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Trading Profits Flashcards

(57 cards)

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1
Q

Trading profits: Steps to tax a sole trader

A
  1. Adjust profits
    For the accounting period
  2. Deduct capital allowances
    For the accounting period

= Adjusted trading profits

  1. Tax adjusted trading profits
    For the accounting period
  2. Consider which tax year to tax this accounting period in (basis periods)
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2
Q

Trading profits: How to consider which tax year an accounting period is in

A

Basis periods

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3
Q

Trading profits: Ongoing business profits are taxed on a:

A

Current year basis

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4
Q

Current year basis

A

Profits taxed in a tax year are from:
The 12m accounting period
Ending in that tax year

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5
Q

Trading profits: Allowable expenditure (general rule)

A

Incurred wholly and exclusively
For trading purposes
Not specifically disallowed by legislation

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6
Q

Most common example of taxable trading income not included in the accounts

A

Sole trader
Removing goods from business
For personal use

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7
Q

Trading income: Treatment: Sole trader removing goods from the business for personal use: Correctly treated in accounts (cost removed from purchase)

A

Add back the profit element

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8
Q

Trading income: Treatment: Sole trader removing goods from the business for personal use: Still included in purchases (no adjustment made in the accounts)

A

Add back selling price

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9
Q

Trading income: Main examples of allowable expenditure not included in the accounts

A

Capital allowances

Business expenses borne personally by the owner

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10
Q

The two types of non-trading income that may have been included in the accounts but should be removed for tax purposes

A
  1. Income taxed elsewhere
    E.g. chargeable gains
    Rental income
    Savings income
  2. Income exempt from tax
    E.g. exempt capital gains
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11
Q

Trading income: Disallowable expenditure for sole traders: Not wholly and exclusively for trading purchases if:

A
  1. Too remote from the purpose of the trade
  2. Had both trade and non-trade purpose (duality principle)
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12
Q

Trading profit: What can you do if there is a dual purpose for expenditure?

A

A reasonable apportionment between business use and private use

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13
Q

Trading income: Disallowable expenditure for sole traders: Remuneration

A

Most payments to staff are allowable
(Salaries, bonuses, redundancy, cost of providing benefits)

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14
Q

Trading income: If earnings not paid within nine months of the year end

A

Deductible in the period in which they are paid

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15
Q

Trading income: Employer’s contributions to pension schemes allowability timing

A

Allowed when paid
(Not on accruals basis)

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16
Q

Trading income: Allowability: Training expenditure

A

Allowable

If aimed at improving the skills needed in the business

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17
Q

Trading income: Appropriation definition

A

Withdrawal of funds from a business’s profits

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18
Q

Trading income: Allowability: Appropriations

A

Dissalowable
(as expenses)

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19
Q

Appropriation examples

A
  1. Business owner’s salary
  2. Sole trader/partner drawings
  3. Unreasonable payments made to family member employees
    (Excess is therefore disallowed)
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20
Q

Trading income: Allowability: Impaired debts: Depends on

A

Whether Specific or General provision

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21
Q

Trading income: Allowability: Impaired debts: Specific provisions movements

A

Allowable

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22
Q

Trading income: Allowability: Impaired debts: General provisions movements

A

Disallowable

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23
Q

Trading income: Allowability: write off of trade bad debts

24
Q

Trading income: Allowability: Write off of non trade bad debts

25
Trading income: Allowability: Capital expenditure
Not allowed (In computing the taxable trading profit) May be allowed for CGT
26
Trading income: Allowability: (Disallowable) capital gains examples
Depreciation Loss/profit on sale of fixed assets Cost of capital assets included within repairs and maintenance Improvements/enhancements Expenditure required to first bring an asset into a useable state Capital-related expenditure included within legal and professional fees (with exceptions)
27
Trading income: Allowability: Repairs and maintenance
Allowable
28
Trading income: Repairs definition
Returning asset to its original condition
29
Trading income: Allowability: Repairs using current industry standards even with element of improvement (E.g. replacing single to double glazing)
Allowable
30
Trading income: Allowability: Subscriptions
Normally allowable Because wholly and exclusively for purposes of the trade
31
Trading income: Allowability: Donations: Small to local charities
Allowable
32
Trading income: Allowability: Donations: Gifts of stock or assets to local charities or schools
Allowable
33
Trading income: Allowability: Donations: To national charities
Disallowable (But GA)
34
Trading income: Allowability: Donations: To political parties
Disallowable (Same with subscriptions)
35
Trading income: Allowability: Entertaining: Client
Disallowable
36
Trading income: Allowability: Entertaining: Staff
Allowable
37
Trading income: Allowability: Gifts: Trade samples to customers
Allowable
38
Trading income: Allowability: Gifts
Disallowable Unless: 1. Less than £50 per recipient per year 2. Not: Food Drink Tobacco Vouchers for exchangeable goods 3. Carries conspicuous advertisement for the business
39
Trading income: Allowability: Gifts: To employees
Normally allowable No upper limit (Unlike benefits in kind) But might result in IT for employee
40
Trading income: Allowability: Legal and professional charges
Allowable If incurred for purposes of the trade E.g. legal fees chafing debts Charges incurred in defending the title to fixed assets
41
Trading income: Allowability: Legal and professional fees: Relating to capital expenditure E.g. fees associated with acquiring fixed assets
Generally Disallowable
42
Trading income: Allowability: Legal and professional: Capital expenditure: Exceptions
1. Fees and other costs of Obtaining long term debt finance 2. Cost of registering patents 3. Renewing short (>50y) lease Expense allowable Legal expenses incurred in initial granting of lease disallowable
43
Trading income: Allowability: Cost of hiring, leasing or renting plant and equipment
Allowable
44
Trading income: Allowability: Cost of hiring, leasing or renting plant and equipment: Exception
Car lease payments Where CO2 emissions over 50g/km Flat rate 15% disallowance (If leased car is used by sole trader partly for private use then there will also be a disallowance for the private use)
45
Trading income: Allowability: Cost of hiring, leasing or renting plant and equipment: Leased car with private use system
Work out Disallowable expense first: 85% of business proportion of cost The remainder is the disallowance
46
Trading income: Allowability: Fines
Generally Disallowable
47
Trading income: Allowability: Fines: Exception
Parking fines Incurred by employee (Not owner) Whilst on work business
48
Trading income: Allowability: interest on borrowings for the purpose of the trade E.g. business account overdraft
Allowable
49
Trading income: Allowability: Interest on late paid tax
Disallowable
50
Trading income: Allowability: irrecoverable VAT
Allowable If related to allowable expenditure
51
How have the tests used to determine whether a transaction is trading (IT) or capital (CGT) been developed?
Case law
52
How is trading income determined?
Badges of trade
53
Badges of trade
Subject matter (personal, investment, resale) Length of ownership (less = trading) Frequency + similarity by same person Supplementary work and marketing Circumstances responsible for realisation (forced to raise cash = not trading) Motive (profit = trading) Method of finance used to acquire the asset (short term loan = trading esp if only repaid after sale of asset) Method of acquisition and source of finance (Inherited asset less trading. Short term finance to buy/improve = trading) Similarity to taxpayer’s editing trade
54
Trading allowance amount
£1000
55
Trading allowance applies to
Sole traders (Not partnerships)
56
Trading allowance effect: Under the limit
Aren’t taxable And don’t need to be declared for tax purposes
57
Trading allowance effect: Over the limit
Taxpayer can elect to deduct the allowance from the receipts rather than any actual expenses incurred Applies to all individual’s trades Relates to a specific tax year (In exam assume not elected)

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