Chapter 4 - Trading Profits Flashcards
Q: What are the three main steps for taxing a sole trader?
A:
- Adjust profits for the accounting period.
- Deduct capital allowances for the period.
- Apply the tax year basis to tax profits arising in the tax year.
Q: What is the pro forma used to adjust accounting profit for tax?
A:
1. Net profit per accounts.
2. Add disallowable expenditure and taxable trading income not
credited in accounts.
3. Less allowable expenditure not charged in accounts, income not
taxable as trading income, and capital allowances.
4. Resulting figure is the Tax Adjusted Trading Profit.
Q: What is allowable expenditure in tax adjustments?
A: Expenditure incurred wholly and exclusively for trading purposes, which is not disallowed by legislation.
Q: What is disallowable expenditure, and how is it treated in tax calculations?
A: Expenditure that is allowable for accounting purposes but disallowed for tax purposes. It must be added back to the accounting profit when calculating tax-adjusted trading profit.
Q: What is an example of taxable trading income not included in accounts?
A: Goods removed from the business for personal use (Drawings).
Q: How should personal use of business goods be treated in tax calculations?
A:
- If correctly treated in accounts (cost removed from purchases): add
back the profit element. - If no adjustment made in accounts (cost still included in purchases):
add back the selling price.
Q: What are examples of allowable expenditure not included in accounts?
A:
- Capital allowances
- Business expenses borne personally by the owner
Q: What types of non-trading income included in accounts must be removed for tax purposes?
A:
- Income taxed elsewhere (e.g., chargeable gains, rental income, or savings income).
- Income that is exempt from tax (e.g., certain capital gains).
Q: What is the rule for disallowed expenditure for a sole trader?
A: Expenditure is disallowed if it is not incurred wholly and exclusively for the purposes of the trade. This includes personal or private expenses, or any expenditure that is too remote from the trade or has both a trade and non-trade purpose.
Q: How is private expenditure treated in adjusting taxable profit?
A: Private expenses are disallowed if they are not wholly and exclusively for business purposes, but HMRC may accept an apportionment for business use.
Q: Are payments to staff considered allowable expenses?
A: Yes, most staff payments (salaries, bonuses) are allowable, but appropriations like the owner’s salary or unreasonable family payments are disallowed.
Q: How are impaired debts treated in tax adjustments?
A: Write-offs for specific trade bad debts are allowable, but general provisions and non-trade debts must be added back as they are disallowed.
Q: What is the treatment of capital expenditure for tax purposes?
A: Expenditures related to capital assets, such as depreciation and improvements, are disallowed. However, basic repairs and maintenance that restore an asset without enhancing it are allowable.
Q: Are subscriptions and donations allowable for tax purposes?
A: Donations to local charities and gifts of stock to charity are allowable. Donations to national charities and political parties are disallowed, but tax relief may be available via Gift Aid.
Q: What types of entertaining expenses are allowed?
A: Client entertaining is disallowed, but staff entertaining is allowable. Customer gifts are allowable if they are under £50, business-related, and not food, drink, or tobacco.
