer 24

Add to capital allowances
Does not include cost of the land or P&M
3% straight-line allowance

Question 25

Sole traders and partners using the cash basis

Answer 25

Can only claim capital allowances on cars No relief available for expenditure on buildings Deduct trade-related capital Capex on other assets directly from trade profits

Question 26

Sole traders and partners using the GAAP basis

Answer 26

Can claim capital allowances on most assets Structures and buildings allowances available for expenditure on buildings Cannot deduct any Capex from trade profits

Question 27

Capital allowance acquisition cost

Answer 27

Purchases recorded at their purchase price net of recoverable VAT If VAT irrecoverable, then VAT inclusive price is used If trader brings a personal asset into the business, cost = MV when brought in

Question 28

Capital allowance disposal value

Answer 28

The lower of disposal proceeds and original cost If given away / sold at under MV, disposal value = MV on date of disposal

Question 29

When is a balancing charge needed?

Answer 29

When the value of a disposal exceeds the tax written down value Reduces the pool to nil and reduces allowances by the same amount

Question 30

When is a balancing allowance needed?

Answer 30

When the value of a disposal falls below the tax written down value Reduces the pool to nil and increases allowances by the same amount

Question 31

Assets with private use

Answer 31

Keep in its own column Allowances are calculated in full in the private use asset column, but the allowance column is scaled by the % of business use

Question 32

Capital allowance availability on purchase of fixtures conditions

Answer 32

The seller having either claimed FYA on the fixtures or allocated them to a capital allowance pool prior to the date of sale. The value of the fixtures must be formally fixed

Question 33

WDA for small pools

Answer 33

If the main pool / SRP balance is under £1k it can be written off as a WDA

Question 34

Results of a trading loss

Answer 34

Trading income recorded as nil Tax relief can be obtained for the loss

Question 35

Unincorporated trader loss relief options

Answer 35

s.64 s.83 s.72 s.89

Question 36

Loss relief exam technique

Answer 36

1. How much loss will be used? 2. In which tax year will it be used? 3. What will it be used against? - trading income or general income

Question 37

s.64

Answer 37

Sets a trading loss against the trader's general income for CY and PY - broad for all income

Question 38

s.83

Answer 38

Automatically carries over any remaining trading loss after any s.64 claim and sets it off against the first available future trading profits - specific to trading income

Question 39

s.72

Answer 39

Available for trading losses incurred in any of the first 4 tax years Trading losses can be set off against the general income of the 3 tax years preceding the tax year of the loss on a FIFO basis

Question 40

Non-active trader restriction

Answer 40

If individual devotes under 10 hours a week to the trade, loss relief against non-trading income restricted to £25k / tax year Any remaining loss c/f against future profits from the same trade

Question 41

s.89

Answer 41

Available for a loss on the cessation of a trade to be carried back and relieved in earlier years Loss available = loss of the last 12 months of trading Relief given against trading income in the final tax year and previous 3 tax years on a LIFO basis Count loss from start of final tax year to cessation date first

Question 42

Income tax reliefs against total income restriction

Answer 42

Limit on the amount of relief a trader can get when setting trading losses against non-trading income in a tax year Higher of: - £50k - 25% of adjusted total income

Question 43

Allocation of partnership profits

Answer 43

1. Perform adjustments to profit 2. Calculate and deduct capital allowances 3. Split profit between the partners 4. Treating each partner as a separate sole trader, apply the rules to allocate taxable trading profits to the appropriate tax year

Question 44

Limited liability partnerships

Answer 44

The liability of the partners is limited to the amount of capital that they contribute to the partnership

Question 45

Taxable profits pro forma (Cash basis)

Answer 45

Cash receipts in accounting period (Allowable business expenses paid)

Question 46

Notional partnership losses

Answer 46

Partner with a notional loss records Nil taxable trading income Remaining partners have total profit reallocated to them in the ratio: (Partner profit / total positive partner profits) x total profit