3. TC - Trading Income Flashcards
What are the steps for adjusting profit for a sole trader?
- Adj profits for the acc period X
- Deduct capital allowances for that acc period (X)
Adj trading prof for the acc period X
- Consider which tax year to tax this acc period in (based on rules)
Show the adjustments to profit
Net profit per accounts X
Add disallowable expenditure X
Add taxable trading income not credited in the accs X
Less
Income included in the acc that is not taxable trading income (X)
Expenditure not charged in acc but allowable for purposes of tax (X)
Cap allowances (X)
Tax adj trading profits X
What is disallowable expenditure?
Any amounts that are allowable for acc purposes, but not for tax purposes
Must be added back to the acc profits
What is the general rule for whether expenditure is allowable?
General rule is that expenditure not incurred wholly and exclusively fr trading purposes is disallowable
So has to be added back
Give some examples of disallowable expenditure
- Cap expenditure
- Depreciation
- Appropriation of profit
- Movements in general provisions
- Client entertaining
- Gifts
- Donations to political parties/charities
- Subscriptions (unless trade/prof associations)
- Fines
- Legal fees of capital nature
- E’ment parents
- Leased cars
- Interest on late payment of tax
- E’er pension contributions
When are gifts allowable?
When they are gifts to employees Gifts of trade samples Gifts to customers if adv bus and not food, drink , tobacco or vouchers Less than £50/receipient per year
What must be added back when there is goods taken for own use?
If the cost is already adjusted for, then just add back the profit element
If the cost is not adj for, add back the selling price
What must be considered when considering whether the following is allowable expenditure for tax?
Capital expenditure
Disallowable and add back
Must distinguish whether repairs (allowable) or improvements (disallowable, may be subject to CGT)
What must be considered when considering whether the following is allowable expenditure for tax?
Appropriation of profits
and give some examples of appropriation of profits
E.g.s Business owner salary
Drawings
Private elements of expenditure
Unreasonable payments to family members
None are allowable
When its goods for own use must work out
- If cost already adj for, add back profit only
- If cost not already adj for, add back selling price
What must be considered when considering whether the following is allowable expenditure for tax?
Movements in general provisions
Must separate from specific provisions
What must be considered when considering whether the following is allowable expenditure for tax?
Gifts
Disallowable UNLESS
Gifts to e’ees
Gifts of trade samples
Gifts to customers under £50 that isn’t food, drink, tobacco or vouchers
What must be considered when considering whether the following is allowable expenditure for tax?
Charities/political party donations
Disallowable UNLESS small donations for local charities
What must be considered when considering whether the following is allowable expenditure for tax?
Fines
Disallowable UNLESS e’ee parking fines whilst at work
What must be considered when considering whether the following is allowable expenditure for tax?
Legal fees of capital nature
Disallowable EXCEPT
- Fees and other costs of obtaining LT debt finance
- Cost of registering patents
- Cost of renewing a short lease (not initial grant or acquisition)
What must be considered when considering whether the following is allowable expenditure for tax?
Employment payments
Wages/salaries are allowable generally following accruals concept
But if not paid within 9 months of acc period then they are disallowed and allowed when actually paid
On cessation of trade, payments in addition to redundancy payments are only allowable up to 3x statutory redundancy pay
What must be considered when considering whether the following is allowable expenditure for tax?
Leased cars
If the leased car has CO2 emissions:
- Over 110g/km = disallowance of 15% * hire charge
- Less than 110g/km - hire charge allowable
What must be considered when considering whether the following is allowable expenditure for tax?
Employer pension contributions
Allowable on paid basis
So disallow any accrual at the end of the period
Give 2 examples of taxable trading income not credited in the accounts?
- where the sole trader has removed goods from the bus for their own use
- Customer may pay for item with goods/serv rendered. Any non-monetary consideration is specifically taxable so if trader hasn’t included it in accs, add the value of the work’s worth to profits
How is is treated where sole trader has removed goods from bus for own use?
If correctly treated in accs (i.e. cost removed from purch) increase profits for tax purposes by the profit element
If costs are still included in purch (i.e. no adj made to accuse) increase profits for tax purposes by full selling price
How is it treated in the accs if customer has paid for item with goods/services rendered rather than cash?
