7. Trading income

Question 1

What basis’ is trading income usually on?

Answer 1

Current-year accruals

Question 2

Disallowable expenditure explained:

Appropriations

Answer 2

Disallowable.

Question 3

Disallowable expenditure explained:

Interest payable

Answer 3

Interest payable on tax disallowable

Question 4

Disallowable expenditure explained:

Repairs and maintenance

Answer 4

Repairs and maintenance is allowable.
Improvement/enhancement is not.
An asset must already be in working condition to be classed as a repair.

Question 5

Disallowable expenditure explained:

Car leasing

Answer 5

Where a cars Co2 emissions exceed 110g/km, disallow 15% of hire charge.

Question 6

Disallowable expenditure explained:

Donations

Answer 6

Small donations to local charities are allowable.
Political donations and donations to national charities are not.

!! Gift of stocks or assets to charities and local schools also allowable

Question 7

Disallowable expenditure explained:

Entertainment

Answer 7

Entertainment of staff fully allowable, not of clients.

Question 8

Disallowable expenditure explained:

Gifts

Answer 8

To staff: allowable but may be taxed on employee

To clients: allowable where less than £50 per annum, fully advertised and not food, drink, tobacco or vouchers for business.

Question 9

Disallowable expenditure explained:

Impaired debts

Answer 9

Allowable where trade debt.

Note: recovery of written off debt is taxable.

Question 10

Disallowable expenditure explained:

Employee pensions and payments (5)

Answer 10

• Counselling to ex-employee allowable
• Redundancy payments on cessation of pay allowable up to four times statutory redundancy pay.
• Insurance premiums against employee illness/death are also allowable.
• Earnings not paid within 9 months of the year end are not deductible until the period in which they are paid.
• Employers contribution to pension allowable when paid rather than on accrued basis.

Question 11

Disallowable expenditure explained:

Fines

Answer 11

Generally disallowable but allowable where

• Employee incurred parking fine in business related travel
• Damage is done relating to trade and not a breach of law

Question 12

Disallowable expenditure explained:

Misappropriation (theft/fraud)

Answer 12

Allowable where conducted by an employee

Question 13

Disallowable expenditure explained:

Provision for future costs

Answer 13

allowable where in line with UK GAAP

Question 14

How do you treat short-lease premiums for traders renting business property

Answer 14

Add back: amortisation on lease charged in accounts

Deduct: P - P x 2% x (n-1) divided by years of lease for annual deduction

Question 15

How many years prior to beginning to trade can you include expenses from? When will they be dated as for tax purposes?

Answer 15

7 years prior will be dated as first day of trade.

Question 16

When can an unincorporated business elect to use the cash basis?
When must it use accruals?

Answer 16

Can use cash basis where cash receipts exceed £150,000

Must use accruals is cash receipts exceed £300,00

Question 17

What must you start with when using the cash basis?

What must you assume they are using under cash basis?

Answer 17

Start with revenue received.

Assume also claiming AMAP flat rate mileage allowance.

Question 18

Under the cash basis, there is no distinction between capital and revenue expenditure. Therefore (3)

Answer 18

• assets allowable purchases when paid for
• assets allowable income when sold
• capital assets available for cars only.

Question 19

Advantages and disadvantages of cash basis (2 for each)

Answer 19

+ simpler accounting requirements
+ pay tax when receive funds
- losses can only be carried forward
- expenses only deductible when paid