Trading Profits Flashcards
Define allowable expenditure:
Expenditure incurred exclusively for trading purposes, not specifically disallowed by legislation
What must be added to the accounts for tax purposes?
- Disallowable expenditure
- Taxable trading income not credited in the accounts
What must be removed from the accounts for tax purposes?
- Allowable expenditure not charged in the accounts
- Income allowed in the accounts that is not taxable trading income
- Capital allowances
Regarding sole traders removing goods for personal use, what do you do if it was treated correctly in the accounts?
add back the profit element
Regarding sole traders removing goods for personal use, what do you do if no adjustment was made to the accounts (still included in purchases)?
add back the selling price
What are the two main examples of allowable expenditure that won’t have been included in the accounts?
- Capital allowances
- Business expenses borne personally by the owner
What are the two types of non-trading income that should be removed for tax purposes?
- Income taxed elsewhere eg chargeable gains, rental income
- Income that is exempt from tax eg exempt capital gains
When may expenditure not be classed as exclusively for trading purposes?
- It is too remote from the purposes of trade
- It has both trade and non-trade purpose (the duality principle)
What may HMRC do regarding the duality principle?
Accept a reasonable apportionment between allowable business use and disallowable private use
What happens if earnings are not paid within 9 months?
They are deductible in the period are paid (treated on cash basis rather than accrual)
When are contributions to pension schemes allowed?
In the accounting period they are paid (cash basis)
What are the criteria for classifying training for employees and sole traders?
- It is allowable when improving skills of employees needed in the business
- Only allowable when maintaining the skills of sole trader
What is an appropriation and how is it treated?
- Withdrawal of funds from business profits
- Disallowable
How are unreasonable payments to family members classified?
Excess is disallowable, classed as appropriations of profit
How are impaired debts treated?
- Movements in specific provisions are allowable
- Movements in general provisions are disallowable
How are bad debts treated when considering trade or non-trade related?
- Trade related bad debts are allowable
- Non-trade related bad debts are disallowable
Expenditure relating to what is not allowed in the taxable trading profit?
capital assets
How are subscriptions generally classified?
allowable
How are donations treated?
This is dependant on the recipient of the donation
Allowable - Small donations to local charity, Gift of stock to local charity or schools
Disallowable - Donations to national charities (some relief via gift aid), subscriptions or donations to political parties
This is dependant on the recipient of the donation
1. Allowable - Small donations to local charity, Gift of stock to local charity or schools
2. Disallowable - Donations to national charities (some relief via gift aid), subscriptions or donations to political parties
How is client entertaining treated as opposed to staff entertaining?
Staff entertaining is allowable, client entertaining is disallowable
Gifts to customers are generally disallowable, but when are they treated as allowable?
- When costs per recipient are < £50 per year
- It is not food, drink tobacco or vouchers exchangeable for goods
- Carries a conspicuous advertisement for the business
To whom are gifts generally allowable?
employees
When are legal and professional fees allowable, and give an example?
- Incurred for the purpose of trade
- Legal fees incurred to chase debts
How are legal fees relating to capital expenditure classified?
disallowable
What are the three exceptions to classifying capital expenditure meaning they are treated as allowable?
- Fees or costs of obtaining long term debt finance
- Cost of registering patents
- The expense of renewing a short lease (50 years or less). This does not include acquiring the lease, or renewing a long lease.
How are costs relating to hiring, leasing, or renting plant and equipment classified? (cars)
allowable
What conditions may change the above, giving specific numerical details?
There is a flat rate of 15% disallowance of car lease payments where CO2 emissions exceed 50g/km.
All fines are treated how? And what is the exception?
- Disallowable
- Parking fines incurred by an employee whilst on work are allowable (however doesn’t apply to a sole trader)
What trading allowance applies to sole traders?
£1000
When is the trading allowance beneficial?
When expenses are less than £1,000 as if they are more than that, you would use the expenses value instead of the optional £1,000
How is interest on late paid tax treated?
Disallowable
