Trading Profits Flashcards
Trading profits: Steps to tax a sole trader
- Adjust profits
For the accounting period - Deduct capital allowances
For the accounting period
= Adjusted trading profits
- Tax adjusted trading profits
For the accounting period - Consider which tax year to tax this accounting period in (basis periods)
Trading profits: How to consider which tax year an accounting period is in
Basis periods
Trading profits: Ongoing business profits are taxed on a:
Current year basis
Current year basis
Profits taxed in a tax year are from:
The 12m accounting period
Ending in that tax year
Trading profits: Allowable expenditure (general rule)
Incurred wholly and exclusively
For trading purposes
Not specifically disallowed by legislation
Most common example of taxable trading income not included in the accounts
Sole trader
Removing goods from business
For personal use
Trading income: Treatment: Sole trader removing goods from the business for personal use: Correctly treated in accounts (cost removed from purchase)
Add back the profit element
Trading income: Treatment: Sole trader removing goods from the business for personal use: Still included in purchases (no adjustment made in the accounts)
Add back selling price
Trading income: Main examples of allowable expenditure not included in the accounts
Capital allowances
Business expenses borne personally by the owner
The two types of non-trading income that may have been included in the accounts but should be removed for tax purposes
- Income taxed elsewhere
E.g. chargeable gains
Rental income
Savings income - Income exempt from tax
E.g. exempt capital gains
Trading income: Disallowable expenditure for sole traders: Not wholly and exclusively for trading purchases if:
- Too remote from the purpose of the trade
- Had both trade and non-trade purpose (duality principle)
Trading profit: What can you do if there is a dual purpose for expenditure?
A reasonable apportionment between business use and private use
Trading income: Disallowable expenditure for sole traders: Remuneration
Most payments to staff are allowable
(Salaries, bonuses, redundancy, cost of providing benefits)
Trading income: If earnings not paid within nine months of the year end
Deductible in the period in which they are paid
Trading income: Employer’s contributions to pension schemes allowability timing
Allowed when paid
(Not on accruals basis)
Trading income: Allowability: Training expenditure
Allowable
If aimed at improving the skills needed in the business
Trading income: Appropriation definition
Withdrawal of funds from a business’s profits
Trading income: Allowability: Appropriations
Dissalowable
(as expenses)
Appropriation examples
- Business owner’s salary
- Sole trader/partner drawings
- Unreasonable payments made to family member employees
(Excess is therefore disallowed)
Trading income: Allowability: Impaired debts: Depends on
Whether Specific or General provision
Trading income: Allowability: Impaired debts: Specific provisions movements
Allowable
Trading income: Allowability: Impaired debts: General provisions movements
Disallowable
Trading income: Allowability: write off of trade bad debts
Allowable
Trading income: Allowability: Write off of non trade bad debts
Disallowable
Trading income: Allowability: Capital expenditure
Not allowed
(In computing the taxable trading profit)
May be allowed for CGT
Trading income: Allowability: (Disallowable) capital gains examples
Depreciation
Loss/profit on sale of fixed assets
Cost of capital assets included within repairs and maintenance
Improvements/enhancements
Expenditure required to first bring an asset into a useable state
Capital-related expenditure included within legal and professional fees (with exceptions)
Trading income: Allowability: Repairs and maintenance
Allowable
Trading income: Repairs definition
Returning asset to its original condition
Trading income: Allowability: Repairs using current industry standards even with element of improvement
(E.g. replacing single to double glazing)
Allowable
Trading income: Allowability: Subscriptions
Normally allowable
Because wholly and exclusively for purposes of the trade
Trading income: Allowability: Donations: Small to local charities
Allowable
Trading income: Allowability: Donations: Gifts of stock or assets to local charities or schools
Allowable
Trading income: Allowability: Donations: To national charities
Disallowable
(But GA)
Trading income: Allowability: Donations: To political parties
Disallowable
(Same with subscriptions)
Trading income: Allowability: Entertaining: Client
Disallowable
Trading income: Allowability: Entertaining: Staff
Allowable
Trading income: Allowability: Gifts: Trade samples to customers
Allowable
Trading income: Allowability: Gifts
Disallowable
Unless:
1. Less than £50
per recipient
per year
- Not:
Food
Drink
Tobacco
Vouchers for exchangeable goods - Carries conspicuous advertisement for the business
Trading income: Allowability: Gifts: To employees
Normally allowable
No upper limit
(Unlike benefits in kind)
But might result in IT for employee
Trading income: Allowability: Legal and professional charges
Allowable
If incurred for purposes of the trade
E.g. legal fees chafing debts
Charges incurred in defending the title to fixed assets
Trading income: Allowability: Legal and professional fees: Relating to capital expenditure
E.g. fees associated with acquiring fixed assets
Generally Disallowable
Trading income: Allowability: Legal and professional: Capital expenditure: Exceptions
- Fees and other costs of
Obtaining long term debt finance - Cost of registering patents
- Renewing short (>50y) lease
Expense allowable
Legal expenses incurred in initial granting of lease disallowable
Trading income: Allowability: Cost of hiring, leasing or renting plant and equipment
Allowable
Trading income: Allowability: Cost of hiring, leasing or renting plant and equipment: Exception
Car lease payments
Where CO2 emissions over 50g/km
Flat rate 15% disallowance
(If leased car is used by sole trader partly for private use then there will also be a disallowance for the private use)
Trading income: Allowability: Cost of hiring, leasing or renting plant and equipment: Leased car with private use system
Work out Disallowable expense first:
85% of business proportion of cost
The remainder is the disallowance
Trading income: Allowability: Fines
Generally Disallowable
Trading income: Allowability: Fines: Exception
Parking fines
Incurred by employee (Not owner)
Whilst on work business
Trading income: Allowability: interest on borrowings for the purpose of the trade
E.g. business account overdraft
Allowable
Trading income: Allowability: Interest on late paid tax
Disallowable
Trading income: Allowability: irrecoverable VAT
Allowable
If related to allowable expenditure
How have the tests used to determine whether a transaction is trading (IT) or capital (CGT) been developed?
Case law
How is trading income determined?
Badges of trade
Badges of trade
Subject matter
(personal, investment, resale)
Length of ownership
(less = trading)
Frequency + similarity by same person
Supplementary work and marketing
Circumstances responsible for realisation
(forced to raise cash = not trading)
Motive
(profit = trading)
Method of finance used to acquire the asset
(short term loan = trading esp if only repaid after sale of asset)
Method of acquisition and source of finance
(Inherited asset less trading. Short term finance to buy/improve = trading)
Similarity to taxpayer’s editing trade
Trading allowance amount
£1000
Trading allowance applies to
Sole traders
(Not partnerships)
Trading allowance effect: Under the limit
Aren’t taxable
And don’t need to be declared for tax purposes
Trading allowance effect: Over the limit
Taxpayer can elect to deduct the allowance from the receipts rather than any actual expenses incurred
Applies to all individual’s trades
Relates to a specific tax year
(In exam assume not elected)
