5 - trading profits

Question 1

what are the badges of trade

Answer 1

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

Question 2

explain what the profit seeking motive badge is and the case for it

Answer 2

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

Question 3

explain what the number of transactions badge is and the case for it

Answer 3

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

Question 4

explain what the nature of the asset badge is and the case for it

Answer 4

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

Question 5

explain what the existance of similar trading transactions badge is and the case for it

Answer 5

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

Question 6

explain what the changes to the asset badge is and the case for it

Answer 6

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

Question 7

explain what the ‘the way the sale was carried out’ badge is and the case for it

Answer 7

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

Question 8

explain what the source of finance badge is and the case for it

Answer 8

if money was borrowed short term to buy the asset, this indicates trading

Question 9

explain what the interval of time between purcahse and sale badge is

Answer 9

if an asset is bought and sold shortly after, this could be trading

Question 10

explain what method of acquisition badge is

Answer 10

an asset that is acquired by inheritance is less likely to be the subject of trade

Question 11

what is a trading allowance

Answer 11

an allowance which exempts an individuals trading profits which are less than the trading allowance

Question 12

what is the trading allowance figure

Answer 12

1000

Question 13

how does the trading allowance work

Answer 13

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

Question 14

what is disallowable in terms of capital expenditure

Answer 14

capital expenditure (taken out of profit anyway) and depreciation

Question 15

are appropriations allowable or disallowable?

Answer 15

disallowable

Question 16

how do you treat general provision accounts?

Answer 16

this is disallowable and must be added back to accounting profit

Question 17

how do you treat trade and non trade bad debts?

Answer 17

trade bad debts are allowable
non-trade bad debts are disallowable

Question 18

how are entertaining and gifts treated?

Answer 18

entertaining staff = allowable
entertaining clients = disallowable
gifts to customers if they help the business and no more than £50 = allowable
gifts to employees = allowable

Question 19

how are charitable donations treated?

Answer 19

small donations to local charities are allowable
donations to national charities are disallowable
gift aid declaration donations are disallowable (comes off personal tax)

Question 20

how are fines and penalties treated?

Answer 20

disallowable, includes PAYE or late VAT payment penalties

Question 21

how is interest treated?

Answer 21

interest paid on loans for business purposes - allowable
interest on late payment of tax - disallowable

Question 22

how are the costs of hiring plant and equipment treated?

Answer 22

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)

Question 23

how do you treat goods taken from a business by the owner for personal use without reimbursing the business?

Answer 23

the owner is taxed on the profit they would have made if the goods had been sold at market value

Question 24

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

Answer 24

a. add back the selling price
b. add back the profit (selling price - cost)

Question 25

how to treat non trade income in accounts?

Answer 25

deduct it

Question 26

how to treat business expenditure incurred personally?

Answer 26

deduct it