Any non-monetary consideration is specifically taxable so if trader hasn’t included it in accs, add the value of the work’s worth to profits
How may it come up in a question about taxable trading income not credited in the accounts?
May get a Q giving details of taxable income they didn’t know how to deal with so didn’t include, so will need to be added to profit figures
Give an example of income that is not taxable as trading income that has to be removed from the accs
Capital gains
Rental (property) income
Savings income
Income that is exempt from tax
Give an example of deductible expenditure not charged in the accounts
Business exp that have been borne personally by the owner (and are allowable)
What requirements must be met for expenditure before trade commenced to be deductible?
It would’ve been deductible if the trader had already been trading (i.e. are wholly and exclusively for the purposes of trade)
It was incurred within 7 years before trade commenced
How are deductible expenditure not dealt with in the accounts treated in a tax comp?
If they haven’t been dealt with then they’ll need deducting
But if they have then no treatment is required
What are some new areas you may have to deal with in the exam?
Fixed rate expenses
Motor vehicles
Use of home for business purposes
Business premises partly used as trader’s home
What are fixed rate expenses?
Any unincorporated businesses may made deductions for certain expenses on a fixed rate basis, rather than using the actual expenses
This is to simplify the trader’s tax affairs
This is optional for a business and you’ll be told in the Q if deductions are made on a fixed rate business (otherwise assume the normal way based on relevant business proportion)
Can be made for motor vehicles, use of traders hoe and business premises partly used as the traders home
Is fixed rate expenses automatically used?
No, it is optional
What are the 2 methods for dealing with motor vehicle expenses
If a trader incurs expenditure on acquisition, lease, hire or use of a car, motor cycle or goods vehicle for trade, they can calc in 2 ways:
- Calc business proportion of actual motor expenses (e.g. bus proportion of cap allowances and other costs such as fuel
- Claim a fixed rate deduction in respect of MV expenses using the approved mileage allowance rates, with no other deductions (e.g. fuel costs)
What is the approved rate for motor expenses?
45p/mile for first 10,000 miles (25p/mile after that) for cars and goods vehicles
24p/mile for motor cycles
When CAN’T indivs claim the fixed rate deduction for motor vehicles?
- If the trader has previously claimed capital allowances on that vehicle
- If the trader made a deduction under the cash basis when acquiring the vehicle
Can you switch between the 2 methods for MV deductions?
No, once adopted, the trader must continue to use the fixed rate method i respect of that asset
How can traders calculate the allowable expense for use of home?
- Calc the business portion of the actual expenses (e.g. the business proportion of the utility bills)
- Claim a fixed monthly deduction
How are the fixed monthly deduction rates calculated for
Calculated based on the number of hours spent working for the business from home
But no allowance is available if less than 25 hrs /month
TYU2: Churchill runs a sole trader business. He uses his car and one of the rooms in his house for business purposes. During the year 30 June 2019 he drove 1,250 miles per month for business and spent 80 hrs per month working from home, except in Dec where he spent 105hrs.
Calc the fixed rate deduction Churchill can claim for his use of car and home for business purposes.
Total mileage = 1,250 x 12 = £15,000 miles
10,000 x £0.45 £4.5k
5,000 x £0.25 = £1,250
Deductible amount £5,750
Home
11 months x £18 £198
1 month x £26 £26
Deductible amount £224
What is the monthly adjustment for premises costs deducted from total costs for pate use?
£350 for 1 occupant
£500 for 2 occupants
£650 for 3 or more occupants
***CHECK
What is the trading allowance?
£1,000 per tax year for sole traders
TYU3: Claire runs a hotel in which she also lives with her partner Don. Their daughter Ellie, a medic student, is away 9 months of the year, but lives there 3 years. The total premise expenses were £15,000 for the y/e 31 March 2020.
Calc Claire’s allowable expenses for y/e 31 March 2020.
Total premises expenses £15k
Less late rate: 9 months x £500/month = £(4,500)
Less flat rate: 3 months x £650/month = £(1,950)
Allowable expenses £8,550
What action is required if a sole trader’s gross income is no more than £1k for tax year?
Then the sole trader income does not need to be declared as it is exempt
What action is required if a sole trader’s gross income is no more than £1k for tax year?
Then the sole trader income does not need to be declared as it is exempt
What should you assume in the exam if a sole trader has trading receipts of less than £1,000?
