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
