M6 - Income from self-employment

Question 1

Badges of Trade purpose

Answer 1

To identify whether a sales activity is classified as a trade, or just a hobby

Question 2

The subject matter of the transaction

Question 3

If an individual satisfies one badge of trade, does that mean that it is a trade?

Answer 3

Not necessarily. If it is a trade, there will likely be multiple badges involved.

Question 4

Are any badges/questions more important than others?

Answer 4

No

Question 5

What happens to the portion of costs under a self-employed that are for personal uses?

Answer 5

They are added back to the profit figure

Question 6

List some disallowable expenses that must be added back to profit

Answer 6

• 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

Question 7

is car hire or leasing business allowable?

Answer 7

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

Question 8

How is a lease premium a business allowable expense? (revenue element)

Answer 8

Lease premium - capital element is deducted from profit in proportion to the time the lease applied to the tax period

Question 9

how is the capital element of a lease premium calculated?

Answer 9

lease premium * 2% * (number of years of lease minus 1)

Question 10

What is the capital element of a 21 year lease of £10,000?

Answer 10

0.02 * £10k * 20 = £4,000

Question 11

Is the capital element of a lease business allowable?

Answer 11

No, same rule to capital expenditure applies

Question 12

what happens if an owner takes an item of inventory for his own personal consumption?

Answer 12

the full sale price of the item is added back to profit

Question 13

What happens to non-trade income such as interest received?

Answer 13

It is removed from profit figure. Only trade income is allowed

Question 14

What happens to any expenses incurred before the beginning of a sole trader business’ first trading day?

Answer 14

up to seven years of prior expenses are deducted from the profit figure to the first period of trade

Question 15

what types of non-current fixed assets qualify for capital allowances?

Answer 15

• plant & machinery
• furniture
• equipment
• vehicles

Question 16

Are buildings eligible for capital allowances?

Answer 16

No, only integral features are like escalators, etc.

Question 17

what allowances are available for the main pool?

Answer 17

1. 18% WDA per annum
2. AIA of £1m per annum

Question 18

what allowances are available for the special rate pool?

Answer 18

1. 6% WDA per annum
2. AIA of £1m per annum

Question 19

how is an item accounted for when it is sold?

Answer 19

at the lower of original cost or sale proceeds

Question 20

Explain the small pool balance claim

Answer 20

If the balance of the main or special rate pool is less than £1k, the whole £1k can be claimed in full

Question 21

what is a short life asset and how does it qualify for capital allowances?

Answer 21

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

Question 22

SBA meaning

Answer 22

Structures and Buildings Allowance

Question 23

what allowance is available for buildings and structures built after 29 Oct 2018

Answer 23

3% straight line basis.

Question 24

what is excluded from the SBA allowance?

Answer 24

cost of land

any integral feature (can qualify for higher allowance)

Question 25

When can a building be eligible for SBA?

Answer 25

when it starts being used

Question 26

what are the three main rules to consider when a building is sold?

Answer 26

1. all SBA allowances claimed are added back to the sale price for the chargeable gain calculation 2. No balancing allowance or charge is given 3. The buyer can continue to claim the 3% of the original purchase price

Question 27

Is there AIA available for cars (sole trader)?

Answer 27

No

Question 28

Is there AIA available for vans (sole traders)?

Answer 28

Yes

Question 29

How much WDA FYA (first year allowance) is allowed for cars if CO2 is 0g?

Answer 29

100% FYA

Question 30

How much WDA FYA (first year allowance) is allowed for cars if CO2 is 1-50g?

Answer 30

18% WDA

Question 31

How much WDA FYA (first year allowance) is allowed for cars if CO2 is 50g or more?

Answer 31

6% WDA

Question 32

another name for First Year Allowance for cars?

Answer 32

Spot allowance, because it is given on the day of purchase rather than accounting period

Question 33

if a car is used privately by a business owner, what happens to the allowance claimed?

Answer 33

The allowance is offset to profits in part

Question 34

If an asset is used to claim AIA, is it then added to the main pool?

Answer 34

No, once AIA has been fully claimed against an asset, no further allowances can be given as the full value is used up

Question 35

what happens to capital allowances in the event of a trading loss?

Answer 35

the business owner can choose to not claim the allowances or to claim in part. Then, any loss relief is obtained

Question 36

loss relief from trading can be offset against chargeable gains? true or false?

Answer 36

True. However, the relief against chargeable gains can only be offset against periods for which loss relief was applied

Question 37

options to choose from for loss relief

Answer 37

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) 2. carry relief forward against future trade profits

Question 38

what must be done first in order to apply loss relief to chargeable gains?

Answer 38

The loss relief must be fully applied to trade and personal income. Once fully applied, it may then be applied to capital gains

Question 39

can loss relief be carried forward again if not fully used against a period?

Answer 39

Yes, it is continually carried forward until all used up

Question 40

what is the best way to apply loss relief?

Answer 40

in a way which reduces the TTP but protects the personal allowance figure for each year. Find that sweet in-between balance

Question 41

what happens if a business makes a loss in any of the first four years of trading?

Answer 41

the loss is applied to the first year, and then carried to the next until it is all used up up to three years

Question 42

Can a loss made by a sole trader be offset against employment income in a previous period?

Answer 42

Yes

Question 43

Cessation of trade loss relief

Answer 43

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