Trading Profits Flashcards
What is a badge of trade?
The key factors of deciding if an activity constitutes a trade
What are the badges of trade?
Intention to make a profit
Number of similar transactions
Nature of the asset
Connection with existing trade
Changes to the asset
Reason for sale
Source of finance
Period of ownership
Method of acquisition
What are the 2 methods of preparing accounts?
Cash basis (assume unless told otherwise)
Accruals basis
How are the methods of preparing accounts calculated?
Cash: Trading profit = trading income rec’d - allowable expenses paid
Accruals: Trading profit = trading income accrued - allowable expenses accrued
What are the steps of a tax adjustment?
Net profits per accounts
Add disallowable expenses/income not shown on accounts
Less non-trade income/expenditure not in accounts
Less capital allowances
What is the trading allowance?
If trading receipts < £1000 not taxable
If trading receipts > £1000, can deduct £1000 from receipts
What is allowable expenditure?
Expenditure incurred wholly and exclusively for the purpose of trade
What happens to dual purpose expenses?
They are disallowed
What items are disallowable?
Capital expenditure not relating to revenue
Depreciation and p/l on disposal
Appropriation of profit: sole trader drawings, excessive remuneration, partner salaries
General provisions
Non-trade bad debts
Non-staff entertainment
Gifts to customers if they include: no advertisement, food/drink/tobacco, >£50
Donations to national charities, politics, gift aid
Fines and penalties except parking fines by employee
Interest on late paid tax
Legal fees related to capital expenditure
Car leasing at 15% disallowance if emissions >50g/km
What legal costs are allowable?
Renewal of short lease
Cost of patent registration
Cost of raising long-term finance
If there is also private usage of assets, what proportion is allowable?
85% of business proportion
What is the adjustment for profits not shown in accounts?
Goods taken by owner for personal use
If nothing recorded, add back selling price
If treated as drawing, add back profit
What happens if non-trading income is in the accounts?
Deduct as taxed elsewhere
What is done for expenditure not shown in the accounts?
Business expenses paid personally is allowable and should be deducted
Can be deducted if incurred within 7 years of start date
What items are different in the cash basis?
Capital expenditure on plant and machinery
Purchase of cars - capital allowance claimed as normal
Goods taken for own use - add back cost price
Bad debts - not allowable
Car lease payment - not restrictions
Interest payments - allowed up to £500 pm
Ceasing asset use - market value taxable
Ceasing to trade - value of stock and wip taxable
