5 - trading profits Flashcards
what are the badges of trade
profit seeking motive
the number of transactions
nature of the asset
existence of similar trading transactions or interests
changes to the asset
the way the sale was carried out
source of finance
interval of time between purchase and sale
method of acquisition
explain what the profit seeking motive badge is and the case for it
trading requires a profit motive to exist when the asset is acquired
purchase and resale of 20,000 of silver bullion as protection against the devaluation of sterling, this was treated as a trading activity
explain what the number of transactions badge is and the case for it
a transaction may be treated as a trading activity if a number of similar transactions are entered into
purchase of a mill-owning company and the stripping of it’s assets, this was the 4th one so it was treated as a trade
explain what the nature of the asset badge is and the case for it
the subject matter indicates whether a trade is being carried out
if they are bought for resale at profit, cases are 34000000 yards of aircraft linen and 1000000 rolls of toilet paper
explain what the existance of similar trading transactions badge is and the case for it
the other activities should be considered to see whether a similarity exists
if an accountnat sold a car, it would be unlikely to be a trade
explain what the changes to the asset badge is and the case for it
if an asset is purchased then subjected to a resale process, it might be trading activity
purchase of a quantity of brandy which was then blended and recasked before sale
explain what the ‘the way the sale was carried out’ badge is and the case for it
if a sale is carried out in a way that is typical to a trading organisation it is likely to be considered as trading
a woodcutter who bought a consignment of whisky and sold it through an agent is trading
explain what the source of finance badge is and the case for it
if money was borrowed short term to buy the asset, this indicates trading
explain what the interval of time between purcahse and sale badge is
if an asset is bought and sold shortly after, this could be trading
explain what method of acquisition badge is
an asset that is acquired by inheritance is less likely to be the subject of trade
what is a trading allowance
an allowance which exempts an individuals trading profits which are less than the trading allowance
what is the trading allowance figure
1000
how does the trading allowance work
if above 1000, an individual can calculate trading taxable income the usual way, on accruals, or deduct deemed expenses of 1000 from the receipts with no further deductions of actual expenses
what is disallowable in terms of capital expenditure
capital expenditure (taken out of profit anyway) and depreciation
are appropriations allowable or disallowable?
disallowable
how do you treat general provision accounts?
this is disallowable and must be added back to accounting profit
how do you treat trade and non trade bad debts?
trade bad debts are allowable
non-trade bad debts are disallowable
how are entertaining and gifts treated?
entertaining staff = allowable
entertaining clients = disallowable
gifts to customers if they help the business and no more than £50 = allowable
gifts to employees = allowable
how are charitable donations treated?
small donations to local charities are allowable
donations to national charities are disallowable
gift aid declaration donations are disallowable (comes off personal tax)
how are fines and penalties treated?
disallowable, includes PAYE or late VAT payment penalties
how is interest treated?
interest paid on loans for business purposes - allowable
interest on late payment of tax - disallowable
how are the costs of hiring plant and equipment treated?
generally, allowable
for leases on cars, a flat rate disallowance of 15% of the least payments applies to polluting cars (car leases taken out from 1 april where co2 emissions are above 50g/km)
how do you treat goods taken from a business by the owner for personal use without reimbursing the business?
the owner is taxed on the profit they would have made if the goods had been sold at market value
how do account for goods taken by the business if
a. nothing is recorded in the accounts
b. it has been treated as drawings at cost
a. add back the selling price
b. add back the profit (selling price - cost)
