Seminar 4 Flashcards
are capital contributions reduced from the list price of the car when being taxed?
yes
how are monthly payments towards a car reduced?
reduced off the end total
trade = ?
its not always obvious whether or not a person is carrying out a trade, it could be mistaken for capital gains
how is discernment practiced with regards to whether or not financial activity is trading?
it’s left to case law decisions
what are the ‘badges of trade’
criteria used to identify trading activities
examples of the badges of trade
- subject matter of the transaction
- length of the period of ownership
- frequency of transactions
- supplementary work
- way it was carried out
- reason for sale
- profit motive
- source of finance
- existence of similar transactions
allowable = ?
not taxed, exempt
disallowable = ?
taxed, not exempt
how are profits of a self-employed person taxed?
charged to income tax by ITTOIA2005
what does a self employed person do?
conducts a trade, profession, or vocation
how do you calculate trading profits?
begin with net profit from income statement
make adjustments to comply with tax law
deduct deductible expenses
how is accounting profit adjusted for tax purposes?
net profit from accounts + disallowables - expenditures not shown in accounts = tax adjusted profit before capital allowances
tax adjusted profit before capital allowances - capital allowances = tax-adjusted profit after capital allowances
how does trading allowance work?
allowance is 1,000 per tax year
if trading income <= 1,000, it’s exempt
if trading income >= 1,000, choose: trading income - expenses, or trading income - 1,000
if an expenditure is incurred purely for trading purposes, it is…
allowable / deductible
if an expenditure is incurred for both trading & private purposes it is…
disallowable / not deductible
capital expenditures on non-current assets which bring an enduring benefit to the business is…
disallowed (still taxed)
what are examples of capital-related expenses that are disallowed?
legal/professional charges incurred on the acquisition of a fixed asset
depreciation/amortisation
losses on the disposal of a fixed asset
repairs to a newly-acquired fixed asset
are appropriations of profit allowed or disallowed?
disallowed
this includes owner’s withdrawals/salary
appropriations of profit include owner’s personal income tax/NICs
salary payment to family members unnecesarily is disallowable
appropriation of profit = ?
deductions from revenue
are customer entertaining costs allowed/disallowed?
customer entertaining costs are disallowed
staff entertaining costs are allowed (though employees may incur a tax liability)
are gifts to employees allowable?
yes
costs of gifts to customers is allowed/disallowed?
disallowed unless the gifts cost less than £50 per customer per year
increases in general provisions for bad debts/stock provision are…
disallowable (still taxable)
decrease in general provision must be…?
decreased from net profit
general provisions = ?
general provisions are balance sheet items representing funds set aside by a company as assets to pay for anticipated future losses
trade bad debts are …?
allowable (not taxed)
non-trade bad debts are…?
disallowable
e.g., loans to employees
donations to national/local charities & gift aid donations?
national charity donations are disallowable
donations to small local charities are allowable if they increase business reputation
gift aid donations are disallowable
political donations & gifts of stock to UK charities are…?
political donations are disallowable
gifts of stock to UK charities is allowable
fines & penalties are…?
disallowable unless they’re incurred as a result of doing business
legal & professional fees are…?
allowable if they relate to income (e.g., collecting bad debts, suing)
professional fees relating to HMRC = ?
disallowable
fees relating to capital expenditures = ?
disallowable (e.g., cost of acquiring capital assets)
registering a patent & legal costs for lease renewal = ?
allowable
if earnings for employees are charged in accounts, but not yet paid within 9 months of the end of the period, the cost is…?
allowable only in the period in which they’re paid
redundancy payments/compensation
educational courses for trade purposes
employer’s pension contributions…?
allowable
what calculation applies to polluting cars?
disallowance of 15% * the lease payment
further adjustment if the car’s isn’t wholly used for business purposes to disallow the private use
what are other allowable expenditures?
interest payable (if incurred for trade purposes)
non-recoverable VAT
patent royalties paid for trade purposes
pre-trading expenditure incurred 7 years before starting to trade
stock/inventory taken from the business for traders’ private use is treated as..
a sale at normal selling price
if nothing is shown in the accounts for this, add back the selling price
if treated as drawings at cost, add back to profit
non-trading income must be…
deducted
e.g., rental income, profit on disposal of fixed assets, investment income
expenditures not shown in the accounts may include…?
business expenditure paid personally by the owner
this is allowable (not taxed)
