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PTX > Trading Profits > Flashcards

Trading Profits Flashcards

1
Q

Trading profits: Steps to tax a sole trader

A
  1. Adjust profits
    For the accounting period
  2. Deduct capital allowances
    For the accounting period

= Adjusted trading profits

  1. Tax adjusted trading profits
    For the accounting period
  2. Consider which tax year to tax this accounting period in (basis periods)
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2
Q

Trading profits: How to consider which tax year an accounting period is in

A

Basis periods

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3
Q

Trading profits: Ongoing business profits are taxed on a:

A

Current year basis

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4
Q

Current year basis

A

Profits taxed in a tax year are from:
The 12m accounting period
Ending in that tax year

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5
Q

Trading profits: Allowable expenditure (general rule)

A

Incurred wholly and exclusively
For trading purposes
Not specifically disallowed by legislation

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6
Q

Most common example of taxable trading income not included in the accounts

A

Sole trader
Removing goods from business
For personal use

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7
Q

Trading income: Treatment: Sole trader removing goods from the business for personal use: Correctly treated in accounts (cost removed from purchase)

A

Add back the profit element

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8
Q

Trading income: Treatment: Sole trader removing goods from the business for personal use: Still included in purchases (no adjustment made in the accounts)

A

Add back selling price

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9
Q

Trading income: Main examples of allowable expenditure not included in the accounts

A

Capital allowances

Business expenses borne personally by the owner

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10
Q

The two types of non-trading income that may have been included in the accounts but should be removed for tax purposes

A
  1. Income taxed elsewhere
    E.g. chargeable gains
    Rental income
    Savings income
  2. Income exempt from tax
    E.g. exempt capital gains
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11
Q

Trading income: Disallowable expenditure for sole traders: Not wholly and exclusively for trading purchases if:

A
  1. Too remote from the purpose of the trade
  2. Had both trade and non-trade purpose (duality principle)
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12
Q

Trading profit: What can you do if there is a dual purpose for expenditure?

A

A reasonable apportionment between business use and private use

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13
Q

Trading income: Disallowable expenditure for sole traders: Remuneration

A

Most payments to staff are allowable
(Salaries, bonuses, redundancy, cost of providing benefits)

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14
Q

Trading income: If earnings not paid within nine months of the year end

A

Deductible in the period in which they are paid

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15
Q

Trading income: Employer’s contributions to pension schemes allowability timing

A

Allowed when paid
(Not on accruals basis)

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16
Q

Trading income: Allowability: Training expenditure

A

Allowable

If aimed at improving the skills needed in the business

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17
Q

Trading income: Appropriation definition

A

Withdrawal of funds from a business’s profits

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18
Q

Trading income: Allowability: Appropriations

A

Dissalowable
(as expenses)

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19
Q

Appropriation examples

A
  1. Business owner’s salary
  2. Sole trader/partner drawings
  3. Unreasonable payments made to family member employees
    (Excess is therefore disallowed)
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20
Q

Trading income: Allowability: Impaired debts: Depends on

A

Whether Specific or General provision

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21
Q

Trading income: Allowability: Impaired debts: Specific provisions movements

A

Allowable

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22
Q

Trading income: Allowability: Impaired debts: General provisions movements

A

Disallowable

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23
Q

Trading income: Allowability: write off of trade bad debts

A

Allowable

24
Q

Trading income: Allowability: Write off of non trade bad debts

A

Disallowable

25
Q

Trading income: Allowability: Capital expenditure

A

Not allowed
(In computing the taxable trading profit)
May be allowed for CGT

26
Q

Trading income: Allowability: (Disallowable) capital gains examples

A

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)

27
Q

Trading income: Allowability: Repairs and maintenance

A

Allowable

28
Q

Trading income: Repairs definition

A

Returning asset to its original condition

29
Q

Trading income: Allowability: Repairs using current industry standards even with element of improvement
(E.g. replacing single to double glazing)

A

Allowable

30
Q

Trading income: Allowability: Subscriptions

A

Normally allowable
Because wholly and exclusively for purposes of the trade

31
Q

Trading income: Allowability: Donations: Small to local charities

A

Allowable

32
Q

Trading income: Allowability: Donations: Gifts of stock or assets to local charities or schools

A

Allowable

33
Q

Trading income: Allowability: Donations: To national charities

A

Disallowable

(But GA)

34
Q

Trading income: Allowability: Donations: To political parties

A

Disallowable

(Same with subscriptions)

35
Q

Trading income: Allowability: Entertaining: Client

A

Disallowable

36
Q

Trading income: Allowability: Entertaining: Staff

A

Allowable

37
Q

Trading income: Allowability: Gifts: Trade samples to customers

A

Allowable

38
Q

Trading income: Allowability: Gifts

A

Disallowable

Unless:
1. Less than £50
per recipient
per year

  1. Not:
    Food
    Drink
    Tobacco
    Vouchers for exchangeable goods
  2. Carries conspicuous advertisement for the business
39
Q

Trading income: Allowability: Gifts: To employees

A

Normally allowable

No upper limit
(Unlike benefits in kind)

But might result in IT for employee

40
Q

Trading income: Allowability: Legal and professional charges

A

Allowable
If incurred for purposes of the trade
E.g. legal fees chafing debts
Charges incurred in defending the title to fixed assets

41
Q

Trading income: Allowability: Legal and professional fees: Relating to capital expenditure
E.g. fees associated with acquiring fixed assets

A

Generally Disallowable

42
Q

Trading income: Allowability: Legal and professional: Capital expenditure: Exceptions

A
  1. Fees and other costs of
    Obtaining long term debt finance
  2. Cost of registering patents
  3. Renewing short (>50y) lease
    Expense allowable
    Legal expenses incurred in initial granting of lease disallowable
43
Q

Trading income: Allowability: Cost of hiring, leasing or renting plant and equipment

A

Allowable

44
Q

Trading income: Allowability: Cost of hiring, leasing or renting plant and equipment: Exception

A

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)

45
Q

Trading income: Allowability: Cost of hiring, leasing or renting plant and equipment: Leased car with private use system

A

Work out Disallowable expense first:
85% of business proportion of cost

The remainder is the disallowance

46
Q

Trading income: Allowability: Fines

A

Generally Disallowable

47
Q

Trading income: Allowability: Fines: Exception

A

Parking fines
Incurred by employee (Not owner)
Whilst on work business

48
Q

Trading income: Allowability: interest on borrowings for the purpose of the trade
E.g. business account overdraft

A

Allowable

49
Q

Trading income: Allowability: Interest on late paid tax

A

Disallowable

50
Q

Trading income: Allowability: irrecoverable VAT

A

Allowable
If related to allowable expenditure

51
Q

How have the tests used to determine whether a transaction is trading (IT) or capital (CGT) been developed?

A

Case law

52
Q

How is trading income determined?

A

Badges of trade

53
Q

Badges of trade

A

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

54
Q

Trading allowance amount

A

£1000

55
Q

Trading allowance applies to

A

Sole traders
(Not partnerships)

56
Q

Trading allowance effect: Under the limit

A

Aren’t taxable

And don’t need to be declared for tax purposes

57
Q

Trading allowance effect: Over the limit

A

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)

PTX (14 decks)

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