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Level 5 Business Tax Planning > Lecture 2A > Flashcards

Lecture 2A Flashcards

1
Q

What are badges of trade

A

In UK tax law, badges of trade are criteria used to determine whether a particular activity amounts to trading

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2
Q

Why are badges of trade important

A

The concept is important because profits from trading activities are taxable

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3
Q

What are the different factors of badges of trade

A

These factors, known as the “badges of trade,” include:
- Profit Motive
- Frequency of Transactions
- Nature of the Asset
- Connection with Existing Trade
- Changes to the Asset
- Method of Sale
- Source of Finance
- Period of Ownership
- Supplementary Work or Effort
- Reason for Acquisition and Sale

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4
Q

What does profit motive mean

A

Was the activity undertaken with the intention to make a profit? A clear profit motive often indicates trading

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5
Q

How does the frequency of trade affect weather or not its considered trading

A

A single transaction might not constitute trading, but frequent and repeated transactions are more likely to be considered trade

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6
Q

What does the nature of the asses have to do with trade

A

Assets held for personal use or enjoyment may not indicate trade

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7
Q

What does the connection of the existing trade

A

Is the activity linked to the person’s other trade or profession? If so, it might be viewed as part of a trading activity

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8
Q

How do HMRC use badges of trade

A

HMRC and courts use these badges to assess individual cases, considering all relevant factors rather than treating any single badge as definitive

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9
Q

What do badges of trade help distinguish between

A

The badges of trade help distinguish between trading income, investment income, and capital gains

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10
Q

What’s the implication of the badges of trade on tax

A

If the activity is considered trade, profits are subject to Income Tax or Corporation Tax
Capital gains might be taxed at lower rates or exempt, so misclassification could lead to tax consequences

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11
Q

What’s the implication of the badges of trade on national insurance

A

Trading activities can result in liability for Class 2 or Class 4 National Insurance Contributions

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12
Q

What does calculation of trading profits for UK tax purposes involves determining

A

The calculation of trading profits for UK tax purposes involves determining the taxable profit from an individual’s or company’s trade

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13
Q

Accounting profit =

A

Trading Income - Allowable Expenses = Accounting Profit

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14
Q

What are some common adjustments for accounting profits

A

Common adjustments include:
- Add Back Non-Allowable Expenses
- Deduct Allowable Adjustments

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15
Q

What are add back non-allowable expenses

A

Expenses disallowed for tax purposes must be added back to the accounting profit

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16
Q

Examples of add back non-allowable expenses

A

These might include:
- Depreciation
- Private or non-business-related expenses
- Fines and penalties
- Entertaining expenses

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17
Q

Which tax reliefs and allowances reduce taxable profit

A

Some tax-specific reliefs and allowances reduce taxable profit:
- Capital Allowances
- Trading Loss Relief
- Other tax-deductible items not included in the accounts

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18
Q

What are the steps for calculating trading profits in the UK

A
  1. Start with Accounting Profit
  2. Adjust for Tax Purposes
  3. Include Taxable Adjustments
  4. Account for Losses
19
Q

What taxable adjustments needs to be included for taxable adjustments

A

Add back income or profits that are taxable but not included in the accounting profits, such as:
- Balancing charges
- Other income related to the trade

20
Q

What happens if your adjusted profit is negative

A

If the adjusted profit is negative, you have a trading loss

21
Q

What can a trading loss be used for

A

This can be used to:
- Offset against other income in the same year
- Carry back to previous tax years
- Carry forward to future trading profits

22
Q

What is corporation tax for profits over £250,000

A

Corporation Tax is at 25% for profits over £250,000

23
Q

What is corporation tax for profits under £50,000

A

The rate is 19% for profits under £50,000

24
Q

What does the treatment of expenditure for UK tax purposes depend on

A

The treatment of expenditure for UK tax purposes depends on whether the expense is considered allowable or disallowed under the rules of the Income Tax Act 2007 or the Corporation Tax Act 2009

25
Q

When is an expense allowable

A

An expense is allowable if it is incurred wholly and exclusively for the purposes of the trade

26
Q

What are some allowable expenses

A

Allowable Expenditure:
- Cost of Goods Sold
- Employee Costs
- Premises Costs
- Travel and Subsistence
- Professional Fees
- Marketing and Advertising
- Repairs and Maintenance
- Insurance
- Interest and Finance Costs

27
Q

What are some disallowed expenses

A

These are costs not deductible for tax purposes:
- Capital Expenditure
- Private or Non-Business Expenditure
- Entertaining
- Fines and Penalties
- Loan Repayments
- Provisions and Reserves
- Depreciation
- Political Donations
- HMRC Penalties and Interest

28
Q

What is required if an expense is partly allowable and disallowabe

A

Some expenses may be partly allowable and partly disallowed, requiring an apportionment if there is both business and private use

29
Q

What are examples of expenses that are partly allowable or partly disallowable

A

For example:
- Motor Vehicle Costs
- Home Office Costs

30
Q

What is capital expenditure

A

Costs of acquiring or improving long-term assets

31
Q

What is revenue expenditure

A

Costs incurred in the day-to-day running of the business

32
Q

When calculating income tax and corporation tax what is it essential to distinguish between

A

When calculating taxable profits for Income Tax or Corporation Tax it’s essential to distinguish between trading income and non-trading income

33
Q

Where does trading income arise from

A

Trading income arises from the main business activity of buying and selling goods or services

34
Q

What is trading income subject to

A

It is subject to specific adjustments to ensure that taxable trading profits are accurately calculated

35
Q

What are some key adjustments for trading income

A

Key Adjustments for Trading Income:
- Non-Allowable Expenses
- Capital Allowances
- Private Use Adjustments
- Stock and Work-in-Progress Adjustments
- Bad Debt Adjustments
- Balancing Charges

36
Q

What adjustments need to be made for non-allowable expenses

A

Certain expenses (e.g., depreciation, entertaining, or private use of assets) must be added back to the accounting profits

37
Q

What adjustments need to be made for capital allowance

A

Replace depreciation with claims for capital allowances on qualifying business assets

38
Q

What s the private use adjustment

A

If any trading expenses or assets are used for personal purposes, the personal proportion must be disallowed

39
Q

What dos non-trading income refer to

A

Non-trading income refers to income that does not arise directly from the trade

40
Q

What are examples of non-trading income

A

Examples include:
- Rental income
- Investment income
- Capital gains from selling non-trading assets

41
Q

What are key adjustments for non-trading income

A

Key Adjustments for Non-Trading Income:
- Rental Income
- Interest Income
- Dividend Income
- Capital Gains
- Grant or Subsidy Income
- Foreign Income

42
Q

What happens with trading income, rental income, and non-trading income for sole traders and partnerships

A

Trading income, rental income, and non-trading income are taxed as part of total income under Income Tax
Deduct the Personal Allowance

43
Q

What is dual purpose income

A

If income can be both trading and non-trading apportion it reasonably between categories

44
Q
A

Level 5 Business Tax Planning (3 decks)

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