UK Recap Income from self- employment

Question 1

What are the badges of trade

Answer 1

1. Subject matter
   – anything can be trading stock but some items are more likely to be so than others.
   For example, the purchase and resale of a substantial number of toilet rolls is considered trading.
2. Length of period of ownership
   – normally, trading stock is held for a short period of time.
   For example an item that is held for less than 12 months will be considered trading stock, but an item that is held for more than 12 months is likely to be considered a capital asset.
3. Frequency of similar operations
   – the more often a deal takes place, the greater the assumption that it is a disposal of
   trading stock.
   For example if cars are bought and sold throughout the year, this will be considered to be the trading of cars; however if there is a one time sale of one car, then that is likely to be considered to be the sale of a capital asset.
4. Subsequent work
   – change of character of an asset to make it more saleable is likely to be indicative of
   trading.
   For example, buying bulk marble for flooring and breaking it down into smaller saleable units to use for individual floors, will be considered trading. Also, advertising and making the item more marketable may be indicative of trading.
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5. Circumstances
   – sudden emergency, for example the urgent need of cash can negate the presumption
   of trading.
   For example selling a vintage car from a collection of vintage cars because of the urgent need of cash will be considered to be the sale of capital assets.
   This is because the motive is not to trade cars, it is to obtain cash quickly.
   If the sale is to pay off a business loan then this would be considered to be trading and subject to income tax on the profit.
6. Motive
   – intention of making a profit is necessary for trading.
   For example, selling cars at a loss just to get immediate cash will not be considered trading, but waiting to sell cars at a price that will earn a profit will indicate trading

Question 2

Irrecoverable debts are deductible providing

Answer 2

They relate to the trade. For example, if a loan was made to an employee and then the employee left without paying it back and it was written off, then this is an irrecoverable debt, but it is disallowed because it is not a trading item.

Question 3

Gifts to customers are only allowable if

Answer 3

• they cost less than £50 per person per year, and
• the gift is not food, drink, tobacco or vouchers exchangeable for goods and services * the gift carries a conspicuous advertisement for the business.
  For example as Christmas presents, a sole trader can give his customers pens with the company logo printed on them as gifts, as long as they cost less than £50 per customer.

Question 4

Are donations allowable?

Answer 4

Charitable donation (Not made under Gift Aid)
* if it is wholly and exclusively for trading purposes (e.g promoting business’ name), and it is to a local charity then it is allowable
For example if a donation was made to a local charity and in return, at the charity fundraiser, the business was shown as a sponsor/organiser, then this would be an allowable expense.

Question 5

Are costs of renewing a lease allowable?

Answer 5

Only if costs of renewing a short lease (50 years or less)

Question 6

Premium paid for the grant of a lease

Answer 6

The premium itself is disallowed as is any amortisation of the premium. The allowable amount per year is:
(51 – n)/50 × Premium
An alternative calculation that you may have seen before is:
Premium - (2% x (n-1) x Premium)/n
n = number of years of the lease

Question 7

If an owner removes goods from the business for his own use he must

Answer 7

add back the item as a sale at market value, unless the owner accounts for the cost of the goods in the business accounts then they need only add back the lost profit on the item.

Question 8

Pre-trading expenditure

Answer 8

allowable if it is expenditure incurred in the seven years before a business commences to trade then it is treated as an expense incurred on the day the business starts trading and follows the above rules

Question 9

Small businesses are allowed to use the cash basis and may continue until

Answer 9

if the business’ turnover does not exceed £150,000

The business may continue to use the cash basis until the turnover exceeds £300,000

Question 10

Cash basis does not have ? and therefore

Answer 10

Capital allowances
All capital and revenue items are included in the profit and loss except for cars (Vans are included)

Question 11

Under the cash basis - the rules for cars are

Answer 11

No capital allowances - only mileage is allowed to be claimed

Question 12

What are the capital allowances for S/E? Main pool and special

Answer 12

Main 18%
Special 6%

Question 13

Capital allowances are now also available on

Answer 13

integral features of a building including lifts and escalators, electrical systems, heating and air cooling system

Question 14

Main pool

Answer 14

1. Computers, equipment, shelving, vans and lorries
2. Movable office partitioning
3. Alterations to building incidental to the installation of plant and machinery
4. Tables and chairs
5. Fire regulation expenditure

Question 15

Special Rate Pool

Answer 15

1. Integral features of a building
   – these include all major systems in a building.
   For example, electrical, thermal, cooling systems. 2. Long life assets
   These are assets, when new, with an expected economic working life of 25 years or more when total expenditure based on a 12-month accounting period exceeds £100,000

Question 16

First year allowances

Answer 16

These are given for new motor cars with zero CO2 emissions.
This is a 100% allowance on the cost of the car and it is given in the period of acquisition.
The F.Y.A. is not time apportioned for a period of less than 12 months.

