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.
How to compute tax adjusted profits?
See page 95
What is the trading allowance?
A trading allowance is available to individuals who carry on a trade. The allowance is £1,000.
What is allowed expenditure?
Expenditure incurred wholly and exclusively for the purposes of the trade, not specifically disallowed by legislation.
Are capital expenditure allowable expenditure?
No
Are appropriations of profit allowable?
Appropriations of profit (such as the payment of a ‘salary’ to a sole trader or partner) are disallowable.
Payment of a salary to a family member which is not reasonable remuneration for the services provided to the business may also be treated as an appropriation of profit.
If a business pays the owner’s personal income tax and national insurance contributions or any other personal expense on his behalf, these are also appropriations of profit (drawings) and are disallowable.
Are general provisions allowable?
No
Are specific provisions allowable?
Yes
Are trade bad debts allowable?
Yes
Are non-trade bad debts such as loans to employees allowable?
No
Is expenditure on entertaining staff allowable?
Yes
Are gifts of trade samples allowable?
Yes
Are gifts to customers allowable?
Gifts to customers are allowable if they incorporate a conspicuous advertisement for the business, are not
food, drink, tobacco or vouchers exchangeable for goods, and the total cost per customer is no more than £50
Are gifts to employees allowable?
Gifts to employees
Are donations to small charities allowable?
Reasonably small donations to local charities are allowable if the gift enhances the public image of the trade.
Are donations to national charities allowable?
Donations to national charities are disallowable.
Are political donations allowable?
No
Are subscriptions to trade and professional associations allowable?
Yes
Are fines and penalites allowable for sole traders and partners?
No
Are parking fines incurred by an employee on a business activity allowable?
Yes
Is interest allowable?
Interest paid on money borrowed for business purposes is allowable.
Interest on late payment of tax is disallowable.
Are legal and professional fees relating to income allowable?
Yes
Are legal and professional fees relating to capital expenditure allowable?
No
Which three exceptional expenses relating to capital assets are allowable?
Legal costs relating to the renewal of a short lease (50 years or less)
Costs of registration of a patent or copyright for trade use
Incidental costs of raising long-term finance
Is irrecoverable VAT an allowable expense?
Irrecoverable VAT is allowable for trading purposes only if the item of expenditure to which it relates is allowable.
Are earnings paid to employees allowable?
Earnings paid to employees are generally allowable
Are car leasing and rental costs allowable?
In principle, the costs of hiring, leasing or renting plant and equipment are allowable.
However for leases taken out on cars (not motorcycles) a flat rate disallowance of 15% of the lease payments applies where CO2 emissions are above 110 g/km for leases taken out on or after 6 April 2018 (1 April for companies).
Thus from 6 April 2018, there is no disallowance if
CO2 emissions are less than or equal to 110 g/km. For car leases taken out before 6 April 2018 (1 April for companies) the 15% disallowance applies only to those cars with CO2 emissions above 130 g/km.
What is the treatment of goods taken by owner?
The sale price of goods taken from the business by the owner is trading profit.
Should non-trading income be deducted?
Yes.
Any non-trade income in the accounts must be deducted.
Examples include rental income, profits on the disposal of fixed assets and investment income.
Sole traders may also include other miscellaneous income in their trade accounts.
Is expenditure not shown in the account allowable?
The most common expenditure not shown in the accounts is business expenditure paid personally by the owner.
Such expenditure is allowable and should be deducted.
What are the exemptions regarding childcare facilities before 6 April 2011?
Childcare payments of up to £55 per week
What are the exemptions regarding childcare facilities after 6 April 2011?
The exemption is as follows:
– Basic rate taxpayer in terms of basic earnings – £55 per week
– Higher rate taxpayer in terms of basic earnings – £28 per week
– Additional rate taxpayer in terms of basic earnings – £25 per week
