Self Employment (unincorporated Business) - CH 3 Flashcards
The 2 badges of trade?
Trading profits (subject to income tax and NI) and capital gain (subject to CGT)
Six badges of trade questions?
- Subject matter - why did we acquire the asset?
- if for personal enjoyment or consumption or for investment potential this indicates a non trading activity - Frequency of transactions - a higher frequency indicates trading activity
- Length of ownership - a short period of ownership indicates trading activity
- Profit motive - selling in order to make profit (rather than to raise emergency cash) indicates trading activity
- Supplementary work - if supplementary work is performed on the assets prior to its sale (to increase their marketability) this indicates trading
- How the asset is acquired - if the item was gifted or inherited this is unlikely to constitute trading activity
If the tests indicate trading then goes to Income tax and NIC
If not then CGT
Summary of steps to find assessable trading profits for sole trader/partners (4 steps)?
- Net profits per accounts
- Adjustments to profit:
Add disallowed expenditure eg depreciation
Add income taxable as trading profits not included in SPL
Less profits in accounts not taxable as trading profits
Less deductible expenditure not included in accounts
=Adjusted profit
Less capital allowances (CH 4)
=taxable profit
- Apply basis of assessment rules (CH5) this gives assessable profits for the tax year x
Page 28 for allowable and disallowed items of expenditure
Cash basis for small businesses - what business can use the cash basis?
Unincorporated businesses (sole traders and partnerships)
Annual revenue does not exceed 150k and the trader must leave the scheme if their annual revenue exceeds 300k
Cash for small businesses - calc of taxable profits pro forma (3 lines)
Total cash receipts X
Total allowable business expenses paid (X)
Taxable trading profits (apply basis periods to these) X
Effect of the cash basis on pg 30