Question 17

From 1 January 2019, the annual investment allowance is

Answer 17

£1,000,000.

This is given to an individual for a 12 month period and is time apportioned if the period is below 12 months.

Question 18

Ideally, this A.I.A should be allocated to

Answer 18

special rate pool assets purchased first because the allowances on these assets are only 6% per year, therefore tax relief on these assets is received over a longer period.

Question 19

For cars with a CO2 emission less than or equal to 50g, an

Answer 19

18% W.D.A. is given, therefore these are considered to be main pool assets.

Question 20

For cars with a CO2 emission of more than 50g, an

Answer 20

6% W.D.A. is given, therefore these are considered to be special rate pool assets.

Question 21

Disposal of the assets

Answer 21

Use LOWER OF
1. Proceeds
2. Original cost
When an item of plant or machinery is sold - the lower of the sale proceeds received or the original cost of the asset is deducted from the written down value of the relevant pool.

Question 22

In the final year of trading, the

Answer 22

A.I.A., W.D.A., F.Y.A. are not given

Question 23

Structural and Buildings Allowance

Answer 23

The SBA is is a new type of capital allowance available when a building (or a structure) has
been constructed / purchased for use in the trade. For example, offices, retail and
wholesale premises, factories and warehouses all qualify for the SBA.
This allowance is also available if an unused building/structure has been renovated for use
in the trade.
The rate of the allowance is 3% per annum and is given for a period of 33 years and 4
months.

Question 24

To note about the SBA:

Answer 24

The value of land does not qualify for the SBA
Expenditure which qualifies as plant and machinery (and therefore will get the AIA) cannot
also qualify for the SBA and vice versa.
The SBA can only be claimed from when the building / structure is brought into use in the
trade. This means that the SBA will be time apportioned for the period when it is first
brought into use, this is unlike capital allowances for plant and machinery which are given
the full allowance in the period of purchase.
A separate SBA is given for each building / structure
When the building / structure is sold, this will not result in a balancing allowance or
balancing charge. For the seller, he allowances already given at the date of sale will be
added to the sale proceeds when calculating the chargeable gain / capital loss for capital
gains tax. For the buyer, the 3% p.a. will continue to be given for the period remaining out
of the 33 years and 4 months

Question 25

Short life assets are main pool assets that have an expected life of

Answer 25

8 years or less.

Question 26

A de-pooling election can be made so that the asset gets

Answer 26

its own W.D.A.’s and on sale of the asset, a balancing allowance or balancing charge can arise.

Question 27

If the asset is not sold within the 8 years of acquiring the asset, then the written down value is

Answer 27

added back to the main pool

This happens on the 8th anniversary of the end of the accounting period in which the asset was acquired.

Question 28

Any asset (including a car) bought on hire purchase (HP) is treated as if

Answer 28

purchased outright for the cash price

Long-term leases (those with a term of five or more years) are treated in the same way as HP

Question 29

The buyer normally obtains capital allowances on

Answer 29

the cash price when the agreement begins

Question 30

Trading losses can be:

Answer 30

1. Carried forward against the Trading income of the same trade of future years
2. Relieved against Current year total income plus capital gains
3. Carried back against 12 months of total income plus capital gains

Question 31

Trading losses can be relieved against the total income of the current year and the total income of the previous XX months.
If the total income of the year has been used, then the

Answer 31

12

chargeable gains of that year can also be used to relieve the loss remaining

Question 32

For using the loss against other income (not including trading income), there is a maximum limit which applies, this is

Answer 32

the greater of £50,000 or 25% of total income (including trading income).

Question 33

The amount of trade loss available to offset against chargeable gains is the lower of:

Answer 33

• trade loss left
• current year capital gains less current year capital losses less the full amount of capital losses brought forward.

