Adjustments to Profit

Question 1

Allowable expenditure

General rules

Answer 1

• expenditure incurred wholly and exclusively for the purposes of the trade

Question 2

Capital expenditure

Answer 2

Cash:
* Allowed except payments relating to land, building and cars
* Proceeds on sale of capital assets taxable as trading income

GAAP:
* Disallowed
* Allow repairs and maintenance
* Disallow improvements and enhancement
* Disallow deprecation
* Disposal of fixed asset = add back
* Profit of fixed asset = deduct

Question 3

Private Usage

Answer 3

Only business proportion allowable, add back private use proportion

Question 4

Disallowable expenditure

Apporpriation of profit

Answer 4

• payment of salary to a sole trader/ partner
• any private expenses (income tax or NIC)
• payment of unreasonable salary to family member (above MV)

all disallowed

Question 5

Extertainment/ Gifts

Answer 5

Disallow gifts:
* without business name
* food/ drink or vouchers
* cost > £50

Allow gifts:
* to employees
* of trade samples

Entertainment
* disallow customer entertaining
* allow staff entertainment

Question 6

Donations and subscriptions

Answer 6

Allowed:
* small local charities
* trading stock
* used P&M to charities/ educational establishments
* subscriptions to trade and professional assocations

Disallowed:
* national charities
* political donations

Question 7

Fines

Answer 7

Disallowed, except parking fines incurred by employee on a business activity

Question 8

Interest

Answer 8

• Allowed interest paid on business loans
• Disallowed interest on late payment of tax and other non- business loans

Question 9

Legal and professional fees

Question 10

Employee payments

Answer 10

• Allowed earnings paid to employees if paid within 9 months of end of accounting period
• Allowed pension contributions if within accouting period

Question 11

Car leasing and rental costs

Answer 11

Cash:
* Generally allowable

GAAP:
* 15% of lease payments for polluting cars (>50g/km) disallowed

Question 12

Provisions

Answer 12

Cash:
* no deduction for any provision as no payment of cash

GAAP:
* disallowed general provisions
* increase in provision disallow
* decrease in provision allow

Question 13

Bad debts

Answer 13

Cash:
* automatic bad debt relief - no adjustment required

GAAP:
* Allow trade bad debts
* Disallow non trade bad debts e.g. loans to employees written off

Question 14

Private use in TTP (long question 2)

Answer 14

• no adjustment needed for private expenses - any costs related to employees are fully deductible for the business