Ch 3: Self-Employment

Question 1

What are the 6 badges of trade?

Answer 1

1. subject matter
2. frequency of transactions - more = trading
3. length of ownership - short = trading
4. profit motive - if selling to raise emergency cash, less likely to be trading
5. supplementary work - if it exists = trading
6. how the asset was acquired

If the tests indicate a trade exists = profits assessed for income tax
If the tests indicate no trade exists = profit from sale assessed for CGT

Question 2

What are the 4 steps to find assessable trading profits?

Answer 2

1. Net profits per accounts x
2. Adjustments to profit:
   Add: disallowed expenditure
   Add: income taxable as trading profits
   Less: profits in accounts not taxable as trading profits (bank interest, divs received, rent received, profits on disposal)
   Less: Deductible expenditure not included in accounts
   = adjusted profits
3. Less: capital allowances
   = taxable profit
4. Apply basis periods (this gives you the assessable profits for the tax year)

Question 3

Cash basis for small businesses (only apply if told) - which businesses can use the cash basis?

Answer 3

• unincorporated businesses (sole traders and partnerships)

- annual revenue does not exceed £150k (the trader must leave if their annual revenue exceeds £300k)

Question 4

How do you calculate taxable profits under the cash basis?

Answer 4

Total cash receipts x
Total allowable business expenses paid (x)
= taxable trading profits (apply basis periods to these)

Question 5

What effect does the cash basis have on expenses (list 11)?

Answer 5

• Capex on plant & machinery - capex is a deduction, disposal proceeds are taxable income
• Private use assets - restrict the non-business element
• Cars - Flat rate mileage (instead of CAs - no CAs on anything)
• Goods for own use - Add cost price to the income (normally MV)
• Bad debts - automatic relief
• Car lease payments - fully deductible
• interest payments - allowed up to £500 for a 12mth period
• private use of business premises - add a flat rate private use adjustment to profit
• trading loss relief - may ONLY be set against future trading profits (biggest disadvantage)
• ceasing to use as asset in trade - MV is a taxable receipt
• ceasing to trade - MV of stock and WIP is a taxable receipt