Trading income

Question 1

Importance of badges of trade

Answer 1

Determine whether a sale by an individual has resulted in
- trading profits (subject to income tax and national insurance)
- a capital gain (subject to capital gains tax)

Question 2

Badges of trade

Answer 2

Intention to make a profit
Number of similar transactions
Nature of the asset
Connection with existing trade
Changes to the asset
Reasons for sale
Source of finance
Period of ownership
Method of acquisition

Question 3

Assessable trading profits

Answer 3

Net profit
Adjustments to profits
- disallowed expenditure
- income taxable as trading profits
- (profits in accounts not taxable as trading profits)
- (deductible expenditure not included in accounts)
(Capital allowances)

Question 4

Trading allowance

Answer 4

A trading allowance of £1,000 is available to individuals who carry on a trade
If trading receipts for an individual are =<£1,000, those receipts are not taxable
If trading receipts > £1,000, the individual can choose between
- calculating their taxable trading income using the accruals basis
- using the trading allowance by deducting £1,000 from the receipts with no further reduction for actual expenses

Question 5

Allowable items of expenditure

Answer 5

Wholly and exclusively for the purposes of trade

Question 6

Disallowed items of expenditure

Answer 6

Capital expenditure
Depreciation
Appropriation of profit
Excessive element of pay to family and friends
General provisions for bad debts and provisions for non-trade bad debts
Client entertaining
Gifts
Donations and subscriptions
Fines and penalties
Interest on late paid tax
Capital expenditure fees
Irrecoverable VAT on disallowed expenditure
Employment payments
Car leasing and rental costs

Question 7

Other adjustments to profits

Answer 7

Trader taxed on the selling price of goods taken for their own use
- if nothing recorded in the accounts, add back the selling price
- if cost amount included in revenue, add back the profit

Question 8

Rules that make disallowed items of expenditure allowable

Answer 8

Gifts if to employees / trade sample / to customers only if there is a conspicuous advert / not food, drink, tobacco, vouchers / under £50 a customer
Small and local donations / of stock
Only subscriptions to professional associations
Parking fines incurred by employees in the course of business
Registering patents

Question 9

Adjustment when goods taken out of business transaction not recorded in the accounts

Answer 9

Add back selling price

Question 10

Adjustment when cost amount included in revenue

Answer 10

Add back the profit

Question 11

Fixed rate expenses

Answer 11

Fixed rate deductions can be claimed in respect of
- expenditure on motor vehicles
- use of home for business purposes
- business premises partly used as trader’s home

Question 12

Fixed rate expenses for motor vehicles

Answer 12

Cars - 45p up to 10,000 miles, 25p afterwards
Motorcycles - 24p
Bicycles - 20p

Question 13

Fixed rate expenses for use of home for business purposes

Answer 13

25 - 50 hours worked = £10 monthly adjustment
51 - 100 hours worked = £18 monthly adjustment
> 101 hours worked = £26 adjustment

Question 14

Fixed rate expenses for use of business premises as home

Answer 14

1 occupant = £350 monthly adjustment
2 occupants = £500 monthly adjustment
3 or more occupants = £650 monthly adjustment

Question 15

How many years before the commencement of trade is expenditure incurred allowable?

Answer 15

7 years
- treated as expense incurred on day 1 of trade