Assume the trading allowance applies and the income is exempt so doesn’t need to be declared
UNLESS their expenses exceed the income as they can elect to use the trading allowance to receive relief from future trading loss
Is the use of the trading allowance automatic?
Yes if someone earns over £1,000
But if they earn less than that it needs to be adopted if the income is less than £1k in order to get relief for trading losses
Assume in the exam assume that if actual exp are less than £1k that the trader will elect to use the trading allowance
What does the trading allowance also apply to?
- normal trading
- Misc income such as an amount received from a one-off piece of work (e.g. writing exam questions)
For the purpose of the £1k limit, trading income and misc income are added together
What are the 3 scenarios for basis periods
- Current Year Basis - Ongoing business assessed on acc period ending in tax year
- Opening Year Rules - commencement of trade assessed using special opening year rukes
- Cessation of trade assessed using special ‘closing year rules’
TYU4: Rana runs a business providing IT support services. Get income for the year ended 31 March 2020 was £4,900 and she had tax allowable expenses of £890.
Calc Rana’s tax adjusted trading profit assuming she takes adv of all beneficial claims
Rana’s income is more than £1k therefore must be declared for tax purposes.
However she can choose to deduct the trading allowance rather than actual expenses.
This will be preferable in this case as allowable exp is less than £1k
Tax adj trading profits = £4,900 - £1k = £3,900
What is the basis period for opening year?
Actual basis must be applied
i.e. tax from start of trade to the following 5 April
What are the rules for determining the second year onwards basis?
Whether there was a Period of Account ending in 2nd tax year
If no - tax Actual tax year (6 April - 5 April)
If Yes - need to decide whether Period of Account was 12 months, less than 12 months or more than 12 months
What period is taxed if there is a period of account ending in 2nd tax year and POA is exactly 12 months?
i.e. if have commenced trading and deciding what to tax in 2nd year
That THAT accounting period
i.e. Current year basis
What period is taxed if there is a period of account ending in 2nd tax year and POA is less than 12 months?
i.e. if have commenced trading and deciding what to tax in 2nd year
Tax first 12 months from trading
i.e. from date of commencement
What period is taxed if there is a period of account ending in 2nd tax year and POA is over 12 months?
i.e. if have commenced trading and deciding what to tax in 2nd year
Tax LAST 12 months of long POA
What is the calculation determining the basis period for the last tax year?
Tax all profits not yet assessed in prev years X
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What is the calculation determining the basis period for the last tax year?
Tax all profits not yet assessed in prev years X
(i.e. from end of prev basis period to date of cessation)
Less overlap profits from commencement of trade (X)
TYU5: Herita commenced business of 1 Jan 18 and made ups rest acc for period to 30 June 19. Thereafter to 30 June each year. Tax adj trading profits have been Period to 30 June 2019 £27k Y/e 30 June 2020 £30k Y/e 30 June 2021 £40k
Calc the trading income assessments for all relevant years.
Show any overlap profits arising and the period to which they relate
First tax yr (17/18)
Actual basis
Basis period 01/01/18 - 05/04/18
3/12 x 27k = £4.5k
2nd yr (18/19) actual basis
Basis period: 06/04/18-05/04/19
12/18 x £27k =£18k
3rd tax yr (19/20)
Long POA ends in yr: 12m to acc date
Basis period: 01/07/19 to 30/06/19
12/18 x £27k
4th yr (20/21) CYB y/e 30/06/20 £30k
5th yr (21/22) CYB y/e 30/06/21
Overlap prof = £13.5k i.e. 01/07/18- 05/04/19
TYU6: Mike commenced a new trade on 1 July 2018 and decided that his normal acc date would be 31 May each year.
Tax adj trading profits =
Period to 31 May 19 £5,500
Y/e 31 May 2020 £11k
Y/e 31 May 2021 £9k
Calc the trading income assessments for all relevant years. Show any overlap profits arising and the periods to which they relate.
