Business Income Tax Flashcards
Disallowable expense
Expenses that need to be added back in to profit calculation.
Cap Ex (improvement or enhancement). Depreciation Profit on disposal of fixed asset Private expenses Sole traders income tax/NIC Salary of sole trader or partner Increase in provision Non trade related bad debts (including loans to employees written off) Entertaining customers Donations to national charities/ political parties Fines and penalties Interest of late payment of tax Legal/ professional fees relating to HMRC dealings
Allowable expense
Things that are meant to be deducted from revenue to arrive at income.
Repairs and maintenance Loss of disposal of fixed asset Reasonable payment to family member as salary Decrease in provision Bad debts relating to trading activity Entertaining employees Gifts to employees/ trade samples Donations to local charities Interest on trade loans Trade related legal and professional fees - specifically relating to renewal of short term lease, registering patent, raising long term finance
Non trading income in accounts
Deduct from trading profits, examples are rental income, profits on disposal of fixed assets and investment income
Trading allowance
If trading receipts are less than £1000 then trading allowance applies, reducing the trading income for the year to NIL and giving full tax relief for the year.
Adjustment to profits
Used when trading receipts in the year are in excess of £1000. The adjustment to profits method starts with trading profit, add back disallowable expenses and deduct non-trading income, deduct capital allowances to calculate the taxable trading profit before using basis periods to calculate the tax liability for certain tax periods.
Partial Relief
When allowable trading expenses are less than £1000 the trader can elect to deduct the trading allowance of £1000 instead of actual expenses to get partial relief.
Pre-trading expenditure
Deemed to be deductible on first day trading if it occurred within 7 years prior to start date of trading or if it would have been deemed deductible had it occurred within trading.
Fixed Rate deductions
Where a fixed allowance is deducted rather than actual expenditure incurred.
Examples are expenditure on motor vehicles, use of home for business purposes, business premises partially used as trader’s home.
Current Year Basis
Applies to continuing business. The tax profits for the 12 month accounting period ending in the tax year.
Opening Year Rules
First year : Date of commencement til following April 5th
Second year depends on if there is a accounting period ending in tax year 2. If yes and they are >12 months then tax 12 first 12 months of trading. If <12 months then same rule as if the AP doesn’t end in tax year, you would tax 12 months to AP end date.
Cessation Rules
Profits taxed in the final year are the profits from the end of the basis period of the perambulate year to the date of cessation.
Main Pool: Writing Down Allowances
Expenditure on assets which are in the main pool includes:
- All machinery, fixtures and fittings and equipment
- Vans, forklift trucks, lorries
- Cars with CO2 emissions of 110g / km or less, and no private use
A writing down allowance (WDA) is given on the balance of the main pool at the end of
the period of account.
The WDA rate is 18%. If the period is not 12 months long, the WDA must be pro-rated
accordingly.
Main Pool: First Year Allowances
100% FYA available on:
- Energy and water saving equipment
- Technology-efficient hand dryers
- New plant and machinery in designated assisted areas within an enterprise zone
(expenditure by company)
- Qualifying capital expenditure on Research and Development
- New and unused cars where expenditure incurred before 31 March 2021 with CO2
emissions ≤50g/km CO2 or electrically propelled
- New zero emission goods vehicles
- Electric charge point equipment purchased before 6 April 2023 (1 April for
companies)
FYA are given in full in the period of purchase, they are not pro-rated if the period is not
12 months long.
Annual Investment Allowance
AIA is available on all qualifying expenditure excepcars and structures and buildings.
The allowance is £1,000,000 per annum for the two year period from 1 January 2019 to
31 December 2020. It was £200,000 per annum prior to this period and will fall back to
£200,000 after this period.
For periods of account straddling any of those dates the AIA will need to be pro-rated.
WDA
Written Down Allowance - 18% pa, pro-rated for non 12 month periods. If pro-rating calculate WDAs on last
Small plant and machinery pools
If TWDV is less than £1000 write it off as WDA. If relevant pro-rate £1000 small pool limit.
Capital Allowances on Cessation
No FYA, AIA or WDAs given in final period of account.
SBA
Structures Building Allowance - allowance on expenditure on new commercial structures and buildings after 29 Oct 2018.
Allowance is 2% straightline over 50 years.
It is pro-rated for accounting periods.
Special Pool
6% allowance from 6th April 2019. It was 8% before this, so if the accounting period straddles these dates then calculate a pro-rated hybrid rate.
Long life assets (>25 years life and total expenditure >£100,000)
Thermal insulation
Integral features such as electric,cold water systems, lifts, escalators and external solar shading
Solar panels
Cars with Co2 emissions in excess of 110g/km
S.83 Trading Loss
Loss carried forward, must be used on first year of available trading income. Automatically carries forward until fully used. Used for NSI, then SI and then DI.
S.72 Trading Losses
Losses occurring in one of the first four tax years can be relieved against the prior three years in FIFO order.
S.64 Trading Losses
Current year and/ prior year losses allowance on non-trading income. Capped at higher of 50,000 or 25% adjusted total income for the tax year.
Anti avoidance
Non active traders that spend less then 10hrs per week personally involved in business work are limited to 25,000 for loss relief.
Notional Profits and Losses
Overall a partnership might make profit but the allocation of profits to partners can cause some partners to make a notional loss. Therefore, the profit sharing allocation will need to be altered so that those partners are making NIL taxable trading profits, and the profit making partners will bare those losses in proportion to the profit allocated to them.
Badges of trade
Profit seeking motive Number of transactions and frequencing Method of acquisition Source of finance (bank?) Changes to asset (developed) Nature of asset The way the sale was carried out
Disposal Value of asset
Sales proceeds limited to original cost. Therefore if the sales proceeds are more than original cost, then the original cost will be used.
Single Asset Pool
Applies to assets with use by business owners or assets with short life (sale within 8 years of purchase)
Balancing Allowance
This arises in cessation of trade for MP and SR pool, it will also arise in the single asset pool if the asset is sold for less than its TWDV.
Balancing Charge
This arises in MP and SR pool on the cessation of trade or if there is a negative balance on the pool.
For single asset pools the balancing charge will arise when the asset it sold for more than it TWDV.
