Trading Profits Flashcards
What are the Badges of Trade?
Intention to make a profit
Number of similar transactions
Connection with existing trade
Change to the asset
Reasons for sale
Source of finance
Period of ownership
Method of acquisition
How are taxable trading profits computed?
Net profits per financial accounts (accounting profits)
Add disallowable income/expenditure not shown in accounts
(non-trade income not in accounts)
= Tax adjusted profits before capital allowances
(Capital allowances)
= Tax adjusted profit/loss after capital allowances
How much is the annual trading allowance?
£1000 tax free if trading profits exceed £1k
What defines an allowable expenditure?
Wholly and exclusively for the purposes of the trade
What are some allowable expenditures?
Trade bad debt
Staff entertaining
Gifts to employees
Gifts of trade samples
Gifts to customers if they don’t exceed £50 and serve as conspicuous advertising
Small donations to local charities
Subscriptions to trade and professional associations
Interest on sums borrowed for the business
Legal and professional fees related to trade
Irrecoverable VAT of an allowable item
Employment payments
Pension Scheme
Business use of an asset
What are some disallowable expenditures?
Capital expenditures - add back
Depreciation - add back
Appropriation of profit - add back
Goods ford own use - add back
General provision - add back
Non-trade bad debts - add back
Non-staff entertaining - add back
All gifts over £50 - add back
Donations to national charities - add back
Political donations - add back
Gift aid - add back
Fines and penalties (unless incurred during business) - add back
Interest paid on late paid tax - add back
Legal and professional fees related to capital - add back
Private use - add back
Car lease if >50g/km - add back 15% of lease cost
What is the golden rule on trading profits not shown in accounts?
Owner must be taxed on the profit he would’ve made if the goods had been sold at market value.
How are disallowable expenses treated?
Add back if not already included
Deduct if included
How are allowable expenses treated?
Left alone if already included
Deduct if not included
What assumption should be made regarding the trading allowance?
Assume trading allowance applies if receipts <1000.
If more, assume no election has been made
How are capital expenditures treated?
Disallowable
Maintenance e.g. redecorating - allowable
Repairs returning assets to original condition - allowable
Depreciation - disallowable
What are appropriations of profit and are they allowable?
Withdrawls from a business after tax
Disallowable
How are general provisions treated?
Creation/increase in general provision - disallowable
Decrease - deduct from accounting profit
Creation/increase in a specific provision - allowable
How are bad debts treated?
Trade bad debts - allowable
Non-trade bad debts (loans to employees) - disallowable
How is entertainment treated?
Expenditure on entertaining staff - allowable
All other entertaining expenditure - disallowable
What gifts are allowable?
Gifts of trade samples
Gifts to customers (not food/drink and <£50)
Gift to employees
All other disallowable
How are donations and subscriptions treated?
Small donations to charity - allowable
Donations to national charities - disallowable
Gift aid - disallowable in arriving at TTP, added back to net profits
Gifts of trading stock/used plant+machinery to charities - allowable
Political donations - disallowable
Subscriptions to trade and professional associations - allowable
How are fines and penalties treated?
Generally disallowable
Parking fines incurred by employees on business - allowable
How is interest treated?
Interest paid on money borrowed for business purposes - allowable
Interest on late tax payment - disallowable
How are legal and professional fees handled?
Fees relating to income - allowable
Fees incurred dealing with HMRC - disallowable
Fees relating to capital expenditure - generally disallowable
Renewal of short lease (<50 years) - allowable
Costs of registration of a patent/ copyright for trade use - allowable
Incidental costs of raising long term finance - allowable
How is irrecoverable VAT treated?
Allowable for trading purposes if the item of expenditure to which it relates is allowable
How are employment payments and pensions treated?
Earning paid to employees - allowable
Redundancy- allowable
Training - allowable
Employer contributions to pension - allowable if not accrued
NIC contributions - allowable
How is car leasing and rental costs handled?
Plant and equipment costs - allowable
Car leases - flat rate disallowance of 15% of lease payments
Polluting car lease taken out from 6th April 2021 and CO2 above 50g/km
How are trading profits not shown in accounts handled?
If nothing recorded - add back selling price
If treated as drawings at cost - add back profit
How is non trading income treated?
Must be deducted
How is expenditure not shown in accounts handled?
Allowable and should be deducted
When a family member is overpaid what happens?
Excess pay is added back
What expenses are disallowable for sole traders?
Salary
NIC
Pension contributions
