chapter 3 trading income

Question 1

what characteristics can tell us an income is trading income? (Badges of trade)

Answer 1

1. The Subject matter of transaction: Trade is indicated where property does not yield an on-going income or give personal enjoyment. E-G: Stock in trade
2. The length of ownership: The sale of property within a short time of its acquisition is an indication of trading.
3. Frequency of similar transactions: Trading is indicated by repeated transactions in the same subject matter.
4. Work done on the property: A trading motive is indicated where work is carried out to property to make it more marketable, or where steps are taken to find purchasers.
5. Circumstances responsible for the realization: A forced sale to raise cash for an emergency indicates that the transaction is not trading in nature.
6. Motive: If a transaction is undertaken with the motive of realizing a profit, this is a strong
   indication of trading

Question 2

what are allowed expenses

Answer 2

Expenses which have connection with trade are allowed.

Question 3

what are disallowed expenses

Answer 3

Expenses which are non-trading expenses and have connection with
capital assets are disallowed

Question 4

what drawings are allowed expenses

Answer 4

Salary to owner – disallowed (+)

Question 5

what drawings are disallowed expenses

Answer 5

o Excess salary to relatives – disallowed (+

Question 8

what legal fees are allowed

Answer 8

o Related to business (revenue / recurring exp) (Allowed)

Question 9

what legal fees are disallowed

Answer 9

o Related to capital or personal exp. (Disallowed)

Question 10

in what situations are bad debts disallowed

Answer 10

o Provision for doubtful debt ➔ disallowed (+), also non business related bad debts e.g loan to employees are considered disallowed

Question 11

in what situations are bad debts allowed

Answer 11

o Bad debt written off (Impairment loss) allowed if exclusively business related e.g bankruptcy of a customer

Question 12

what capital expenses are allowed expenses

Answer 12

• Renewal of short-term leases
  (< 50 years)
• Initial cost of loan / debt financing
• Cost of registering patents &
  trademarks
• Defending title to assets

Question 13

what capital expenses are disallowed

Answer 13

New leases
* Issue of equity
* (-) Profit / (+) Loss on sale of NCA
* Repairs of dilapidated assets
(destroyed)

Question 14

what gifts and entertainment are disallowed

Answer 14

customers and suppliers - disallowed

Question 15

what gifts and entertainment are allowed

Answer 15

employees-allowed
hopwever allowed for customers:
- if value is less than 50 pounds
-if business logo is there
-however food and drink not allowed

Question 16

what donations are allowed

Answer 16

Small donation to local charities or donations to charities in local vicinity -Allowed

Question 17

what donations are disallowed

Answer 17

o Political donations, GAD, national charity-disallowed donations

Question 18

what fines and penalties are disallowed

Answer 18

all of them except one

Question 19

what fines and penalties are allowed

Answer 19

parking fine by employee on duty- allowed

Question 20

in what situations are pre trading expenses allowed

Answer 20

allowed if:

o Incurred 7 years prior
o Recurring / trade expense
o Assume to have incurred on the first day of trading

Question 21

how to treat a car lease

Answer 21

if a car is leased that has a CO2 emission of more than 50 g/km then 15% of the expense will be disallowed

Question 22

how is trading income calculated for small companies

Answer 22

-on a cash basis

Question 23

when is it appropriate to classify the small

Answer 23

This treatment can be used where revenue is initially below the threshold of £150,000
* Note: leave cash basis when its revenue is twice the threshold - that is £300,000.

Question 24

what is the advantages of cash basis of accounting?

Answer 24

o Only pay tax when funds are received.
o Simple Accounting Requirements (receivables, payables and inventory are ignored)

Question 25

what is the disadvantages of cash basis of accounting

Answer 25

o Losses can only be carried forward against future trading profits
o Expense only deducted when actually paid