4: Trading Profits Flashcards
What are the three steps to taxing the trading profits of a sole trader?
1: Adjust profits for the accounting period
2: Deduct capital allowances for that accounting period
Get total tax adjusted trading profit for that accounting period
- Tax those profits arising in the tax year
What is disallowable expenditure?
Expenditure that is allowable for accounting purposes, but not for tax purposes
Must be added back when calculating adjusted trading profit
What is applying the ‘tax year basis’?
Taxing the profits arising in the tax year (you may be given the accounting period)
What is taxable trading income not credited in the accounts?
When a sole trader removes goods from the business for personal use
- if cost removed from purchases, add back in the profit element
- if still in purchases, add back the selling price
What is allowable expenditure not charged in the accounts?
Capital allowances
Business expenses borne personally by the owner
What is income included in the accounts that is not taxable trading income?
Income that should be in another category:
- chargeable gains
- rental income
- savings income
Exempt income, ie. exempt capital gains
Decrease in general provision
When is something disallowable private element of expenditure?
It is too remote from the purposes of the trade
It has both a trade and non-trade purpose (the duality principle)
- HMRC will accept a reasonable apportionment between business use and private use
What are the three disallowable examples of remuneration?
The business owner’s salary
Drawings made by a sole trader/partner
Unreasonable payments made to family member employees
What two things are disallowable in impaired debts?
Movement in general provisions
(Specific provisions are allowable)
Writing off of non-trade bad debts
(Trade bad debts are allowable)
What 6 things to do with capital expenditure are disallowed?
Depreciation
Loss on sale of fixed assets
Cost of capital assets included in repairs and maintenance
Improvement/enchancements
Bringing the asset first into a usable state
Legal and professional fees associated with capital expenditure
(unless one of three conditions met)
What two aspects of capital expenditure are notably allowed?
Repairs and maintenance
Repairs to a current industry standard, even if there is an element of improvement
What is disallowable and allowable with subscriptions and donations?
Disallowable:
Donations to national charities
Subs and dons to political parties
Non-trade subscriptions
Allowable:
Small donations to local charities
Gifts of stock or assets to local charities or schools
What is allowable and disallowable under entertaining?
Client entertaining - disallowable
Staff entertaining - allowable
What is disallowable and allowable with gifts?
Gifts to customers are disallowable, unless:
- cost under £50 per recipient per year
- is not food, drink, tobacco or vouchers
- carries an advert for the business
Had to meet all three
OR
a trade sample
Gifts to employees are allowable (although will be a taxable benefit for them)
Under what three conditions are legal fees to do with capital expenditure actually allowable?
Allowable:
- obtaining long term debt finance
- registering patents
- renewing short term leases (not new leases)
Note: personal tax work is private use, and is DISALLOWABLE
What is disallowable expenditure with cars?
A flat rate disallowance for leased cars
15% x leased car payments, if the car is over 50g emissions.
Remember any private use is also disallowable
What is disallowable with fines?
All fines APART FROM parking fines incurred by an employee (not business owner) while on work business
What is disallowable with interest?
Interest on late paid tax is disallowable
Interest paid directly to the owner in respect of capital invested is disallowable
What is EVERYTHING in disallowable expenditure! 12 big categories
Private element of expenditure by owner
Appropriate of money
- business owner’s salary
- drawings made by a sole trader/partner
- unreasonable payments to family
Impaired debts
- write off of non-trade debts
- increase in general provisions
Capital expenditure
- depreciation
- loss on sale of fixed assets
- cost of capital assets included in reps
- improvements/enhancements
- bringing the asset first into usable state
- legal and professional fees associated with capital expenditure (three exceptions)
Donations to national charities
Subs and donations to political parties
Non-trade subscriptions
Client entertaining
Client gifts (unless meets three conditions)
Car leasing: 15% x payments if Co2 > 50g
Fines (unless incurred by employees)
Interest on late paid tax
Accrued pension contributions
What are badges of trade, and why would small traders want to avoid them?
Ways to determine whether someone has started trading
Used to determine whether a transaction is trading (taxed under income tax) or capital (taxed under CGT).
Allows the smallest traders to avoid having to carry out a full adjustment to profit
What is badge of trade number 1?
SOFIRM
Subject matter - bought for resale is trade
Ownership period length - shorter periods indicate trading
Frequency or number of similar transactions - high frequency indicates trading
Improvements to goods - makes them more marketable
Reason for sale - being forced to make a sale for cash isn’t trading
Motive - intention to make profit is trading
What is badge of trade number 2?
FAST
Finance method - short-term loan being used to purchase asset suggests trading
Acquisition - inherited asset less likely to be trading
Similar To - transactions similar to taxpayer’s existing trade indicated trading
How do trading allowances work?
Only applies to sole traders
If trading receipts are up to £1,000, they are not taxable and do not need to be declared
If trading receipts are more than £1,000, they can take the allowance from this instead of the actual expenses incurred, if they wish.
