Employment income and Trading Income

Question 1

What date is used when calculating employment income for employees and for directors? (1 and 5)

Answer 1

Employees: Earlier of date paid and date entitled to payment (usually first one)

Director: Earlier of date paid and date entitled to payment.
 Date on which earnings credited in companies account (would say in Q)
 Last day of the period of account if the earning determined before end of period
 Date on which earning determined if they are determined before the end of the period

Question 2

What is an allowable deduction and when is it accepted? Give 4 examples of deductible expenses.

Answer 2

Deduction on Employment Income

Accepted if: Employee obliged to pay and incur cost and expense wholly, exclusively, necessary for job

Examples: PQ subscription, expenses required to WFH, tools/ uniform (buying own hard hat),employee contribution to pension

Question 3

How do you treat amount that has been given as reimbursement to employee for expenses

Answer 3

Amount rec= taxable income

Question 4

What happens where employee pays to travel to client site and NOT reimbursed?

Answer 4

Allowable income decreases

Question 5

When is travel between home and work allowable? (3)

Answer 5

o No normal place of work- travel costs between home and work allowable (e.g. regional manager)
o Normal place is WFH- travel cost allowable
o Temporary workplace- travel cost allowable (e.g. secondment)

Question 6

Give 3 situations relating to entertaining clients and employee reimbursement

Answer 6

Reimbursed directly- e.g. take a client to lunch. Exempt for employee and has no impact but is a disallowable expense for employer

Specific entertaining allowance- e.g. £100 for spending on client. This is income, however if you spend £80 on entertaining then you get taxed on £20. You get deduction on expenditure. For employer £100 is disallowed

General allowance- whole amount is taxable. For employer this is allowable expense (staff cost). Basically extra salary

Question 7

What is SMRS?

Answer 7

Statutory mileage rate scheme
Using own car/van/bike

Statutory rate set by HMRC
* 45p for car/van for first 10000 miles and 25p after that. Extra 5p for passenger
* 24p for motorbike
* 20p for bike

In exam rates are higher. Any excess is part of taxable income and any shortfall is allowable deduction

Question 8

Formula for car benefits and how do you find in hardmans?

Answer 8

(List price - contribution) x CO2 emission)

contribution max= £5000

Search for company car

Question 9

How do you calculate assets lent to employee? When transferred?

Answer 9

When lent: Benefit = 20% x cost when first provided for use

When transferred after borrowing, it is the higher of:
 MV when gifted
 MV when first provided – (20% x MV for as long as lent)

Question 10

How do you treat employment related loans and when does the rules not apply

Answer 10

If loan interest is below official rate of 2.25% then the difference is the taxable benefit

Benefit- difference between interest due at ORI and interest actual paid
o No taxable benefit where:
Loan to employee is less than £10,000 or
Made on normal commercial terms by money lending business (Barclays employee with Barclays mortgage)

Question 11

How do you treat employment related loans where the amount changes (increase or decrease through repayment)?

Answer 11

Strict method: Calc monthly benefit on balance at end of each month but only applies if either tax payer or HMRC elects

Avg method: avg of loan outstanding at beginning and end of year x 2.25% (remove any interest paid)

Question 12

What is pre-trading expenditure?

Answer 12

Expenditure before trade commenced is deductible if…
o Trader had already been trading (wholly and excl for purpose of trade) and it was incurred within 7 years before commencement

Reduced trading income and therefore tax

Question 13

What are the two ways of calculating allowable expense for motor vehicles?

Answer 13

Calculate on business proportion
Claim fixed rate deduction using SMRS with no other deductions (fuel cost, capital allowance)

Question 14

What are the two ways of calculating allowable expense for use of home for business?

Answer 14

Track bills and relate to how much is used for business
Fixed monthly deductions calculated based on no. of hours spent (min 25hrs). Find in Hardmans

Question 15

What are the two ways of calculating allowable expense for use of business premises as traders home?

Answer 15

relates to Hotels or B&Bs

o Calc business portion of actual expenses
o Deduct fixed monthly amount for private use from total premises cost based on no. of occupants found in Hardmans

Question 16

What are the 3 basis of assement?

Answer 16

Starting to trade: when sole traders starts, tax adjusted profits time appt from date of start to end of tax year

Ongoing business: use tax year basis (TYB), tax profit in tax year
Transition basis: taxable over 5 years (23/24 was first year). You’ll be given number just divide by 5

Cessation of trade: tax profit not yet taxed and add transition profit not yet taxed

Question 17

What is notional profit/loss

Answer 17

Notional Loss
o If partner makes profit but other partner makes loss due to PSR
 Partner with loss: £0 taxable trading income

Notional profit
o Partnership made a loss but one person makes profit due to PSR
o Partner with profit deemed to have 0 taxable trading income

Split total loss/gain between those who made a loss (in notional profit) or gain (in notional loss)

Question 18

Who pays Class 1/2/4 NIC