First yr (18/19) Actual basis Basis period 01/07/18 - 05/04/19 9/11 x £5.5k = £4.5k
2nd tax yr (19/20)
Short POA ends: tax first 12m trade
Basis period 01/07/18 - 30/06/19
£5.5k + 1/12 x £11k = £6,417
3rd yr (20/21) CYB y/e 31/05/20 £11k
4th yr(21/22) CYB y/e 31/05/21 £9k
There are 2 periods of overlap profits 01/07/18-05/04/19 (9mths) and 01/06/19- 30/06/19 (1mth)
i.e. £4,500 + (1/12 x £11k) = £5,417
When changing the accounting date, and if there ends up being 1 short POA, how is this dealt with?
Tax 12 months to the new acc date
This will create overlap profits which can be relieved on
- Cessation
- A future change of acc date
TYU7: Robert who has been trading for many years decides to cease trading on 31 Dec 2020. Robert regularly made up acc to 30 June 2019 each year
Recent tax adj trading profits have been:
Period to 31 Dec 2020: £6k
Y/e 30 June 2020: £12k
Y/e 30 June 2019: £15k
Overlap profits were £7.5k
Calc the trading income assessments for the final 2 tax years
19/20 CYB (TY/assessmnet) = basis period y/e 30/06/19 £15k
20/21 tax yr 01/07/19- 31/12/20 (£12k + £6k - £7.5k) = £10.5k
When changing the accounting date, and if there ends up being no period of account ending in the tax year, how is this dealt with?
Create a notional 12 month period of acc ending 12 months before the actual new acc date in the tax year of change.
In the following tax year, tax the 12 months up to the new acc date
This will create overlap profits in the tax year of change, which can be relieved on cessation/ a future change of acc date
When changing the accounting date, and if there ends up being 2 periods of account ending in the tax year, how is this dealt with?
Tax from the end of the previous basis to the new acc date
This results in more than 12 months being taxed: reduce to 12 months by relieving opening year overlap profits
TYU9: Papa, a sole trader, has always made up his acc to 31 March. He decides to change his acc date to 30 June by making up acc for 3 month period to 30 June 19. Papa's tax adj profits are: Y/e 31 March 19 £60k 3 months to 30 June 19 £20k Y/e 30 June 19 £85k
Calc the trading income assessment for TY 18/19 to 20/21
Show any overlap profits arising and the period to which they relate
Trading income assessment:
18/19 CYB y/e 31/03/19 £60k
19/20 Change of acc date Short period of acc ending in yr 12mth period to new acc date 01/07/18- 31/03/19: £60k x 9/12 = £45k Period to 30/06/19 £20k Total 19/20 = £65k
20/21 CYB Year to 30/06/20 = £85k
Overlap profits: 01/07/18- 31/03/19 i.e. 9/12 x £60k = £45k
TYU10: Bridget’s tax adj trading profits are as follows:
Y/e 31 Sept 18 £14k
P/e 30 April 19 £12k
Y/e 30 April 20 £18.5k
Calc the trading income assessment for TY 18/19 to 20/21
Show any overlap profits arising and the period to which they relate.
18/19 CYB: year to 30/09/18 £14k
19/20 change of acc date Short POA ending in yr 12 month period to new acc date 5 m/e 30/09/18: 5/12 x £14k = £5,833 7 m/e 30/04/19 = £12k Total 19/20 £17,833
20/21 CYB: Year to 30/04/20 £18,500
Overlap profits: 5m/e 30/09/18 i.e. 5/12 x £14k = £5,833
What is not deemed a genuine commercial reason to be allowed to change acc year end twice within the 5 year tax year limit?
obtaining a tax adv is not accepted as a genuine commercial reason.
TYU11: Freddie starts to trade on 1 Nov 2017. He makes up acc to 31 Oct each year.
He decides to change his acc date to 31 Dec and makes up a 14 month set of acc to 31 Dec 2020.
His taxable trading income is:
y/e 31 Oct 2018 £36k
y/e 31 Oct 19 £46,100
14 m/e 31 Dec 2020 £37,400
Calc the trading income assessments for the first 4 tax years of trading.
