Seminar 4 Continued Flashcards
list some badges of trade
- frequency of transaction
- profit motive
- source of finance
- period of ownership
- reason for sale
- supplementary work
- subject method of the transaction
- method of acquisition
what must happen to accounting when calculating trading profits?
accounting profits must undergo tax adjustments
deductible/allowable expenses are…
deducted from net profit
disallowable expenses are…
added back to net profit
how does adjusting tax profit computation look?
net profit
+ disallowable expenditure
+ trading income not shown in accounts
- expenditure not shown in accounts
- non-trading income in accounts
- capital allowances
= tax adjusted profit after capital allowances
is depreciation an allowable expense?
no depreciation is disallowable, and must be added back to profit
what is the alternative to depreciation of a fixed asset?
capital allowances
this allows plant & machinery to be written off from period-to-period
what is the trading allowance?
£1,000 trading allowance
what happens if one earns less than £1,000 from trading?
the earnings are exempt
what happens if one earns more than £1,000 from trading?
they can choose:
- trading income - allowable expenses
or
- trading income - £1,000 allowance
an expenditure is allowable when wholly used for ___ purposes
‘trading’
trading purposes make an expenditure allowable (deductible from profits)
if an expenditure is incurred for both trading and private purposes, is it deductible?
no, it’s disallowable
are capital expenditures on non-current assets allowed?
no, capital expenditures on non-current assets are disallowed
are expenses associated with non-current assets allowable or disallowable?
disallowable
these include:
- legal/professional charges involved
- depreciation/amortisation
- losses on disposal of asset
- repairs associated with asset
are appropriations of profit allowed or disallowed?
disallowed
(e.g., salary to partner unnecesarily, owner drawings)
customer entertaining costs are…
disallowed
gifts to employees are…
allowed, though employees may receive a taxable benefit
gifts to customers are…
disallowed when they cost more than £50 per customer per tax year
disallowed when they’re food/drink/tobacco
disallowed when they don’t have the business’s branding on it
increase in general provision for bad debts are…?
disallowable
increase in general provision is…
decrease in general provision is…
increase = added to profit
decrease = deducted from profit
are general provisions for specific debts allowable or disallowable?
allowable
trade bad debts are…
allowable
how are recoverable trade bad debts handled?
there’s no adjustment required
non-trade bad debts are…
disallowable (e.g., loans to employees)
donations to national charities are…?
disallowable (added back to profits)
donations to local charities/educational establishments are…?
allowable (deducted from profits)
gift aid donations are…?
disallowable (added back to profits)
gifts of stock or used plant & machinery are …?
allowable (deducted from profit)
political donations are…?
disallowable
subscriptions are…?
allowable (if they relate to trade)
fines/penalties are…?
generally disallowed unless they relate to business activity
legal/professional fees relating to trade are…?
allowable
fees relating to HMRC are…?
disallowable
fees relating to capital expenditure are…?
generally disallowable
legal costs on renewal of a lease are…?
allowable if the lease is short term (less than 50 years)
costs of registering a patent are…?
allowable
how are employee salaries handled?
if they haven’t been paid 9 months within the end of the period, it’s only allowable within the period in which it is paid
redundancy payments/job loss compensation is …?
allowable (deducted from profit)
educational courses and pension contributions are…?
allowable (deducted from profit)
are cars disallowed or allowed?
disallowance of 15% is applied to the lease payments of the car
what are some other allowable expenditures?
- interest payable (if incurred for trade purposes)
- non-recoverable VAT
- patent royalties (for trade purposes)
- pre-trading expenditure (incurred 7 years prior to trading commencement)
stock taken from the business for the trader’s private use is…
treated as a sale made at normal selling price
non-trading income is…
deducted from trading profit
e.g., rental income, profit on the sale of a fixed asset
expenditures not shown in accounts are…?
allowable, and should be deducted from profit
e.g., business expenditure paid personally by the owner