Question 34

Chargeable gains do not have to be utilised in the loss claim but if the taxpayer chooses to use the trade loss against capital gains of the same year then the loss is treated as

Answer 34

a current year capital loss and so it cannot be restricted to preserve the annual exemption.

Question 35

The only times you can restrict a capital loss to preserve the annual exemption are

Answer 35

on capital losses b/f and capital losses in the year of death.

Question 36

Opening years’ relief - If a loss is made within the first 4 tax years of trading (after applying the opening year rules)

Answer 36

then the loss can be relieved against total income of the individual for the previous 3 tax years on a FIFO basis

The loss cannot be restricted to save personal allowances

Question 37

Terminal loss relief - If a trading loss occurs in the final 12 months of trading, then this trading loss can be

Answer 37

offset against any trading profits of the final tax year of trade and then carried back for 3 tax years against the trading profits of the company on a LIFO basis

the loss cannot be restricted to save any personal allowances

Question 38

As long as there is at least

Answer 38

one partner common to the business before and after the change, the partnership continues

Question 39

From 2019/20 the default method for the calculation of property income is the

Answer 39

cash basis - rental income received less allowable expenses paid. This gives automatic bad debt relief as rental income is not taxed unless it is received.

Question 40

Rental income and allowable expenses will be assessed on an accruals basis when:

Answer 40

• Property income receipts for the tax year exceed £150,000
• The property business is carried on by a company
• An election is made for the accruals basis to apply (elect by 31 January 2026 for 2023/24 tax year

Question 41

Capital expenditure is XX?

Answer 41

NOT allowed, therefore repairs are allowable, however capital expenditure to improve the property are not allowed.
This differentiation can be made simpler by asking yourself whether the expenditure improved the income earning capacity of the property, if it did, it is likely to be capital expenditure.
Capital allowances may be claimed for expenditure on plant and machinery used for the maintenance of the property

Question 42

If a landlord uses their own vehicle to travel to and from the property they can

Answer 42

either
deduct the actual motoring costs or use the approved mileage allowance which we saw
in the Topic The authorised mileage allowances

Question 43

There is no relief for the initial cost of furniture and furnishings, there is only relief when assets are X

Answer 43

Replaced

The amount of relief is reduced by any proceeds from selling the old asset which has been replaced (Replacement cost - sale proceeds = replacement furniture relief).

Question 44

Mortgage interest is only allowable on

Answer 44

Non residential properties

Question 45

Relief is available for revenue expenditure incurred before letting commenced.

Answer 45

• This means that it must be incurred within 7 years of renting
• It will be treated as though it is incurred on day 1 of renting

Question 46

Advantages of being classified as a furnished holiday letting are:

Answer 46

1. Capital allowances are claimed on the cost of furniture instead of claiming replacement furniture relief if the accruals basis is used (Refer to Topic Capital allowances). If the cash basis is used then deduction is available for the capital costs of the furniture when paid.
2. Annual investment allowance is 100%. (This is a part of capital allowances and can be seen in Topic Capital allowances)
3. Relevant earnings when calculating the maximum amount that can be invested in a registered pension scheme includes income from a furnished holiday letting. (Refer to Topic Pensions)
4. Rollover relief is available if the owner invests in another furnished holiday letting. (Refer to Topic Rollover relief, Holdover relief)
5. Gift relief is available on the gift of a furnished holiday letting. (Refer to Topic Rollover relief, Holdover relief)
6. Entrepreneur’s relief/Business Asset Disposal Relief is available on the disposal of a furnished holiday letting. (Refer to Topic Rollover relief, Holdover relief

Question 47

In order to qualify to be a furnished holiday letting, the following conditions need to be satisfied:

Answer 47

1. The accommodation must be situated in the European Economic Area.
   For example in Malta.
2. The accommodation must be available for letting for at least 210 days in the tax year.
3. The accommodation must actually be let for 105 days in the tax year.
4. The accommodation must be let on a commercial basis.
   This means that no one person should occupy the letting for more than 31 consecutive days in the tax year.

Question 48

Calculating the income element and capital elements of the premium:

Answer 48

• Capital element:
  Premium received * ((number of years of lease-1)*2%)
• Income element:
  Premium received-capital element = income element

Question 49

How is a property business loss given tax relief?

Answer 49

Relief is only given against future property business profits
If total expenses exceed total income, the property income assessable is NIL and the excess property loss is carried forward and offset against future property income profits ONLY.