Computing Trading Income (1) Self-Employment

Question 1

What are the badges of trade?

Answer 1

Number of principles based on previous court decisions which indicate whether an activity is trading in nature

Question 2

If a trade exists?

Answer 2

Accounting profits beed to be adjusted to establish taxable trading profit

Question 3

When applying badges of trade, deem to be trading profit?

Answer 3

Income tax and NIC

Question 4

When applying badges of trade, deem to be non-trading profit?

Answer 4

CGT (usually preferable)

Question 5

Subject matter in badges of trade?

Answer 5

Whether person is trading or not may sometimes be decided by examining the subject matter of the transaction

Question 6

Frequency of transactions in badges of trade?

Answer 6

Frequency indicates the carrying on of a trade is interpreted as trading transactions

Question 7

Length of ownership in badges of trade?

Answer 7

Court may infer adventures in nature of trade where items purchased are sold soon afterwards

Question 8

Profit motive in badges of trade?

Answer 8

Strong indication that a person is trading

Question 9

Supplementary work and marketing in badges of trade?

Answer 9

Work is done to make a property more marketable

Question 10

Manner in which assets were acquired in badges of trade?

Answer 10

If acquired unintentionally (by inheritance) and then sold, it is unlikely that trading has taken place

Question 11

Another word for deductible?

Answer 11

Allowable

Question 12

Another word for non-deductible?

Answer 12

Disallowable

Question 13

How must profits of the business be calculated?

Answer 13

Through GAAP using the accruals basis. These profits are subject to any adjustment specifically required for income tax purposes

Question 14

What must happen with disallowable expenditure?

Answer 14

Must be added back top net profit in the computation of taxable trading profit

Question 15

Examples of disallowable expenditure?

Answer 15

Not incurred wholly and exclusively for trade purposes

Depreciation

Legal fees in relation to capital acquisitions and disposals

Question 16

What happens with profits and losses on sale of non-current assets?

Answer 16

Must be deducted or added back respectively

Question 17

How may chargeable gains or allowable losses be dealt with?

Answer 17

Under capital gains tax for individuals or separately for corporation tax for companies

Question 18

What is the most contentious items of expenditure?

Answer 18

Often be repairs (revenue expenditure) and improvements (capital expenditure)

Question 19

Which items are exempt from the capital rule (all deductible)

Answer 19

Fees incurred in the renewal of short leases (less than 50 years) of land and buildings

Incidental costs of obtaining loan finance

Cost of registering patents and trademarks