Trading Profits

Question 1

Define allowable expenditure:

Answer 1

Expenditure incurred exclusively for trading purposes, not specifically disallowed by legislation

Question 2

What must be added to the accounts for tax purposes?

Answer 2

1. Disallowable expenditure
2. Taxable trading income not credited in the accounts

Question 3

What must be removed from the accounts for tax purposes?

Answer 3

1. Allowable expenditure not charged in the accounts
2. Income allowed in the accounts that is not taxable trading income
3. Capital allowances

Question 4

Regarding sole traders removing goods for personal use, what do you do if it was treated correctly in the accounts?

Answer 4

add back the profit element

Question 5

Regarding sole traders removing goods for personal use, what do you do if no adjustment was made to the accounts (still included in purchases)?

Answer 5

add back the selling price

Question 6

What are the two main examples of allowable expenditure that won’t have been included in the accounts?

Answer 6

1. Capital allowances
2. Business expenses borne personally by the owner

Question 7

What are the two types of non-trading income that should be removed for tax purposes?

Answer 7

1. Income taxed elsewhere eg chargeable gains, rental income
2. Income that is exempt from tax eg exempt capital gains

Question 8

When may expenditure not be classed as exclusively for trading purposes?

Answer 8

1. It is too remote from the purposes of trade
2. It has both trade and non-trade purpose (the duality principle)

Question 9

What may HMRC do regarding the duality principle?

Answer 9

Accept a reasonable apportionment between allowable business use and disallowable private use

Question 10

What happens if earnings are not paid within 9 months?

Answer 10

They are deductible in the period are paid (treated on cash basis rather than accrual)

Question 11

When are contributions to pension schemes allowed?

Answer 11

In the accounting period they are paid (cash basis)

Question 12

What are the criteria for classifying training for employees and sole traders?

Answer 12

1. It is allowable when improving skills of employees needed in the business
2. Only allowable when maintaining the skills of sole trader

Question 13

What is an appropriation and how is it treated?

Answer 13

1. Withdrawal of funds from business profits
2. Disallowable

Question 14

How are unreasonable payments to family members classified?

Answer 14

Excess is disallowable, classed as appropriations of profit

Question 15

How are impaired debts treated?

Answer 15

1. Movements in specific provisions are allowable
2. Movements in general provisions are disallowable

Question 16

How are bad debts treated when considering trade or non-trade related?

Answer 16

1. Trade related bad debts are allowable
2. Non-trade related bad debts are disallowable

Question 17

Expenditure relating to what is not allowed in the taxable trading profit?

Answer 17

capital assets

Question 18

How are subscriptions generally classified?

Answer 18

allowable

Question 19

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

Answer 19

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

Question 20

How is client entertaining treated as opposed to staff entertaining?

Answer 20

Staff entertaining is allowable, client entertaining is disallowable

Question 21

Gifts to customers are generally disallowable, but when are they treated as allowable?

Answer 21

1. When costs per recipient are < £50 per year
2. It is not food, drink tobacco or vouchers exchangeable for goods
3. Carries a conspicuous advertisement for the business

Question 22

To whom are gifts generally allowable?

Answer 22

employees

Question 23

When are legal and professional fees allowable, and give an example?

Answer 23

1. Incurred for the purpose of trade
2. Legal fees incurred to chase debts

Question 24

How are legal fees relating to capital expenditure classified?

Answer 24

disallowable

Question 25

What are the three exceptions to classifying capital expenditure meaning they are treated as allowable?

Answer 25

1. Fees or costs of obtaining long term debt finance
2. Cost of registering patents
3. The expense of renewing a short lease (50 years or less). This does not include acquiring the lease, or renewing a long lease.

Question 26

How are costs relating to hiring, leasing, or renting plant and equipment classified? (cars)

Answer 26

allowable

Question 27

What conditions may change the above, giving specific numerical details?

Answer 27

There is a flat rate of 15% disallowance of car lease payments where CO2 emissions exceed 50g/km.

Question 28

All fines are treated how? And what is the exception?

Answer 28

• Disallowable
• Parking fines incurred by an employee whilst on work are allowable (however doesn’t apply to a sole trader)

Question 29

What trading allowance applies to sole traders?

Answer 29

£1000

Question 30

When is the trading allowance beneficial?

Answer 30

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

Question 31

How is interest on late paid tax treated?

Answer 31

Disallowable