Topic 7- Income from Self-employment Flashcards
What is the definition of trading income?
The profits of an unincorporated trader arising from a trade, profession or vocation are assessed as trading income
What are the badges of trade? List them
▪ S: The subject matter of the transaction i.e. inventory or normal purchase like toilet paper
▪ O: The length of the period of ownership. Fast ownership suggests trade
▪ F: The frequency of similar transactions by the same person
▪ I: Improvements and marketing. Working to make the asset more marketable suggests trading e.g. gin, candle, soap are trade
▪ R: Reason for Sale. ‘Forced sale’ is not trade
▪ M: The motive i.e. Profit. BUT, just cause you didn’t make money doesn’t mean it’s not a trade
In addition to the badges of trade, what other things need to be considered?
▪ F: Finance e.g. loan taken to buy the asset ..sell to pay the loan (with or without profit) is a trade
▪ A: Acquisition Method i.e. purchase is a trade. Gift/inheritance is not trade
▪ ST: Existence of similar transactions. Looking at the bigger picture
Are dis allowable expenses added or deducted from the net profit in Self employment?
Add back. HMRC are saying we are not allowed to include them for tax purposes.
What are the list of disallowable expenses in trading income that need to be added back?
▪ Interest paid to owner on capital invested in the business.
▪ Salary /Drawings
▪ Private element of expenditure
▪ Excessive salary paid to a sole traders family
▪ late payment interest
▪ Income tax
▪ Capital Gains Tax
▪ Capital (purchase of building)/new/improved
▪ Loss on a sale of non-current assets
▪ Depreciation
▪ Profit or loss on sale of assets or improvements
▪ Car leasing when emissions exceed 110g/km, 15% disallowed
▪ Donation payment under Gift Aid
▪ Subscriptions political
▪ Non-charitable gifts
▪ National charity donations
▪ Entertainment, customers, suppliers
▪ Gifts to customers if all 3 conditions have not been met
▪ Fees associated with acquiring new non-current assets
▪ The write-off of an NON-trade debt (eg a loan to a customer or a former employee)
▪ New Lease
▪ Fines
▪ Any allowable items state 0 in the computation to communicate to marker you know that this item doesn’t need adjusting
Identify the transactions individually
What are the list of taxable trading income that are not in the income statement and needs to be added back?
This is when Owner takes goods out of the business for his or her use
Trader is treated as making a sale to himself at the normal selling price.
▪ If No accounting entries been made ADD sales price
▪ If accounting entries been made ADD profit element of the transaction. Accounting entry is where the trader has already added back the cost of the goods in the accounts
What are the list of expenditure not included in accounts and should have been that need to be removed (to make profit smaller)?
▪ Business calls paid privately
▪ Business use of the house
▪ Expenses relating to the business paid privately
What are the list of allowable items that do not need to be added back?
▪ Bank / overdraft interest, loan interest or plant and machinery allowable
▪ Trade subscriptions
▪ If local donations with promotion of the business name
▪ Repairs
▪ Entertainment for Employees/staff
▪ Gifts to customers if all 3 conditions have been met. If one exceeds, whole thing NOT ALLOWED
1. Cost less than £50
2. Not food, drink, tobacco, or voucher
3. Carries the company name
▪ Legal fees chasing debts
▪ Registering patents
▪ Write off of TRADE debts
▪ Renewal of short lease (50 years)
▪ Employee car parking fines
▪ Interest paid on trading loans e.g. bank over draft or hire purchase contracts
What are the list of allowable items that do not need to be added back?
▪ Bank / overdraft interest, loan interest or plant and machinery allowable
▪ Trade subscriptions
▪ If local donations with promotion of the business name
▪ Entertainment for Employees
▪ Gifts to customers if all 3 conditions have been met
1. Cost less than £50
2. Not food, drink, tobacco, or voucher
3. Carries the company name
▪ Legal fees chasing debts
▪ Registering patents
▪ Write off of TRADE debts
▪ Renewal of short lease
▪ Employee car parking fines
▪ Car leasing costs (ONLY if emission is not higher than 110- if so then 15% is disallowable)
What is the cash basis for small business?
▪ accounts can be prepared to any date in the year
▪ No distinction between capital and revenue expenditure re plan, machinery and equipment for tax purposes.
▪ the flat rate expense deduction for car expense will always be claimed instead of capital allowances in the exam
should you assume cash or accrual basis unless specifically told otherwise?
Can sole traders choose whether to calculate profits/losses on either the cash or accrual basis?
Accrual Basis
yes
What are the criteria for cash basis and what is the limit to not be able to continue using them
▪ Must have annual cash turnover of up to £150,000
▪ Once chosen it can continue to be used until annual receipts exceed £300,000
▪ There is no distinction between capital and revenue expenditure
What are the advantages of cash basis for small business?
▪ Simpler accounting requirements
▪ Profit is not taxed until cash has been received which helps cash flow
What are the disadvantages of cash basis?
Losses can only be carried forward and set against future trading profits whereas under the accruals basis there are more loss relief options
What is the general rule for disallowable expenditure?
Only expenditure incurred wholly and exclusively for the purpose of the trade is allowable
