Trading income, badges of trade, general adjustment principles

Question 1

Trading income and definition of trade

Answer 1

Trading income - income from a trade and income from a profession (accountancy,law), vocation (ballet acting etc)
trade - any venture in the nature of trade

Question 2

Badges of trade

Answer 2

FROGSPAWN

-Financing arrangements
-Repetition/frequency - If a series of transactions are treated as trading then the first one will be tainted and no longer treated as capital
-Organisation - existence of sales organisation
-Gap - (time between ownership and sale)
-Similar trading activities (whether there is a connection with an existing trade)
-Profit making motive - must demonstrate motive of profit not necessarily existence
-Alterations modifications to make asset more sellable
-Way asset was acquired and reason for sale
-Nature of asset

Question 3

Land

Answer 3

Is the taxpayer dealing (trade) or investing in land

is the taxpayer a resident in the property or a developer

Question 4

Shares

Answer 4

Private individuals who are not share dealers are usually subject to CGT on share disposals regardless of how often they buy and sell shares

in extreme cases they may be described as trading

Question 5

Anti avoidance

Answer 5

exists for land - where an individual is not trading but the main motive for acquiring and developing land was for the profit from disposal then they will be treated as trading income.

Question 6

taxable and non taxable receipts

Answer 6

if receipts are wholly unexpected and unsolicited they will be taxable

if expected they will be taxable

Question 7

Adjustment to profit

disallowable expenditure

repairs

Answer 7

Disallowed expenditure:

capex
Depreciation
Losses on sale of fixed assets
Legal fees on acq/disp of assets (except renewal of a lease <50 years)

repairs - allowable if restoring to original condition, disallowable if replacing or improving asset

first time repairs - if buy asset and repair to the extent that it can actually be used for the first time then capital. if repairs to already usable assets then revenue.

Provisions - allowed if in accordance with FRS 102 :
-Obligation to make payment at AP end date as a result of a past event
-Probable that a payment will be required to settle the obligation
-A reliable estimate can be made of the amount of the obligation

Question 8

Appropriations to trading stock

Answer 8

If a company has an asset used in business but not as trading stock, then uses it as trading stock :

cost of stock = MV at time brought into business as trading stock