Trade Profits & Capital Allowances

Question 1

How do you Calculate Taxable Trading Profits?

Answer 1

Use Net profit per Financial Accounts figure.
Add -
* Disallowable expenditure
* Taxable trading income not yet credited in accounts

Less -
* Allowable expenditure not yet charged in accounts
* Income included in accounts that is not taxable
* Trading income (rental/savings income)
* Capital Allowance

Question 2

What Adjustments to Profits must be Made when Calculating Taxable Trading profits?

Answer 2

£1,000 trading allowance.
Deduct before finding Taxable Profits.

Question 3

What is Allowable & Disallowable Expenditure?

Answer 3

Expenditure incurred wholly and exclusively for the purposes of the trade.
Exceptions = Dual Purpose; apportionment between business (allowable) and private (disallowable) use.
Disallowable expenditure added back to net profit/loss

E.g. Home office apportion electricity, heating, and water compared to whole house (other rooms), minus kitchen and bathrooms.

Question 4

What is Allowable & Disallowable Expenditure Regarding Capital Expenditure?

Answer 4

Allowable -
* Maintenance & repair expenditure.
Disallowable -
* Capital expenditure
* Improvement or enhancement expenditure
* Depreciation/amortisation and profit/losses on sale of the assets

Question 5

What is Allowable & Disallowable Expenditure Regarding Appropriations of Profit?

Answer 5

All Disallowable. E.g.:
* Salaries to partner or family members which is not reasonable remuneration
* Payment of owner’s personal expenses

Question 6

What is Allowable & Disallowable Expenditure Regarding General Provisions?

Answer 6

Allowable:
- Known/assumed bad debts

Disallowable:
- Increase in general provision
- Anything assumed
- Non-trading debts, e.g. loan to employee subsequently written off.

Question 7

What is Allowable & Disallowable Expenditure Regarding Entertainment Expenditure?

Answer 7

Expenditure on entertaining staff is allowable, only.

Question 8

What is Allowable & Disallowable Expenditure Regarding Gifts?

Answer 8

Allowable -
* Gifts of trade samples (not for resale) in ordinary course of trade.
* Gifts to employees/customers if incorporated advert.

Disallowable -
* Gift is food, tobacco, or voucher related.
* Total cost per customer must not exceed £50.

Question 9

What is Allowable & Disallowable Expenditure Regarding Donations & Subscriptions?

Answer 9

Allowable -
* Donations to local charities
* Subscriptions to trade/professional associations.

Disallowable -
* Donation to national charities or Gift Aid.
* Political donations.

Question 10

What is Allowable & Disallowable Expenditure Regarding Fines & Penalties?

Answer 10

Allowable -
Fine incurred by employee on business activity.

Disallowable -
Fines/penalties if incurred by sole trader.

Question 11

What is Allowable & Disallowable Expenditure Regarding Interest and Irrecoverable VAT?

Answer 11

Allowable -
* Interest on money borrowed for business purposes
* Irrecoverable VAT if item of expenditure is also allowable.

Disallowable -
Interest on late payments of tax.

Question 12

What is Allowable & Disallowable Expenditure Regarding Legal and Professional Fees?

Answer 12

Allowable if related to income (collection of trade debts, preservation of trading rights).

Expenditure relating to capital assets are disallowable if:
* Legal costs to renew short lease (<50yrs)
* Cost of registering patent/copyright for trade use
* Incidental costs of raising long-term finance

Question 13

What is Allowable & Disallowable Expenditure Regarding Employment Payments and Pensions?

Answer 13

Allowable -
* Earnings paid to employees (including redundancy payments).
* Cost of educational courses for employees.
* Employers’ contribution to pension schemes (in accounting period).
* Payment of national insurance contributions.

Question 14

What is Allowable & Disallowable Expenditure Regarding Car Leasing and Rental Costs?

Answer 14

Allowable -
* Costs of hiring, leasing, or renting plant/equipment.

Disallowable -
* Lease on car = -15% disallowance of lease payments.
* Cars with CO2 emission <50 g/km are applicable as of 06/04/2021.
* Private use of leased cars.

Question 15

What are other Adjustments that Need to be Made to Profit I?

Answer 15

Taxable income not yet credited in accounts (goods taken from business).
If nothing recorded in accounts, add back selling price.
If treated as drawing at cost, add back profit.

Question 16

What are other Adjustments that Need to be Made to Profit II?

Answer 16

Any non-trade income must be deducted. E.g. rental income, profits on disposals of fixed assets, and investment income.

Business expense paid personally by owner is allowable and should be deducted.

Question 17

What is Capital Allowance?

Answer 17

Gives tax relief by allowing part of cost of capital asset each year.
Available to taxable person (sole trade, partner/company) who incurs capital expenditure on assets to be used for the purposes of a trade.

Question 18

What are the Different Feature of CA?

Answer 18

P&M that the business use to operate.
Cars Written Down Allowance 18% per year so long as emissions <50 g/km.
Annual Investment Allowance (AIA) put to£1,000,000 for 12 month period.
First Year Allowance (FYA) only on 100% low emission vehicles & charging points.

Question 19

How can you Work Out Tax Written Down Values?

Answer 19

= TWDV is the cost of everything bought to date - CAs

Question 20

What is in the Main Pool when Working Out Capital Allowance?

Answer 20

Assets pooled together, additions added, disposals deducted at sale/cost proceeds.
All P&M, cars with low emissions, equipment, fittings, etc…

Question 21

What is the Written Down Allowance?

Answer 21

18% allowance per annum, but apportioned if longer/shorter than 12 months.
Take balance of main pool at end of period of accounts.
Once WDA deducted from main pool, remainder c/f to TWDV.
If balance of main pool < £1,000 for a 12-month period, WDA can be claimed to reduce the TWDV to nil.

Question 22

What is a First Year Allowance (FYA)?

Answer 22

100% allowance given in period of account.
Claim on new vehicles with zero CO2 emissions and electric vehicle charging points.

Question 23

What is the Annual Investment Allowance?

Answer 23

Max allowance is £1m. Used on P&M, but not cars.
For accounting period not 12 months long, AIA is pro-rated up/down.
Any balance of expenditure >£1m, not eligible for WDA

Question 24

How is Capital Allowance Effect when and Asset is Privately Used by a Sole Trader/Partner?

Answer 24

Any private use, in separate column.
Apply AIA & FYA where appropriate. WDA calculated in full & deducted from single asset column.
Business % of allowance can also be claimed.

Question 25

What are Balancing Charges?

Answer 25

Arise when asset has been given too many CA over lifetime.
E.g. asset sold for amount > TWDV.
Balancing charges reduce CA, add to profits computation.
Asset used privately, business element charged.

Question 26

What is a Balancing Allowance?

Answer 26

Arises if too few CA given over assets lifetime.
E.g. asset sold for amount < TWDV.
Add to CA.
Privately used asset, only business element is allowable.
Only main pool, on single asset column at a time.