Trading Income INCOMPLETE

Question 1

Taxes and NICs on trading income

Answer 1

-Income tax (Non sacing)
-Class 2 NIC
-Class 4 NIC

Question 2

What is the class 2 NIC?

Answer 2

-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)

given in paper

Question 3

What is the class 4 NIC?

Answer 3

It is payable on trading income (bands will be given in exam)

1-12,570 (0%)
12,571- 50,270 (9%)
50,271+ (2%)

Question 4

What are the badges of trade?

Answer 4

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 CGT will be paid on it.

Question 5

Badges of trade are…

Answer 5

Funny Otters Can’t Predict Nature!

F - Frequency of transactions
O - Ownership period
C - Complimentary work done
P - Planned or not
N - Nature of asset

These are considerable factors, not conclusive.

Question 6

what is the basis period calculation

Answer 6

ALIGN

A - Accounting year vs. Tax year
Basis period rules align them for tax purposes when they don’t match.

L - Legacy overlapping profits
Old rules (before Finance Act 2023) led to overlapping profits, where the same income was taxed twice.

I - Identify old profits
Overlapping profits from the old rules can still exist.

G - Goodbye old rules
Finance Act 2023 simplified things:

Tax is based on proportional months across the tax year.
Overlapping rules are gone, but any existing overlapping profits are relieved in the transition year.

N - New adjustment
Deduct overlapping profits from trading income in the transition year to calculate the taxable trading income.

Question 7

Partnership business

Answer 7

each partner is given their share of profit and they have to pay their own income tax and NIC.

their share of profit includes salary, interest on capital and share in residual profit

Question 8

what is capital allowance

Answer 8

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

(due to subjectivity etc)

Question 9

capital allowance is available for?

Answer 9

plant & machinery which helps a business to function for its trade.
it is not available for building structures (on them a separate allowance known as SBA is available)

Question 10

capital allowance treatment?

Answer 10

allowed expense in trading PnL.

Question 11

for capital allowance purpose assets are divided in two heads which are.. and why? which is better?

Answer 11

2 heads:

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

why: cuz diff type of assets have diff rates of allowance

main pool is better due to higher allowed exp, lower tax will be charged. faster tax relief.

Question 12

what does main pool include

Answer 12

all assets not shown in any other pool are classified in main pool.

allowance is 18% per year in main pool

Question 13

what assets does special rate pool include?

Answer 13

C - Cars with CO₂ emissions > 50g/km

L - Lifts and escalators

I - Immense Long-life assets (25+ years AND £100k+ expenditure in 12 months) (flooring, plumbing, solar, cable network)

T - Thermal insulations

C - Cooling systems

H - Heating and lighting systems

Question 14

what is the Annual Investment Allowance (AIA)? what does it do and for what assets is it available?

Answer 14

-Tax relief available to businesses that allows them to deduct full cost of assets from trading income.

-Annual limit is £1 million.

-It is available on purchase of NEW plant and machinery.
Not available for cars

Question 15

Who is annual investment allowance available for? And when would it be apportioned?

Answer 15

All businesses eligible for AIA

Limit is proportioned if:
-Business not in operation for a full year.
-Accounting period < 12 months.
-Related businesses (e.g., parent company & subsidiaries, same activity, or shared premises).

Question 16

In what order is AIA used?

Answer 16

-first for Special rate pool assets because rate of allowance is lesser

then main pool assets

Question 17

capital allowance for cars?

Answer 17

There are 4 types of cares:

1) Electric cars with 0% CO2 emmissions:
New: 100% allowance (separate from AIA, so this is available even if AIA is used)

2) Electric 0 emmisisons car but it was purchased Used:
Main pool

-Cars having CO2 of less than 50g: main pool

-Cars having CO2 of more than 50g: special rate pool (because they are worse for environment)

Question 18

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

Answer 18

lower of:
-cost
-disposal proceed

Question 19

if balance in any pool falls below 1000

Answer 19

the entire amount can be written off as an allowed expense in that year, instead of continuing to claim the 18% writing down allowance over several years.

this will simplify accounting for small business, reduce admin burden

this is called the small balance allowance

Question 20

if an asset is purchased for business before start of trading activity how will it impact capital allowance?
And what if it’s used?

Answer 20

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

however if it is used, it’s value will be MV for the purpose of capital allowance

Question 21

can repair expenses go into the capital allowance pools?

Answer 21

normally they are considered as revenue expenditure and treated as normal allowed expense

however

if repair expense done on asset = >50% of value of asset, over two years.
then it will not be treated as revenue expenditure.

it will be included in capital allowance working and yearly allowance will be claimed on it.

Question 22

what if the asset is used partially in business and partially private use? will capital allowance be available?

Answer 22

separate pool (column) will be made

-asset will be depreciated by normal amount however, amount shifted to allowane column will be of business portion only

-Use AIA last against private use asset

-concept of pvt use is only for individuals, as companies cannot do private use

Question 23

what if a company asset is being for private use by director? eg. a car?

