Chapter 4 - Common Adjustments

Question 1

Pre-Trading Expeniture

Answer 1

Spend incurred in the 7 years before commencement of trade are treated as if they’re incurred on day 1 of trading and will be deducted from profits in the first accounting period

Question 2

Entertaining and Gifts

Answer 2

Client entertaining is always disallowed.
Staff entertaining are allowable
Gifts are disallowed unless they’re worth less than £50, the gift bears the business name, logo or ad, and the gift is not food, drink or tobacco

Question 3

Interest Payments

Answer 3

Interest on loans taken out for business purposes is allowable.
Loan for mixed purposes, the business proportion is allowable.
No deduction is allowed for the repayment of the capital part of the loan itself
No deduction is available for interest on overdue tax

Question 4

Assets Bought on Hire Purchase

Answer 4

Ownership of assets bought on HP transfers at the end of the contract, however we treat it as if the lessee owns the asset from the start of the contract. The capital element is not deductible, the interest is

Question 5

Leasing Costs

Answer 5

Costs incurred in leasing or hiring an asset to be used in trade will be allowable.

Question 6

Finance Leases

Answer 6

Finance leases include an element of depreciation, this is the only time depreciation is allowable

Question 7

High Emission Cars

Answer 7

Relief is restricted for the leasing costs of high emission cars at a flat rate disallowance of 15% on cars with emissions above 110g/km. Allow: 85% x lease charge. Maintenance costs for these cars is allowable in full

Question 8

Bad Debts

Answer 8

Trade related bad debts written off are allowable, as are any specific provisions. Loans to employees written off are also allowable

Question 9

Accountancy Fees

Answer 9

Fees for business account prep is allowable, fees for personal returns prep aren’t. Fees incurred dealing with a tax enquiry are usually disallowable.

Question 10

Termination Payments

Answer 10

Termination payments given in a continuing trade are allowable as they’re wholly and exclusively for trade purposes. The same can’t be argued on cessation of trade, so a deduction is only allowed for statutory redundancy pay.

Question 11

Restrictive Covenants

Answer 11

Always allowable

Question 12

Travel and Subsistence

Answer 12

All travel expenses that aren’t from home to the place of work are allowed. Subsistence is generally not allowable.

Question 13

Training

Answer 13

Acquisition of new expertise (e.g accounting exams) is treated as capital ie not allowable.
Ongoing training once qualified is allowed.
Staff training costs are always allowable

Question 14

Website Costs

Answer 14

Setting up a website is treated as capital and not allowable. Update costs are likely to be revenue expenses and are allowable

Question 15

Premiums on Leases

Answer 15

Allowable deduction =
property income assessment on landlord/period of lease
Rent paid by tenant is deductible under accruals basis

Question 16

Fines and Penalties

Answer 16

Generally disallowable. Parking/speeding fines allowed if offence committed in personal capacity or because it is not an expense in the course of earning profits.

Question 17

Post Cessation Receipts and Expenses

Answer 17

See manual

Question 18

Pension Contributions

Answer 18

Employer will obtain relief in the accounting period in which they are paid, not accrued.

Question 19

Sundry Allowable Expenses

Answer 19

Removal expenses
Thefts and defalcations
Donations to charity
Trade subs
R&D costs
Business rates
Patent registry