Trading Profits Flashcards
What are the badges of trade?
- The subject matter of the transaction
- The method of acquisition and source of finance
- The length of the period of ownership
- The frequency or number of similar transactions by the same person
- Supplementary work and marketing
- The circumstances responsible for the realisation
- The motive
Define badges of trade
Tests used to determine whether a transaction is classified as trading or capital
How are tax adjusted trading profits calculated?
+net profit
+disallowable expenditure
+taxable trading income not already credited
(allowable expenditure not already charged)
(not taxable income included)
(capital allowances)
How should drawings be treated if not included in the accounts?
- If correctly treated, add back the profit element
2. If no adjustment has been made, add back selling price
What are the main examples of allowable expenditure not included in the accounts?
- Capital allowances
2. Business expenses borne personally by the owner
What types of non-trading income should be removed from the accounts?
- Income taxed elsewhere
2. Income that is exempt from tax
When is expenditure allowed?
When it is incurred wholly and exclusively for trading purposes
Define appropriation
A withdrawal of funds from a business’s profits that are disallowable as expenses
What are examples of appropriations?
- Business owner’s salary
2. Drawings made by a sole trader or partner
What are examples of capital expenditure?
- Depreciation
- Loss on sale of fixed assets
- Cost of capital assets included within repairs and maintenance
- Improvements and enhancements
- Capital-related expenditure
Is capital expenditure allowed in computing the taxable trading profit?
No
When does the flat rate disallowance of 15% on car lease payments apply?
- For leases taken out before 6 April 2018 where CO2 emissions exceed 130g/km
- For leases taken out on or after 6 April 2018 where CO2 emissions exceed 110g/km
Who does the trading allowance apply to?
Sole traders
Define trading allowance
If a sole trader’s trading receipts are less than £1000 then those receipts are not taxable and do not need to be declared
If a sole trader’s trading receipts are more than £1000 then the taxpayer can elect to deduct the allowance from the receipts rather than any actual expenses incurred
Which expenditure is disallowable?
- Capital expenditure
- Appropriations
- Car leasing and rental costs of 15% (subject to emissions)
- Movements in general provisions
- Non-trade bad debts
- Unreasonable payments made to family members
- Expenditure relating to client entertaining
- Donations to national charities
- Subscriptions and donations to political parties
10 Expenditure of a capital nature - Fines except parking fines by an employee
- Interest on late tax paid
