Sole trader losses and partnerships

Question 1

What is the income tax relief restriction against general income?

Answer 1

When relieving a loss against general income the relief is restricted to the higher of £50k or 25% of adjusted total income. Adjusted total income is total income less gross personal pension contributions.

Question 2

How do you convert a trade loss into a capital loss?

Answer 2

You take the lower of the remaining loss after a general claim and any capital gains less current year capital losses.

Question 3

What is opening year loss relief?

Answer 3

Trade losses incurred in the first 4 tax years of trading can be carried back 3 tax years and offset against general income on a FIFO basis.

A claim must be made by 31 Jan 23, for the tax year 20/21.

The relief is also capped at the higher of 25% of adjusted net income and £50k.

It is an ALL or NOTHING claim.

Question 4

Why is opening year loss relief so beneficial?

Answer 4

The trader can offset losses from a new business up to 3 tax years prior against general income. Therefore it is a very flexible relief; especially if you were earning a high salary before you began your new trade.

Question 5

What is the formula for terminal loss relief?

Answer 5

Terminal loss relief is the trade loss in the last 12 months of trading increased by any overlap profits.

Question 6

What is the deadline for a terminal loss relief?

Answer 6

The deadline is the 31 Jan 2025 for the tax year 20/21.

Question 7

What does a terminal loss relief allow the sole trader to do?

Answer 7

A terminal loss relief allows a sole trader to offset their trading profits in the year of cessation and to carry back the loss against trading profits for the 3 previous years on a LIFO basis.

Question 8

What conditions need to be met in order for a sole trader to offset losses to a new company via incorporation relief?

Answer 8

The consideration must be wholly (at least 80%) in shares and the shares must be held in the tax year that the losses are relieved.

Question 9

How are losses on unquoted shares treated?

Answer 9

Losses on unquoted shares can be used to offset against general income for the current year and prior year provided the shares met the conditions of EIS and SEIS.

Question 10

Which type of fine is an allowable expenses for a sole trader

Answer 10

A parking fine whist conducting business is an allowable expense.

Question 11

What is one drawback on a sole trader electing to use the cash basis?

Answer 11

A sole trader using the cash basis can only carry forward losses instead of being able to use the normal current year and carry back losses available; if they had used the accruals basis.

Question 12

How does the final period differ from other periods when producing a capital allowances computation?

Answer 12

Add additions
Deduct disposals
No AIA
No WDA
Balancing charges and adjustments

Question 13

What are examples of the type of expenditure which qualifies for structures and buildings allowance?

Answer 13

Offices
Retail and wholesale premises
Factories
Warehouses
Walls
Bridges
Tunnels

Question 14

What type of expenditure does NOT qualify for structures and buildings allowance?

Answer 14

Land
Planning permission fees
Stamp taxes

Question 15

What is the structures and buildings allowance formula?

Answer 15

The allowance is 3% straight line over a 33 1/3 year period.

Each building or structure is treated separately.
Enhancement expenditure is treated separately.
The asset must be in qualifying use.
If not used fully for the business, then it must be apportioned.
The allowance is pro rated for periods which are not 12 months long (also if asset is bought and sold within one period).
There is no balancing adjustment when an SBA asset is sold.

Question 16

What happens when an SBA asset is sold?

Answer 16

When an SBA asset is sold, there are no balancing adjustments. However we do need to add the SBA’s assets claimed to the proceeds in the gains calculation.

Question 17

What are the basis period rules?

Answer 17

1st year: Start of trade to end of 1st tax year

2nd year: Does year end land in 2nd tax year. If no then tax the April to 5th April for that tax year.

If yes and period is 12 months long then tax 12 months using the current year basis.

If yes and period is less than 12 months, then tax the 1st 12 months of trade.

If yes and the period is more than 12 months, then tax for 12 month period leading up to the year end.

3rd year: Look for YE finishing in tax year so that you can carry out CYB.

Question 18

What is the year of change?

Answer 18

This is when a trader changes the year end date for their business.

It is treated as follows.

All tax years before the YOC will be taxed at the original year end date.

All tax years before the YOC will be taxed at the new year end date.

There are special rules for the gap period. If the gap is less than 12 months, then we will tax the 12 months up to the gap year end date, which will create over lap profits.

If the gap period is more than 12 months then we will tax 12 months and then deduct the excess months e.g. 15 month gap means tax 12 and deduct 3.

Question 19

Which conditions need to met in order for a change in basis periods to be permitted?

Answer 19

Trader must notify HMRC on the 31st Jan following the change of tax year e.g. 20/21 = 31 Jan 22.

Period from account resulting in the change must not exceed 18 months.

Must have been no period of change in the last 5 years.