Show any overlap profits remaining
17/18 (1st TY) Actual basis
Basis period: 1/11/17 - 5/4/18
5/12 x £36k = £15k
18/19 (2nd TY)
CYB: 12m POA ending in 2nd TY
Basis period: 1/11/17 - 31/10/18
y/e 31 Oct 2018 = £36k
Overlap profits 1/11/16-5/4/18 = 5/12 x £36k
19/20 (3rd TY)
CYB y/e 31 Oct 19 £46,100
20/21 (TY of change of acc date) Basis period: 1/11/19- 31/12/20 14m period to 31 Dec 20 £37,400 Less overlap 2/5 x £15k £(6k) Total 20/21 = £31.4k
Note; 2 months of overlap relief (out of 5 arising in opening yrs) is reliable on change of acc date. The remaining amount of £9k will be c/f and relieved on cessation of trade/ future change of acc date
TYU12: Alice’s tax adj trading profits are as follows:
y/e 31 July 2018 £14k
p/e 31 Dec 19 £34k
y/e 31 Dec 2020 £21k
What are her assessable profits for the years covered by these profits.
Show any overlap profits remaining.
18/19 CYB Year to 31/7/18 = £14k
19/20 Change of acc date Basis period: 17m/e 31/12/19 17 m/e 31/12/19 £34k Less 5m overlap (5/8 x £8k) £(5k) Total 19/20 £29k
20/21 CYB: Year to 31/12/20 £21k
Overlap profits remaining = £8k - £5k = £3k
TYU13: Joey has been trading for many years making up accs to 31 Jan. He decides to change his acc date and makes up a 15 month set of acc to 30 April 2019.
His taxable income is
y/e 31 Jan 2018 £24k
p/e 30 April 2019 £32k
Calc the trading income assessments for all relevant tax years and state the amount of overlap profits
17/18 CYB y/e 31 Jan 18 £24k
18/19 (TY of change of acc date) No POA ending in TY Basis period: 1/5/17 - 30/4/18 9/12 x £24k = £18k 3/15 x £32k = £6.4k Total = £24.4k
Overlap profits 1/5/17 - 31/1/18
9/12 x £24k = £18k
19/20 : 12m to new acc date
1/5/18 - 30/4/19
12/15 x £32k = £25,600
TYU14: Peter has been trading for many years. His recent tax adj trading profits are as follows
y/e 31 Dec 2017 £20k
p/e 31 May 2019 £31k
y/e 31 May 2020 £26.5k
Peter has 3 months of overlap prof b/f of £4k
Calc the trading income assessments for all relevant tax years and state the amount of any overlap profits
17/18 CYB y/e 31/12/17 = £20k
18/19 (TY of change of acc date) No period of acc ending in TY Basis period: 1/6/17 - 31/5/18 = £11,667 5/17 x £31k = £9,118 Total = £20,785
Overlap profits = 1/6/17 - 31/12/17
7/12 x £20k = £11,667
19/20 : 12m to new acc date
1/6/18 - 31/5/19
12/17 x £20k = £11,667
19/20 12m to new acc date
1/6/18 - 31/5/19
12/17 x £31k = £21,882
20/21 CYB y/e 31/5/20 = £26,500
TYU15: Jack makes up his sole trader accs to 30 Sept 19
He decides to change his acc date to 31 Dec and makes up a 3 month set of accs to 31 Dec 2019.
His taxable trading income is
y/e 30 Sept 2018 £21k
y/e 30 Sept 2019 £34k
p/e 31 Dec 2019 £8k
He has 6 months’ overlap profits from commencement of trade totalling £6k
Calc the trading income assessments for the ty 18/19 and 19/20. Show any overlap profits remaining
18/19 CYB y/e 30 Sept 18 £21k
19/20 (TY of change of acc date) 2 POA ending in the year 1/10/18 - 31/12/19 y/e 30 Sept 19 £34k p/e 31 Dec 19 £8k Sub total £42k Less overlap 3/6 x £6k = £(3) Total = £39k
There are £3k of overlap profits still remaining to be c/f
TYU16: Alan’s tax adj trading profits are as follows:
y/e 31 May 2018 £14k
y/e 31 May 2019 £19k
p/e 31 Dec 19 £15k
y/e 31 Dec 20 £21k
He has 10 months of overlap prof b/f of £10k
What are his assessable profits for the years covered by these profits?
18/19 CYB y/e 31 May 18 = £14k
19/20 (TY of change of acc date) 2 POA ending in the yr 1/6/18 - 31/12/19 y/e 31 May 19 £19k p/e 31 Dec 19 £15k sub total = £34k Less: overlap profits 7/10 x £10k £(7k) Total 19/20: 27k
20/21 CYB y/e 31 Dec 2020: £21k
