Chapter 2: Sole Traders - Trade Profits

Question 1

Reasons for adjusting profits

Answer 1

Only income included is trading income

and

only expenditure deducted is ALLOWABLE trading expenditure

Question 2

Adjustment steps to work through

Answer 2

1. Disallowable expenditure
2. Trade income not included in accounts
3. Income not taxed as trade
4. Capital allowances

Question 3

Proforma to adjust profits

Answer 3

Net profit per accounts

Add back:
Disallowable expenditure
Any trade income not included in accounts

Deduct:
Income not taxed as trade
Capital allowances

Taxable trading profits

Question 4

Disallowable expenditure

Answer 4

‘wholly and exclusively for the purpose of the trade’

Can divide expenditure into a part which is wholly for business purposes

Add back:
Fines and penalties
Donations
Capital expenditure
Depreciation
Profit or loss on disposal of non-current assets
Leased cards
Legal and professional fees
Entertaining and gifts
Private expenditure
Wages and salaries

^Ref material

Question 5

Disallowable expenditure - Fines and penalties

Employee fines

Answer 5

Employee fines allowable if they are incurred in the course of their employment.

Example - parking fine whilst on employer business for the employee allowable

Question 6

Disallowable expenditure - Capital expenditure

Hidden costs - repaired and improved
Low value capital items treated as expenses
purchase of second hand asset

Answer 6

If an asset is repaired then this is an allowable deduction

Improved asset - considered capital not allowable

low value capital items as expenses are disallowable

Second hand asset is purchased that needs to be repaired in order to bring it to a condition of use, initial repair would be classified as capital expenditure

Question 7

Disallowable expenditure - legal and professional fees

Fees relating to renewal of a short term lease

Legal expenses that are revenue in nature

Answer 7

Fees relating to renewal of a short term lease - allowable

Legal expenses that are revenue in nature - such as debt collectors and employee contracts are allowable

Question 8

Dis. allowable exp. - private expenditure

Answer 8

Goods taken for own use needs to be accounted for at their normal selling price

Add back to profit the selling price

Personal exp - such as class 2 and 4 NI are disallowable

Question 9

Trading income not included in accounts

Answer 9

Items of income which are missed out of accounts, they must be added back

such as goods taken for personal use - selling price which would of been have been received is added back to profit

Question 10

Income not taxed as trade

Answer 10

Interest received
Dividends received
Property Income
Gains on disposal of capital items

deducted from trading profits

Question 11

Capital allowances

Answer 11

chapter 3

allowable

Question 12

Trading allowance

Answer 12

sole trader received gross trading income under £1000, income is exempt, no need to report

If a trader has annual trading income in excess of £1000, may choose partial relief

for example to deduct business expenses or take first £1000 is not taxed