Chapter 5 - Trading profits

Question 1

What are badges of trade?

Answer 1

The badges of trade are key factors which indicate whether a trade is being carried on.

Question 2

What are the nine badges of trade?

Answer 2

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

Question 3

What do trading profits cover?

Answer 3

Trading profits cover income from a trade, profession or vocation.

Question 4

How to compute tax adjusted profits?

Answer 4

See page 95

Question 5

What is the trading allowance?

Answer 5

A trading allowance is available to individuals who carry on a trade. The allowance is £1,000.

Question 6

What is allowed expenditure?

Answer 6

Expenditure incurred wholly and exclusively for the purposes of the trade, not specifically disallowed by legislation.

Question 7

Are capital expenditure allowable expenditure?

Answer 7

No

Question 8

Are appropriations of profit allowable?

Answer 8

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.

Question 9

Are general provisions allowable?

Answer 9

No

Question 10

Are specific provisions allowable?

Answer 10

Yes

Question 11

Are trade bad debts allowable?

Answer 11

Yes

Question 12

Are non-trade bad debts such as loans to employees allowable?

Answer 12

No

Question 13

Is expenditure on entertaining staff allowable?

Answer 13

Yes

Question 14

Are gifts of trade samples allowable?

Answer 14

Yes

Question 15

Are gifts to customers allowable?

Answer 15

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

Question 16

Are gifts to employees allowable?

Answer 16

Gifts to employees

Question 17

Are donations to small charities allowable?

Answer 17

Reasonably small donations to local charities are allowable if the gift enhances the public image of the trade.

Question 18

Are donations to national charities allowable?

Answer 18

Donations to national charities are disallowable.

Question 19

Are political donations allowable?

Answer 19

No

Question 20

Are subscriptions to trade and professional associations allowable?

Answer 20

Yes

Question 21

Are fines and penalites allowable for sole traders and partners?

Answer 21

No

Question 22

Are parking fines incurred by an employee on a business activity allowable?

Answer 22

Yes

Question 23

Is interest allowable?

Answer 23

Interest paid on money borrowed for business purposes is allowable.

Interest on late payment of tax is disallowable.

Question 24

Are legal and professional fees relating to income allowable?

Answer 24

Yes

Question 25

Are legal and professional fees relating to capital expenditure allowable?

Answer 25

No

Question 26

Which three exceptional expenses relating to capital assets are allowable?

Answer 26

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

Question 27

Is irrecoverable VAT an allowable expense?

Answer 27

Irrecoverable VAT is allowable for trading purposes only if the item of expenditure to which it relates is allowable.

Question 28

Are earnings paid to employees allowable?

Answer 28

Earnings paid to employees are generally allowable

Question 29

Are car leasing and rental costs allowable?

Answer 29

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.

Question 30

What is the treatment of goods taken by owner?

Answer 30

The sale price of goods taken from the business by the owner is trading profit.

Question 31

Should non-trading income be deducted?

Answer 31

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.

Question 32

Is expenditure not shown in the account allowable?

Answer 32

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.

Question 33

What are the exemptions regarding childcare facilities before 6 April 2011?

Answer 33

Childcare payments of up to £55 per week

Question 34

What are the exemptions regarding childcare facilities after 6 April 2011?

Answer 34

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