M6 - Income from self-employment Flashcards
Badges of Trade purpose
To identify whether a sales activity is classified as a trade, or just a hobby
The subject matter of the transaction
If an individual satisfies one badge of trade, does that mean that it is a trade?
Not necessarily. If it is a trade, there will likely be multiple badges involved.
Are any badges/questions more important than others?
No
What happens to the portion of costs under a self-employed that are for personal uses?
They are added back to the profit figure
List some disallowable expenses that must be added back to profit
- Legal fees for purchase of capital items
- Fines (except if it was an employee)
- Gifts are unless:
a) no more than £50 per recipient
b) bear company logo or brand - Donations
- ## Entertaining of customers
is car hire or leasing business allowable?
if emissions are more than 50g/km, 15% of the costs is disallowable and added back to profit.
If emissions are less than 50g/km, it is totally allowable
How is a lease premium a business allowable expense? (revenue element)
Lease premium - capital element is deducted from profit in proportion to the time the lease applied to the tax period
how is the capital element of a lease premium calculated?
lease premium * 2% * (number of years of lease minus 1)
What is the capital element of a 21 year lease of £10,000?
0.02 * £10k * 20 = £4,000
Is the capital element of a lease business allowable?
No, same rule to capital expenditure applies
what happens if an owner takes an item of inventory for his own personal consumption?
the full sale price of the item is added back to profit
What happens to non-trade income such as interest received?
It is removed from profit figure. Only trade income is allowed
What happens to any expenses incurred before the beginning of a sole trader business’ first trading day?
up to seven years of prior expenses are deducted from the profit figure to the first period of trade
what types of non-current fixed assets qualify for capital allowances?
- plant & machinery
- furniture
- equipment
- vehicles
Are buildings eligible for capital allowances?
No, only integral features are like escalators, etc.
what allowances are available for the main pool?
- 18% WDA per annum
- AIA of £1m per annum
what allowances are available for the special rate pool?
- 6% WDA per annum
- AIA of £1m per annum
how is an item accounted for when it is sold?
at the lower of original cost or sale proceeds
Explain the small pool balance claim
If the balance of the main or special rate pool is less than £1k, the whole £1k can be claimed in full
what is a short life asset and how does it qualify for capital allowances?
a short life asset with an expected useful like of 8 years or fewer.
Kept away from the pool and is accounted for individually
still qualifies for WDA and AIA as normal
any balance of unclaimed allowances when the item is sold or scrapped can be claimed in that year. Not allowed for regular capital items
SBA meaning
Structures and Buildings Allowance
what allowance is available for buildings and structures built after 29 Oct 2018
3% straight line basis.
what is excluded from the SBA allowance?
cost of land
any integral feature (can qualify for higher allowance)
When can a building be eligible for SBA?
when it starts being used
what are the three main rules to consider when a building is sold?
- all SBA allowances claimed are added back to the sale price for the chargeable gain calculation
- No balancing allowance or charge is given
- The buyer can continue to claim the 3% of the original purchase price
Is there AIA available for cars (sole trader)?
No
Is there AIA available for vans (sole traders)?
Yes
How much WDA FYA (first year allowance) is allowed for cars if CO2 is 0g?
100% FYA
How much WDA FYA (first year allowance) is allowed for cars if CO2 is 1-50g?
18% WDA
How much WDA FYA (first year allowance) is allowed for cars if CO2 is 50g or more?
6% WDA
another name for First Year Allowance for cars?
Spot allowance, because it is given on the day of purchase rather than accounting period
if a car is used privately by a business owner, what happens to the allowance claimed?
The allowance is offset to profits in part
If an asset is used to claim AIA, is it then added to the main pool?
No, once AIA has been fully claimed against an asset, no further allowances can be given as the full value is used up
what happens to capital allowances in the event of a trading loss?
the business owner can choose to not claim the allowances or to claim in part.
Then, any loss relief is obtained
loss relief from trading can be offset against chargeable gains? true or false?
True. However, the relief against chargeable gains can only be offset against periods for which loss relief was applied
options to choose from for loss relief
1a. Choose current year and previous year to apply relief to trade income and other income subject to max of £50k
1b. Choose current year and previous year’s capital gain income to apply relief (can do after option 1)
- carry relief forward against future trade profits
what must be done first in order to apply loss relief to chargeable gains?
The loss relief must be fully applied to trade and personal income. Once fully applied, it may then be applied to capital gains
can loss relief be carried forward again if not fully used against a period?
Yes, it is continually carried forward until all used up
what is the best way to apply loss relief?
in a way which reduces the TTP but protects the personal allowance figure for each year. Find that sweet in-between balance
what happens if a business makes a loss in any of the first four years of trading?
the loss is applied to the first year, and then carried to the next until it is all used up up to three years
Can a loss made by a sole trader be offset against employment income in a previous period?
Yes
Cessation of trade loss relief
If a business makes a loss in its final 12 months, it can carry it back to previous periods, starting with the most recent finished year going back (LIFO). The loss is not applied to other income though, just trading profits
