Business Income Tax

Question 1

Disallowable expense

Answer 1

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

Question 2

Allowable expense

Answer 2

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

Question 3

Non trading income in accounts

Answer 3

Deduct from trading profits, examples are rental income, profits on disposal of fixed assets and investment income

Question 4

Trading allowance

Answer 4

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.

Question 5

Adjustment to profits

Answer 5

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.

Question 6

Partial Relief

Answer 6

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.

Question 7

Pre-trading expenditure

Answer 7

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.

Question 8

Fixed Rate deductions

Answer 8

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.

Question 9

Current Year Basis

Answer 9

Applies to continuing business. The tax profits for the 12 month accounting period ending in the tax year.

Question 10

Opening Year Rules

Answer 10

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.

Question 11

Cessation Rules

Answer 11

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.

Question 12

Main Pool: Writing Down Allowances

Answer 12

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.

Question 13

Main Pool: First Year Allowances

Answer 13

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.

Question 14

Annual Investment Allowance

Answer 14

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.

Question 15

WDA

Answer 15

Written Down Allowance - 18% pa, pro-rated for non 12 month periods. If pro-rating calculate WDAs on last

Question 16

Small plant and machinery pools

Answer 16

If TWDV is less than £1000 write it off as WDA. If relevant pro-rate £1000 small pool limit.

Question 17

Capital Allowances on Cessation

Answer 17

No FYA, AIA or WDAs given in final period of account.

Question 18

SBA

Answer 18

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.

Question 19

Special Pool

Answer 19

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

Question 20

S.83 Trading Loss

Answer 20

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.

Question 21

S.72 Trading Losses

Answer 21

Losses occurring in one of the first four tax years can be relieved against the prior three years in FIFO order.

Question 22

S.64 Trading Losses

Answer 22

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.

Question 23

Anti avoidance

Answer 23

Non active traders that spend less then 10hrs per week personally involved in business work are limited to 25,000 for loss relief.

Question 24

Notional Profits and Losses

Answer 24

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.

Question 25

Badges of trade

Answer 25

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

Question 26

Disposal Value of asset

Answer 26

Sales proceeds limited to original cost. Therefore if the sales proceeds are more than original cost, then the original cost will be used.

Question 27

Single Asset Pool

Answer 27

Applies to assets with use by business owners or assets with short life (sale within 8 years of purchase)

Question 28

Balancing Allowance

Answer 28

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.

Question 29

Balancing Charge

Answer 29

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.