Chapter 9 - Income from self employment: Computation of income

Question 1

What are the badges of trade? 6

Answer 1

1. Subject matter of the transaction - personal enjoyment? Martin v Lowry (1926)
2. Length of the period of ownership
3. Frequency of transactions
4. Supplementary work - extra work done on product for sale?
5. Reasons for sale
6. Motive - purchase to make profit?
   Look at evidence from all badges of trade

Question 2

Deductibility of expenditure: 2

Answer 2

Expenditure is deductible when computing trading profits only if incurred wholly and exclusively for the purposes of the trade - not as exclusive as the wholly exclusively and necessarily rule applied to expenses of an employee.

1. Expenditure which has no connection to the trade is disallowed (remoteness test)
2. Expenditure which serves both a business purpose and a private purpose cannot be allowed in full (duality test) If the expenditure can be apportioned with reasonable accuracy the private element is disallowed.

Question 3

Explain the case of Strong & Co of Romsey Ltd v Woodifield 1906.

Answer 3

Damages paid by a brewery to a hotel guest injured by a falling chimney were disallowed. These damages were incurred by the brewery in its capacity as a property owner, not in its capacity as a trader and therefore failed the remoteness test.

Question 4

Explain the case of Mallalieu v Drummond (1983)

Answer 4

Duality test - The cost of black clothing worn in court by a lady barrister was wholly disallowed since it was not possible to apportion the cost of the clothing between the part which satisfied professional standards of dress and the part which simply provided warmth and decency.

Question 5

Disallowed expenditure:

Answer 5

Capital expenditure is specially disallowed by no definition of capital is provided. Consequently case law surrounds whether the amount concerned is repairs and improvements.
The following is disallowed:
1. Legal or professional fees incurred in relation to an item of cap expenditure
2. Depreciation or amortisation charges

Question 6

When can repairs be disallowed?

What is the case?

Answer 6

If they relate to a newly acquired asset and the repairs are required in order to put the asset into usable condition.
Law Shipping Co Ltd v CIR 1923. the costs of putting a newly acquired ship into seaworthy condition were disallowed for this reason.
However, if the newly acquired asset was useable when purchased they are generally allowed. Odeon Associated Theatres v Jones 1971. Repairs to cinemas which has been bought in a state of disrepair but nonetheless useable were allowed.

Question 7

Appropriations of profit.

Answer 7

Drawings etc are disallowed. The owners personal income tax payments and personal NIC are also disallowed.

Question 8

Provisions

Answer 8

Disallowed unless can be estimated with reasonable accuracy. e.g. general provisions for doubtful debt

Question 9

Entertainment and gifts 5

Answer 9

Cost of business entertainment is disallowed. Staff ent costs are allowable but the employees concerned may incur an income tax liability if the amount involved exceeds specified limits. The cost of the gift is then disallowed other than:

1. Gifts to employees if made whole and exclusively for trade
2. Samples of trading stock given to the public to as to advertise the business.
3. Gifts to customers which display a conspicuous advertisement for the business, costs no more than £50 per customer per year and do not consist of food drink or tobacco.
4. gifts of trading stock to edu charity etc
5. gifts to charity for trade purposes if made for tase purposes

Question 10

Political donations

Case?

Answer 10

Only if result in definite benefit to be trade can be allowed.
Morgan v Tate & Lyle lTD 1954. The costs of a political campaign against nationalisation were allowed on the grounds that the campaign was waged for the survival of a the trade.

Question 11

Non-trade bad debts: 2

Answer 11

Bad debts in the course of trade are allowable, but loans written off are generally not allowable unless:

1. taxpayer is in the business of lending money and the loan was made during course of trade.
2. The loan was to an employee and was made by the reason of employment and for trade purposes; in this case the amount of the written off loan will usually be taxable on the employee as income from employment.

Question 12

Allowable expenditure?

Answer 12

1. Interest - generally allowed except for late payment of tax
2. Legal fees - disallowed if relating to cap allowances but allowed if for other trade purposes.
   3.

Question 13

Travel expenses cases

Answer 13

Newsom v Robertson 1952 the travelling expenses of a barrister between his home and chambers were disallowed.
Horton v Young 1971 the expenses of self employed bricklayer between him and sits at which he worked was allowed on the grounds business was conducted from him

Question 14

What is sideways relief?

Answer 14

If a business using the cash basis incurs a trading loss, that loss can only be carried forward and set against profits arising from the same trade in subsequent years.