Business Profits and Losses

Question 1

how to determine whether an activity is a trading activity

Answer 1

use the badges of trade

Question 2

what are the badges of trade

Answer 2

1. Subject matter of the realisation
2. Length of period of ownership
3. Frequency of number of transactions by the same person
4. Supplementary work
5. Circumstances responsible for the realisation
6. Motive

Question 3

what is subject matter of the realisation

Answer 3

the actual products/services being traded

Question 4

why would frequency of number of transactions by the same person tell us if it is a badge of trade or not

Answer 4

eg if someone sells their furniture on done deal, this is not a trade

however if their income is to buy, do up and resell furniture, this is a trade as their making multiple transaction

Question 5

when is tax assessed for those businesses who don’t prepare their accounts at the end of the calendar year

Answer 5

tax assessed in tax year of end of accounting year

Question 6

What is taxed in the first year of trade

Answer 6

all profits from commencement to 31 December same year

Question 7

What is taxed in the second year of trade

Answer 7

1. Just one accounting period (12 mos) ending in year 2 - all profits for that 12 month period
2. just one accounting period (!= 12 mos), assess 12 months ending at the end of the accounting period
3. > 1 period ending in year 2 – 12 months ending at the end of the accounting period

Question 8

how are profits taxed in year of cessation

Answer 8

from 1 jan to date of cessation

Question 9

what is a short liveed business

Answer 9

commences and ceased within 3 years

Question 10

what is terminal loss relief

Answer 10

losses incurred in 12months prior to cease of trade can be used to reduce any taxable profits in the past 3 years

Question 11

two cases for loss at year end

Answer 11

set loss against total income for the same year of assessment (eg own personal income)

carry loss forward into next year to reduce trading profits

Question 12

how is it usually decided how to use losses

Answer 12

calculating both and picking one that gives bigger saving

Question 13

can losses be partially used

Answer 13

no

Question 14

examples of non trading income

Answer 14

interest, rental income, dividend income

Question 15

example of trading income

Answer 15

proceeds from sale of goods