Trading Income

Question 1

What is trading income

Answer 1

Income earned by an individual during a tax year through trading/ business activity. It is a non saving income

Question 2

What is the NIC (National insurance contribution) applicable on trading income?

Answer 2

1- Class 2 NIC
2- Class 4 NIC

Question 3

What is the class 2 NIC?

Answer 3

-Fixed amount of 3.45 pounds per week
-It is applied according to the number of weeks of a fiscal year in which the trade took place.
-52 weeks in a year
-Class 2 NIC is waived off if trading income in a tax year is less than 12,570 (small profit threshold)

Question 4

What is the class 4 NIC?

Answer 4

It is payable on trading income at the following rates:
1-12,570 (0%)
12,571- 50,270 (9%)
50,271+ (2%)

Question 5

What are the badges of trade?

Answer 5

Factors that indicate whether a person is doing trade of an asset or not.
If transaction is regarded as a trade then its income will be included in trading income, and income tax and NIC will be payable on it.
If the transaction is regarded as a capital transaction then only CGT will be paid on it.

Question 6

Badges of trade are…

Answer 6

1- Frequency of transaction (too much means trade, one off means capital)
2- Ownership period (short, trade. long, capital)
3- Complimentary work done (yes, trade. no, capital)
4- Transaction is planned or not? planned, trade. not, capital.
5- Nature of Asset:
gold land shares are investment assets, signals capital.
paper, cloth, mobile, bricks signal trade.

These are considerable factors, not conclusive.

Question 7

what is the purpose of basis period calculation?

Answer 7

Accounting and tax year ends may be different.
they need to be aligned when making tax returns
before finance act 2023, this was complex and used to result in double taxation which was called overlapping rules/profits
-now in finance act 2023, proportionate adjustment is introduced in which months will be simply divided in tax year. eg. if accounting year end is 31 dec, then 3 months will be taxed in one tax year and 9 months will be taxed in the next.

Question 8

if overlapping profits of old rules exist then?

Answer 8

simply relieved in profits of finance act 2023.

Question 9

what is capital allowance

Answer 9

Tax allowable depreciation, as normal depreciation is not allowed expense in tax.

Question 10

capital allowance is available for?

Answer 10

plant & machinery which helps a business to function for its trade

Question 11

capital allowance treatment?

Answer 11

allowed expense in trading PnL.

Question 12

for capital allowance purpose assets are divided in two heads which are?

Answer 12

1- Main pool/general pool (18%)
2- Special rate pool (6%)

Question 13

what does main pool include

Answer 13

all capital allowance elligible assets except those which are specifically classified as special rate pool.

Question 14

what assets does special rate pool include?

Answer 14

1. Heating and lighting systems
2. Cooling systems
3. Thermal insulations
4. Cars having CO2 emmision of more than 50g per km
5. Lifts and escalators
6. Long life assets which have a life of 25 years or more AND 100,000 or more expenditure is done on them in a 12 month period

Question 15

what is the Annual Investment Allowance (AIA)?

Answer 15

An annual allowance of 1m is available against purchase of NEW plant and machinery.
-not available against purchase of cars

Question 16

AIA for related businesses

Answer 16

-Only one AIA for all related businesses (all companies within a group having a common parent company controlling them)
-in case of unincorporated business, if an individual owns multiple businesses, they will be regarded as related businesses if activity is same OR they share same premises.

Question 17

In what order is AIA used?

Answer 17

-first for Special rate pool assets
then main pool assets

Question 18

Rates of allowance for cars

Answer 18

-NEW electric car with 0% CO2 emissions: 100% allowance
-USED electric car with 0% CO2 emissions: Main pool
-Cars having CO2 of less than 50g: main pool
-Cars having CO2 of more than 50g: special rate pool

Question 19

if an asset is disposed it is removed from the pool at what value?

Answer 19

lower of:
-cost
-disposal proceed

Question 20

what is small balance allowance?

Answer 20

if the balance in any pool falls below 1000 pounds then the whole value will be shifted to allowance column.

Question 21

if accounting period is different from tax year then how will rates, AIA and limits be dealt with?

Answer 21

PRO RATA BASIS

Question 23

if an asset is purchased for business before start of trading activity how will it impact capital allowance?

Answer 23

it will be treated as purchased on first day of business. the pretrading period is allowed uptil 7 years prior to start of business.

Question 24

CGT rule for repair expenses?

Answer 24

normally they are considered as revenue expenditure and treated as normal allowed expense
however
if repair exp on a particular asset done over two years exceed 50% of value of asset, then it will not be treated as revenue expenditure.
rather it will be included in capital allowance working and yearly allowance will be claimed on it.