Trading Income

Question 1

Badges of trade

Answer 1

Intention to make a profit
Number of similar transactions
Nature of the asset (personal, capital, resale)
Connection with existing trade (eg mechanic selling a car)
Changes to the asset
Reasons for sale
Source of finance 
Period of ownership 
Method of acquisition

Question 2

Trading allowance

Answer 2

An allowance of £1,000 is available to individuals who carry on a trade. If trading receipts for an individual (not partner_ are less than £1,000 those receipts are not taxable.

If the receipts are above £1,000 the individual has a choice between calculating their taxable trading income in the usual way using the accruals basis, or alternatively, by election, deducting deemed expenses of £1,000 from the receipts with no further reduction for the actual expenses. The election applies to all of the individuals trades and relates to a specific tax year.

Question 3

Capital expenditure

Answer 3

Disallowable. Distinguish between genuine repairs and improvements.

Question 4

Depreciation

Answer 4

disallowed

Question 5

Appropriation of goods

Answer 5

1. sole trader drawings
2. excessive remuneration for family / friends
3. partners “salaries”

Question 6

Goods for own use

Answer 6

Effectively an appropriation of profit

Question 7

General provision

Answer 7

For example of bad debts or stock, the movement in the general provision is disallowed.

Specific bad debts are allowable.

Question 8

Non trade bad debts

Answer 8

Disallowable

Question 9

Entertainmnet

Answer 9

Non staff entertaining - disallowed

Staff entertaining - allowable

Question 10

Gifts

Answer 10

Allowable

• gifts to employees
• gifts of trade samples (one per customer per year)
• gifts to customers if they incorporate a conspicuous advertisement, are not food, drink tobacco or vouchers exchangeable for goods and the total cost per customer is no more than £50

Question 11

Donations

Answer 11

Allow

• small donations to LOCAL charities if the gift enhances the public image of the trade
• subscriptions to trade and professional associations

Disallow:

• Donations to national charities
• Political donations
• Charitable donations under Gift Aid

Question 12

Fines and penalties

Answer 12

Disallow fines and penalties except parking fines incurred by an employee on a business activity

Question 13

Allowable expenditure

Answer 13

Wholly and exclusively incurred for the purposes of trade, not specifically disallowed by legislation

Question 14

Interest on late paid tax

Answer 14

Disallowable

Question 15

Interest on sums borrowed by the business

Answer 15

allowable

Question 16

Legal and professional fees

Answer 16

Legal and prof fees relating to capital expenditure is disallowable (eg conveyancing architects, surveyors fees)

However the following expenses relating to capital assets are specifically allowable:

• Legal costs relating to the renewal of a short lease (50 years or less)
• Costs of registration of a parent or copyright for trade use
• incidental costs of raising long term finance

Question 17

Irrecoverable VAT

Answer 17

Allowed if the expenditure to which it relates is allowable

Question 18

Employment payments

Answer 18

Earnings paid to employees are generally allowable (must be paid within 9 months of the accounting period)

• include tax and NIC (employer and employee)
• Redundancy payments are generally allowable (on cessation of trade restricted to 3 times the amount of statutory redundancy pay)

Question 19

Pension scheme

Answer 19

Employers’ contributions to a registered pension scheme are allowable in the accCounting period of payment

Question 20

Car leasing and rental costs

Answer 20

15% disallowance if emissions >110g/km for leases out on / after 6 April 2018. (prior to that it was more than 130g/km)

Question 21

Private use of leased item

Answer 21

A further proportion of the lease cost must be disallowed where there is private use by the sole trader

Question 22

Fixed rate expenses

Answer 22

All unincorporated businesses can elect to deduct business expenses at a fixed rate instead of following normal rules

Question 23

Fixed rate expenses: Motor vehicles

Answer 23

The fixed rate deduction is made using the approved mileage allowances (see tables) rather than actual expenditure

Question 24

Fixed rate expenses: use of home for business purposes

Answer 24

Available where the trader or his employees use part of the trader’s home for business purposes (25 hours+ per month)

25-50 hours monthly adjustment £10
51 - 100 hours monthly adjustment £18
101 or more per month £26

Question 25

Use of business as a home

Answer 25

Reduce allowable costs depending on no. occupants