Chapter 5 - Trading profits Flashcards
What are badges of trade?
The badges of trade are key factors which indicate whether a trade is being carried on.
What are the nine badges of trade?
Profit seeking motive
The number of transactions
Nature of the asset
Existence of similar trading transactions or interests
Changes to the asset
The way the sale was carried out
Source of finance
Interval of time between purchase and sale
Method of acquisition
What do trading profits cover?
Trading profits cover income from a trade, profession or vocation.
Outline the pro-forma for calculating tax adjusted trading profit for sole traders and partnerships
What adjustments to trading profits are we concerned with when calculating taxable trading income for sole traders and partnerships?
- disallowable expenditure
- non-trade income
- income not shown in accounts
- expenditure not shown in accounts
What is the trading allowance?
A trading allowance is available to individuals who carry on a trade. The allowance is £1,000. If trading receipts for an individual (not partner) for a tax year are less than £1,000, those receipts are not taxable.
With regards to trading allowance, what if trading receipts exceed £1,000?
If the receipts are above £1,000 the individual has a choice between calculating their taxable trading income in the usual way, by deducting costs of sale to give taxable trading profits or, by election, deducting deemed expenses of £1,000 from the receipts with no further reduction for actual expenses - the individual will go down whichever route gives the lowest taxable income
What should be assumed in an exam with regards to the trading allowance?
In the exam always assume that the trading allowance applies if the receipts do not exceed £1,000, but if the receipts exceed £1,000 you should assume that no election to use the trading allowance has been made, unless told otherwise.
What is allowed expenditure?
Expenditure incurred wholly and exclusively for the purposes of the trade, not specifically disallowed by legislation.
With regards to allowable expenses, how is capital expenditure treated for taxable trading income for sole traders and partnerships?
Capital expenditure is a disallowable expense and therefore is added back to trading profits
What is important to remember about repairs to newly acquired assets to bring them to a working state with regards to allowable expenses?
Repairs to newly acquired assets in dilapidated state is treated as capital expenditure and therefore is a disallowable expense - other repairs are treated as revenue and therefore are allowable
With regards to allowable expenses, how is depreciation treated for taxable trading income for sole traders and partnerships?
Depreciation is a disallowable expense and therefore is added back to trading profits
With regards to allowable expenses, how is appropriation of profit treated for taxable trading income for sole traders and partnerships?
Appropriation of profit is a disallowable expense therefore if profit given has already deducted any profit appropriations these must be added back
What are the different appropriations of proift we are concerened? How do we adjust for them when calculating taxable trading income for sole traders and partnerships?
- payment of a ‘salary’ to a sole trader or partner - add back
- payment of a salary to a family member which is not reasonable remuneration for the services provided to the business - the excess amount over the salary which would be considered reasonable should be added back
- personal expenses paid by the business (e.g. personal income tax, NI, etc.) on behlaf of the sole trader or partner - add back
With regards to allowable expenses, how are provisions treated for taxable trading income for sole traders and partnerships?
- Provisions made against specifc items are allowable expenditure
- General provisions are a disallowable expense therefore the movement in provision from the prior year should be added back or deducted (depending on if provision is increased or decreased) to trading profits