7. Self-employment income

Question 1

Show the proforma to calculate tax adjusted trading profit from net profit per accounts on an accruals basis

Answer 1

Net profit per accounts X
Expenses disallowed X
Expenses allowed 0
Trading goods for himself X
Expenses not in SOPL (X)
Income not taxable (X)
Capital allowances (X)

= Tax adjusted trading profits

Question 2

What are the most common disallowable expenses? (3)

Answer 2

Any type of withdrawal of funds. Most common:

• Salary/drawings
• Private elements of expenditure
• Interest paid to the owner on capital invested in the business

Question 3

What is the effect of family members being employed in a sole-trader buisness?

Answer 3

Can only claim salary at market rate, excess disallowed.

Question 4

Is capital expenditure an allowable expense?

Answer 4

Only if it is to repair an item that was usable before or to renew a subsidiary part of an asset.

Question 5

What effects how much car lease rental is allowed? What % is it reduced?

Answer 5

Cars with CO2 over 100g/km disallowable by 15%

Question 6

When is a charitable donation allowed? (3)

What can the taxpayer do if not allowed?

Answer 6

• when made wholly and exclusively for business purposes
• local and reasonable in size
• to a registered company

If not allowed, can instead claim through gift aid.

Question 7

Legal and professional charges are generally allowable when relevant to trading purposes. When expenditure is of a capital nature, it is disallowed. What are the exceptions to this? (3)

Answer 7

• Fees and other costs of obtaining long term finance
• Cost of registering patents is allowable
• Expense of RENEWING a short lease (less than 50 yrs)

Question 8

Explain the concept of trading goods for himself? At what £ is this added back?

Answer 8

If he has accounted for removal, he has accounted for cost = only add profit back in.

If not accounted for at all = add back in at full selling price.

Question 9

How do you account for short lease premiums?

Answer 9

Add back amortisation costs and deduct allowable proportion of lease. (Divide below by N for allowable proportion)

P - (P x 2% x (n-1))

Question 10

What income is typically included in the statement of profit or loss that is not taxable trading income? (3)

Answer 10

• Capital receipts
• Other income (property, dividend)
• Income exempt from tax (i.e. interest received from HMRC on repayments)

Question 11

How far back can receipts go in first year?

Answer 11

7 years

Question 12

What is the cash basis limit for unincorporated businesses?

Answer 12

£300,000

Question 13

Should you assume the cash or accruals basis in the exam?

Answer 13

Accruals unless stated otherwise.

Question 14

What is the main difference in working out expenses and income under the cash basis? (3)

Answer 14

No distinction between capital and revenue expenditure so:

• Purchases allowable deductions when paid for
• Sale of assets classed as trading income
• Can still claim capital allowances on cars

Question 15

What are the advantages of the cash basis? (2)

What are the disadvantages of the cash basis? (1)

Answer 15

Advantages:
- Simpler accounting requirements
- Cash available to pay tax liability as profit not realised until received
Disadvantage:
- Losses can only be carried forwards to set against future trading profits.

Question 16

What are flat rate adjustments?
Which are the most common?
When are they used?

Answer 16

Mileage expense

Used in cash basis.