Trading Income Flashcards
Trading Income: Steps to tax a sole trader
- Adjust profits
- Deduct capital allowances
(3. Tax in correct tax year - Basis periods)
Trading Income: What can Fixed Rate Expenses be used for?
- Motor Vehicles
- Trader’s Home
- Premises partly used as trader’s home
Trading Income: Fixed Rate Expenses: Vehicles: When can the fixed rate not be claimed?
- Previously claimed capital allowances on that vehicle
- Made a deduction on cash basis when acquiring the vehichle
Trading Income: Basis Periods: For the affected tax year: Main rule
Tax the profits not yet taxed
Up to the new accounting date
Withing the tax year
Trading Income: Basis Periods: For the affected tax year: If you arrive at more than 12m profit
Deduct overlap profits from commencement to bring the profits being taxed down to 12m
Trading Income: Basis Periods: For the affected tax year: If you arrive at less than 12m profit
‘Go back’ to make it up to 12m
(Creating overlap profits)
Trading Income: Basis Periods: What to do if there is no POA ending in that TY: In the affected year
Create a notional 12m POA
Ending: 12m before the actual new accounting date
In the tax year of change
(Will create overlap profits(
Trading Income: Basis Periods: What to do if there is no POA ending in that TY: In the year after the affected year
Tax the 12m up to the new accounting date
(Will create overlap profits)
Trading income: Disallowable expenditure: General rule
Not wholly and exclusively for trading purposes
Trading income: Do you add back capital expenditure?
Yes
Trading income: Do you add back depreciation?
Yes
“Trading income: Do you add back appropriation of profit?
Business owner’s salary
Drawings
Private expenditure
Unreasonable payments to family”
Yes
Trading income: Do you add back movements in general provisions?
“Yes
Except specific provisions
Which are allowable”
Trading income: Do you add back client entertaining?
“Yes
Except staff entertaining
Which is allowable”
Trading income: Do you add back gifts?
“Yes
Except
1. Gifts to employees
2. Gifts of trade samples
3. Gifts to customers IF
They advertise business
Not food, drink, tobacco or vouchers exchangeable for goods
AND
Less than £50 per recipient per year”
Trading income: Do you add back subscriptions?
“Yes
Except subscriptions to trade and professional associations
Which are allowable”
Trading income: Do you add back fines?
“Yes
Except employee parking fines while on business activity
Which are allowable”
Trading income: Do you add back legal fees of a capital nature?
“Yes
Except
1. Obtaining long-term finance
2. Registering patents
3. Renewing a short lease
Of more than 50y
(Not the initial grant/acquisition)”
Trading income: Do you add back employment payments?
“Not for wages following the accruals concept
Except
1. Not paid in 9m of end of POA
(Still allowed but when actually paid)
2. Payments above redundancy over 3x redundancy “
Trading income: Do you add back employer pension contributions?
“Yes, on a paid basis only
So disallow any accrual at YE”
Trading income: Do you add back leased cars?
Yes with rules (OBT)
Trading income: Do you add back interest on late payment of tax?
Yes
Trading income: What is the most common example of taxable trading income not credited in the accounts?
Removing goods for own use
“Trading income: Removing goods for own use treatment: Correctly treated in the accounts
I.e. cost removed from purchases”
“Increase profits
By the profit element”
“Trading income: Removing goods for own use treatment: Not correctly treated in the accounts (no adjustment made)
I.e. cost still included in purchases”
“Increase profits
By the full selling price”
“Trading income: Treatment of non-monetary consideration
E.g. paying with goods/services”
“Add back to profits
(Add back the money’s worth)”
Trading income: 4 types of income included in the accounts that is not taxable trading income
“1. Capital gains
2. Rental (property) income
3. Savings income
4. Tax-exempt income”
Trading income: Deductible expenditure not charged in the accounts
“Business expenses borne personally by the owner
(And not reflected in the accounts)
If usual conditions are met
(I.e. wholly and exclusively for the purposes of trade)”
Trading income: Is expenditure incurred before trade commenced deductible?
“Yes
If
1. Would have been deductible
2. Within 7y before trade commenced”
“Badges of trade
(Deciding whether a transaction is ‘trading’ or ‘capital’)”
“Subject Matter
(Personal use, Investment, Resale)
Length Of Ownership
Frequency/Number
Of similar transactions by the same person
Supplementary Work and Marketing
Reasons For Realisation
Being forced to may indicate not trading
Motive”
Does a sole trader’s income of less than the £1k trading allowance need to be declared?
No
Trading income: When can a sole trader decide to NOT use the trading allowance?
“Income more than 1k allowance
But expenses exceed their income”
Trading income: Can a sole trader choose to deduct the trading allowance from their income rather than any actual expenses incurred?
“Yes (OBT)
(If income over 1k)
(In exam assume they will elect to use trading allowance)”
“Trading income: Does trading allowance also apply to miscellaneous income?
E.g. A one-off piece of work
“
“Yes
Add misc. income to trading income”
Trading income: Basis periods: The 3 scenarios
“1. Ongoing businesses assessed on accounting period ending in tax year
‘Current year basis’
2. Commencement of trade
‘Opening year rules’
3. Cessation of trade
‘Closing year rules’”
Trading income: Basis periods: First Tax year
“TAX FROM START OF TRADE TO END OF THAT TAX YEAR
(I.e. 5th April)”
Trading income: Basis periods: Second Tax Year: There is a POA ending in the 2nd TY: Exactly 12m
Tax that POA at the CYB
Trading income: Basis periods: Second Tax Year: There is a POA ending in the 2nd TY: POA is less than 12m
“Tax the FIRST 12m of trading
I.e. From the DATE OF COMMENCEMENT”
Trading income: Basis periods: Second Tax Year: There is a POA ending in the 2nd TY: POA is more than 12m
“Tax the LAST 12m
Of the long POA”
Trading income: Basis periods: Second Tax Year: There is NOT a POA ending in the 2nd TY
“Tax the ACTUAL TAX YEAR
(April-April)”
Trading income: Basis periods: Closing year rule
“Tax all profits not yet taxed
(I.e. from end of previous basis period to date of cessation)
SUBTRACT
Overlap profits “
