Computing Trading income (Ch 7)

What are the 6 badges of trade?

• Subject matter

• Frequency of transactions

• Length of ownership

• Profit motive

• Supplementary work and marketing

• Manner of acquisition

What are the tax consequences of an activity being a trade versus not being a trade?

Trade: income tax + NIC, flexible loss relief.

Not a trade: possible CGT or not taxable.

What is the default basis of assessment for sole traders, partnerships and companies?

Unincorporated: cash basis by default; accruals by election

Companies: accruals only.

Under the cash basis, how are capital items (P&M, cars, land and buildings) treated?

P&M (not cars): deducted when paid.

Cars: AMA, or actual costs + capital allowances.

Land and buildings: no deduction.

P&M sale proceeds are receipts (car sale proceeds excluded).

Under the cash basis, how are provisions, bad debts, private-use items and unpaid remuneration treated?

No provisions. Bad debts relieved automatically. Only the business proportion of a private-use item. Remuneration must be paid to be deducted (no 9-month rule).

Under the accruals basis, how are depreciation and profits/losses on disposal of non-current assets treated in the adjustment of profit?

Add back depreciation (capital allowances replace it). Profit on disposal: deduct. Loss on disposal: add back.

What is the layout of the adjustment-of-profit computation?

Net profit + disallowed/non-trade items − non-taxable/taxed-elsewhere items = adjusted profit − capital allowances. Show 0 where no adjustment is needed.

What are the general deductibility tests for a trading expense (wholly and exclusively, remoteness, duality)?

Wholly and exclusively for trade. Remoteness: not for the trade at all → disallow. Duality: two purposes → allow the business part if an exact split can be made.

What are the 3 exceptions to the rule that capital expenditure is not deductible?

Renewal of short leases (<50 years); incidental costs of obtaining loan finance; registration of patents and trademarks.

Which legal fees are deductible or disallowed in computing trading profit?

Disallowed: acquiring capital assets, issuing shares, drafting a partnership agreement, original lease grant. Allowed: defending title to assets, breach of contract, short lease renewal, trade debt collection, normal accounts/self-assessment help.

How are fines, bribes and extortion payments treated in computing trading profit?

Disallowed. An employee's parking fine on business use may be allowed; the trader's own fine never.

How are entertaining and third-party gifts treated in computing trading profit?

Customer/supplier entertaining disallowed; staff entertaining allowed. A gift is allowed only if ALL: ≤£50 per recipient per year, conspicuous business logo, not food/drink/tobacco/vouchers. Fail any condition → the whole gift is disallowed.

What is the 9-month rule for unpaid remuneration under the accruals basis?

Remuneration accrued but not paid within 9 months of the period end is deductible only in the period it is paid.

How are own-use goods (taken by the trader) treated under the accruals basis?

Add the open-market selling price less any amount the trader paid (free: full selling price; at cost: the profit element).

Which trading expenses are always allowed in the adjustment of profit?

Patent/copyright royalties, trade subscriptions, staff counselling, staff education, updating an existing skill, small local charity donations, employer Class 1 and Class 1A NIC, salary to family (if not excessive).

Which items are always disallowed in the adjustment of profit?

Own salary and interest on own capital, interest and penalties on late tax, customer entertaining, learning a new skill, Class 4 and employee NIC, Gift Aid/political/national donations, employee loans written off, general provisions.

How are the trader's private proportions of motor, heat & light and telephone costs treated?

Business use allowed; the owner's private proportion is added back.

What is the difference between the approved mileage allowance and the fixed premises amounts for a trader working from home?

AMA is a deductible business mileage expense. Premises fixed amounts (£350 / £500 / £650 a month for 1 / 2 / 3+ occupants) are the disallowable private amount deducted from actual premises costs.

Which items in the accounts are deducted from profit when computing adjusted trading profit?

Capital receipts, income taxed elsewhere (interest, rent, dividends), exempt income, profit on disposal of fixed assets.

Which allowable items may not be in the accounts and must be deducted separately?

Capital allowances; the annual lease-premium deduction; pre-trading expenditure.

What are the conditions for deducting pre-trading expenditure?

Incurred within 7 years before trading began AND would have been deductible had trading already started. Treated as incurred on the first day of trading.