Chapter 9&10

Question 1

What are the 4 steps to allocate partnership profits

Answer 1

Perform adjustments to profit

Calculate and deduct capital allowances

Split the profit between the partners in accordance with partnership agreement

Treat each partner as separate sole trader and apply basis period rules to calculate TTP for the year

Question 2

What happens to the salary of partners in an LLP

Answer 2

They get taxed as if they were an employee so income tax and NICs

Question 3

When can a business use the cash basis (2 criteria)

In what 2 ways can/must a trader leave the scheme

Answer 3

Unincorporated

Receipts for tax year <150,000 (scaled down for short APs)

Trader just leave scheme if previous tax year exceeded 300,000

Trader may leave if commercial circumstances change

Question 4

How does the cash basis differ from the accruals basis for the following:
Capital expenditure on plant and machinery (excluding cars and land)
(3)

Answer 4

Capital expenditure deductible from trading profits (instead of capital allowances)

Disposal proceeds are taxable income

Restrict to the business use % if private use by sole trader/ partner

Question 5

How does the cash basis differ from the accruals basis for the following:
Purchase of cars

Answer 5

Capital allowances or mileage allowance can be claimed as normal

Question 6

How does the cash basis differ from the accruals basis for the following:
Goods taken for own use

Answer 6

Only add the cost price back to profits (as opposed to sales price)

Question 7

How does the cash basis differ from the accruals basis for the following:
Bad debts

Answer 7

Not allowable, as income is only taxed when received

Question 8

How does the cash basis differ from the accruals basis for the following:
Car lease payments

Answer 8

The 15% restriction does not apply for cars with emissions >50g/km

Question 9

How does the cash basis differ from the accruals basis for the following:
Interest payments

Answer 9

Interest payments on loans are allowed even if they are not wholly and exclusively for purposes of trade (up to max £500 for 12 month period)

Question 10

How does the cash basis differ from the accruals basis for the following:
Ceasing to use an asset in the trade

Answer 10

Market value of the asset is treated as a taxable receipt

Question 11

How does the cash basis differ from the accruals basis for the following:
Ceasing to trade

Answer 11

Value of stock and WIP is treated as taxable receipt in the final period of account

Question 12

When can you assume in the exam that a property business is using the cash basis

Answer 12

If cash receipts are less than 150,000

Question 13

What 3 adjustments must a business make in the first AP if they move from accruals basis to cash basis

Answer 13

TWDV b/f on plant and machinery - tax deduction can be made on P&M in the pools (excluding cars and land)

Adjustment income = opening debtors + opening stock - opening creditors
Needed if tax deduction was given in prev period for accrued expenditure

Adjustment expense = opening debtors + opening stock - opening creditors
Needed if accrued income included in previous period but cash received in current period

Question 14

What 3 adjustments must a business make when moving from the cash basis to the accruals basis

Answer 14

Plant and machinery acquired but not fully paid for - eg hire purchase asset, the unrelieved expenditure is allocated to a capital allowances pool in next AP

Adjustment income = opening debtors + opening stock - opening creditors
Needed if tax deduction given in previous period for prepaid expenses

Adjustment expense = opening debtors + opening stock - opening creditors
Needed if prepaid income included in previous period will be recognized in the profit in the current period under accruals basis