Chapter 6: Self-employment

Question 1

What year is the transitional year for assessing profits as a sole trader / partnership

Answer 1

2023/24

Question 2

Badges of trade - 6 principles

Answer 2

1. Subject matter - what is being sold
2. Frequency of transactions - more indicates trading
3. Length of ownership - short indicates trading
4. Profit motive - is selling to raise emergency cash, less likely to be trading
5. Supplementary work - is it similar to trading?
6. How the asset was acquired - selling an unwanted gift or inheritance is unlikely to be trading

Question 3

General rule for if expenditure is deductible

Answer 3

Wholly and exclusively for trade purposes

Question 4

Disallowable/allowable items - appropriations

Answer 4

Disallowable appropriations
-Interest to the owner on capital invested in business
-Salary/drawings for sole trader/partner
-Private proportion of owners expenditure
-Excessive salary payments to a sole trader’s family

Allowable
-Interest on business overdraft
-Business proportion of exp
-Salary paid at a commercial rate for a job

Question 5

Disallowable/allowable items - Capex

Answer 5

Disallowable
-Depreciation
-Amortisation
-Improvements
-Cost of initial repairs
-Costs associated with capital eg legal costs
-Fees associated with acquiring new non-current assets
-Expenses associated with initial grant of a lease

Allowable
-Capital allowances given as expense instead of depreciation
-Repairs
-Initial repairs if asset can be used before repairs
-Defending title to assets
-Fees associated with obtaining long term debt finance allowable for sole trader
-Expenses of renewing short term lease (under 50 years)

Question 6

Disallowable/allowable items - entertaining and gifts

Answer 6

Disallowed
-Entertaining suppliers/customers
-Gifts (particularly food, drink, tobacco which are never allowed)

Allowed
-Entertaining staff
-Gifts for employees (BIK for ee)
-Gifts to customers if cost <50 per donee per annum and carry conspicuous advert.
If go over 50 pound then whole cost disallowed
-Gifts of business samples to advertise to the public

Question 7

Disallowable/allowable items - subscriptions and donations

Answer 7

Disallowed
-Political subscriptions and donations
-non-trade subscriptions
-Gift aid

Allowable
-Trade subscriptions
-Charitable donation that meets 3 conditions:
1 Wholly and exclusively for trading purposes
2 Local and reasonable in size in relation to the business making the donation
3 registered charity

Question 8

Disallowable/allowable items - Car leasing

Answer 8

Disallowable - 15% of rental and lease charges if co2 emissions above 50g/km

Allowable - Rental and lease charges if co2 emissions under 50g/km

Question 9

Disallowable/allowable items - impairment losses for trade receivables

Answer 9

Disallowed - The write off of a non-trade debt - eg loan to a customer or former employee

Allowable - w/off trade debt
-Debt collection costs
-an allowance for the impairment or irrecoverability of trade receivables if calculated in accordance with GAAP or IFRS

Question 10

Example of trading income not shown in the accounts

Answer 10

Trader is taxed on selling price of goods taken for own use

Question 11

Examples of income in accounts but not taxed as trading income

Answer 11

Interest

Property income

Profit on sale of capex

Question 12

Cash basis for small businesses

Answer 12

If they have annual cash receipts of up to £150,000

Can continue to use cash basis until cash receipts exceed £300,000

Question 13

Disadvantage of cash basis (losses)

Answer 13

Losses can only be set off against future TRADING profits