Chapter 4 - Trading Profits Flashcards
What are the steps to tax a sole trader?
- Adjust profits for accounting period
- Deduct Capital Allowance for that accounting period
- Apply the tax year basis (tax the profits arising in the tax year)
How do you calculate the accounting profit?
Add:
*Disallowable expenditure
*Taxable trading income not credited in the accounts
Less:
*Allowable expenditure not charged in accounts
*Income included in the accounts that is not taxable trading income
*Capital Allowances
What is allowable expenditure?
Expenditure for business purposes only
What’s the tax treatment if the owner draws stock both if correctly treated and if the owner hasn’t changed anything
If correctly treated (removed from purchases) Add back the profit element
If still included in purchases (no adjustments made) - Add back the selling price
What are the two types of non-trading income
> Income taxed elsewhere e.g., chargeable gains, rental income or savings income
> Income that is exempt from tax e.g. exempt capital gains
What is an appropriation?
Withdrawal of funds from a business profits
What are examples of appropriation?
Business owner salary
Drawings made by sole trader / partner.
What are some common examples of capital expenditure which is disallowable when calculating taxable trading profit
*Depreciation
* Loss on sale of fixed assets (equally profit on the sale of fixed assets is deducted from net profit)
*Improvement/enhancements
*Expenditure required to first bring an asset into a useable state
*Capital related expenditure included within legal and professional fees (with exceptions)
What types of gifts are allowable to customers?
Cost <£50 per receipient per year
Not food, drink, tobacco or vouchers exchangeable for goods
Carries a conspicuous advertisement for the business
Are gifts allowable to employees?
Yes - No upper limit
When can expenditure on legal and professional fees be allowed
When incurred for the purposes of the trade e.g. legal fees chasing debts and charges incurred in defending the title to fixed assets.
When are legal and professional fees not allowed?
e.g. fees associated with acquiring new fixed assets
> fees and other costs of obtaining long term debt finance are allowable
> cost of registering patients is allowable
> expense of renewing a short lease less than 50 years is allowable although the legal expenses for it are not
Costs of hiring, leasing and renting plant and equipment is allowable but there is a flat rate disallowance. What is it
15% of car lease payments where CO2 emissions exceed 50g/km
What types of other expenses are allowable?
Parking fine incurred by an employee whilst on work business
Interest on borrowings for the purpose of the trade e.g. business account overdraft is allowable
Interest on late paid tax is disallowable
Irrecoverable VAT is allowable if it relates to allowable expenditure.
What are badges of trade?
A test used to determine whether a transaction is classed as trading (taxable under income tax) or capital (taxable under CGT)
How does HMRC consider badges of trade?
*Subject Matter
*Period of Ownership - How long they’ve got it for
*Frequency - Is it one off or over and over
*Improvements
*Reason for sale
*Motive
*Finance Source
*Acquisition
*Existence of similar transactions