Answer 23

capital allowance will be claimed normally

but

it will be a non cash employment benefit

-director will pay Income Tax on it
-Class 1A NIC will have to be paid by company

Question 24

What is the Short life asset election?

Answer 24

-SLA election applies to new assets only.
-The asset is de-pooled (kept separate from the main or special rate pool).
-Normal allowances (e.g., 18% or 6%) apply, but the asset is tracked separately.

On disposal, balancing adjustment will be available separately.

-Balancing Allowance: If a balance remains after disposal, it is claimed as an immediate allowance.
-Balancing Charge: If the pool becomes negative, the excess is treated as a charge and added to taxable income.

Question 25

SLA column looks like

Answer 25

Cost of asset
Less: Capital allowances
=
Tax written down value
Less: Asset Disposal (Lower of Cost/DP)

If any balance remains, then it is added in capital allowance

If balance is negative, deduct from capital allowance. (add to taxable income)

Question 26

when is SLA election useful

Answer 26

Useful when asset is expected to be sold or scrapped within a short period of time (8 years)I

Without SLA:
Asset goes into the main pool, and the company claims 18% Writing Down Allowance (WDA) each year.
Relief is spread out over many years, even after the asset is no longer useful.

With SLA:

The asset is de-pooled and tracked separately.
When the computers are scrapped in year 4, any unrelieved balance is claimed as a balancing allowance immediately, giving faster tax relief.

Question 27

AIA is used in which order

Answer 27

Special pool
General pool
SLA
Private use assets

Question 28

If a business purchases a green asset (eco friendly)

Answer 28

100% first year allowance (FYA)

could be:
-energy-efficient equipment
-low-emission vehicles, -renewable energy installations (e.g., solar panels)

Question 29

who is elligible for small business scheme?

Answer 29

Sole traders /partnerships with revenue ≤ £150,000 (can stay until revenue hits £300,000).

Question 30

how does small business scheme work

Answer 30

Tax is based on cash sales and cash expenses.

100% deduction for assets (except cars).

Question 31

Loss Relief: for small business scheme

Answer 31

Only carry forward loss relief allowed.

Question 32

benefit of small business scheme

Answer 32

Simplifies returns—prepare directly from cash book.

Question 33

What type of buildings qualify for the Structures and Buildings Allowance (SBA)?

Answer 33

Commercial buildings purchased for use in trade, such as offices, warehouses, factories, and retail premises.

Question 34

When is the SBA available for a building?

Answer 34

Only for buildings constructed after 29 October 2018 (or 1 April 2020 for ATX exams).

Question 35

What is the annual rate of the SBA?

Answer 35

3% per year over a period of 33 years and 4 months

Question 36

Can the value of land be included in the SBA claim?

Answer 36

No, the SBA only applies to the building structure, not the land

Question 37

Can plant and machinery qualify for SBA?

Answer 37

No, if the expenditure qualifies for plant and machinery allowances, it cannot also qualify for the SBA.

Question 38

What happens when a building qualifying for SBA is sold?

Answer 38

The SBA claimed up to the date of sale is added back when calculating Capital Gains Tax (CGT).

CGT= DP-cost+SBA claim

Question 39

Does SBA apply to improvements or renovations to a building?

Answer 39

Yes, subsequent improvements or renovations can also qualify for SBA.

Question 40

What happens if a capital allowance asset is sold?

Answer 40

CGT applies to the gain only (no loss relief since allowances were given on cost).

Asset is removed from the capital allowance pool at the lower of cost or disposal proceeds (DP)

Question 41

What happens to capital allowance pools when a business ceases?

Answer 41

Normal allowances are not claimed.
Entire pool value shifts to the allowance column after disposal adjustments.

Question 42

How are assets treated when transferred to connected parties?

Answer 42

Assets are transferred at tax written-down value (no disposal adjustment).

Connected parties include:
Companies in a 51% group, parents, grandparents, children, grandchildren, siblings, spouse, and business partners.

Question 43

What happens if a business has a trading loss and cannot use it?

Answer 43

The business can choose not to claim capital allowances.

Pool values remain intact and can be used for future profits via written-down allowances.

Question 44

What is the disallowed expense for rented cars with CO2 emissions above 50g/km?

Answer 44

15% of the expense will not be allowed.

Question 45

What is the super allowance, and when is it available?

Answer 45

130% allowance for Main Pool assets, 50% for SRP assets (1 April 2021 – 31 March 2023).
Not available for cars.
If claimed, no written-down allowance is available in that year.

Question 46

Why is AIA preferred over super allowance for SRP assets?

Answer 46

AIA relieves 100% of the value, while super deduction applies to only 50% of the value.

Question 47

What happens when an asset with a super allowance is disposed ?

Answer 47

Balancing charge = Lower of cost or DP.
For SRP assets, balancing charge applies to 50% of the value.
Deducted directly from the allowance column, not the pool.

Question 48

A business is making a trading loss and has no taxable profit to offset the loss against (e.g., in the current year or via carry-back claims).

Answer 48

Don’t claim capital allowances if you can’t utilize the trading loss, and save the pool for future years with profits!