1、Chapter 7 Computing trading income (self-employment),1 The badges of trade 2 The adjustment of profits 3 Pre-trading expenditure,1 The badges of trade,The badges of trade can be used to decide whether or not a trade exists. If trade does exist, the accounting profits need to be adjusted in order to
2、establish the taxable profits.,The badges of trade,The subject matter The frequency of transactions Existence of similar trading transactions or interests The length of ownership The organisation of the activity as a trade Supplementary work and marketing A profit motive The way in which the asset s
3、old was acquired Method of finance The taxpayers intentions,2 The adjustments of profits,There is a difference between the tax (tax law) and accounting treatment (accounting standard) of an item of income and expenditure. Net profit shown in the accounts is the starting point in computing the taxabl
4、e trade profits, many adjustments may be required to calculate the taxable profit.,2.1 An illustrative adjustment,Net profit Add: expenditure charged in the accounts which is not deductible from trading profits (2.3)income taxable as trading profits which has not been included in the accounts (2.4)
5、Less: profits included in the accounts but which are not taxable as trading profits (2.5)expenditure which is deductible from trading profits but has not been charged in the accounts (2.6) Adjusted taxable trading profitNotes: 1. Adjustments to the accounting profits for unincorporated business are
6、similar to those needed for companies. 2. Taxable profit (“adjusted taxable trading profit”) is not the same as trading income.,2.3 Deductible and non-deductible expenditure,Deductible allowablenon-deductible disallowableDisallowable expenditure charged in the accounts must be added back to the net
7、profit in the computation of the taxable trading profit, such as depreciation.,Payments contrary to public policy and illegal payments Capital expenditure Expenditure not wholly and exclusively for the purposes of the trade Bad debts Unpaid remuneration and employee benefit contributions Entertainin
8、g and gifts,Lease charges for cars with CO2 emissions exceeding 160g/km Patent royalties and copyright royalties NIC Penalties and interest on tax Appropriations Subscriptions and donations Legal and professional charges Interest,2.3.2 Payments contrary to public policy and illegal payments,Fines an
9、d penalties are not deductible. Only some qualifying parking fines are allowed.,2.3.3 Capital expenditure,Capital expenditure is not deductible. Depreciation and amortisation are also not deductible. Capital allowance is deductible.,Capital expenditure,Two exceptions to the capital rule are worth no
10、ting. The costs of registering patents and trade marks are deductible. Incidental costs of obtaining loan finance are deductible.,2.3.4 Expenditure not wholly and exclusively for the purposes of the trade,remoteness test: expenditure is not deductible if it is not for trade purpose. duality test: if
11、 expenditure reflects more than one purpose, the private proportion of a proprietor is not deductible but the business element is allowable if an exact apportionment of business expenditure is possible.Notes: normally expense deductible for business use, but non-deductible for private use. Where the
12、 payments are to or on behalf of employees, the full amount are deductible but the employees are taxed under the benefits code. (chapter 4),2.3.5 Bad debts,Only impairment debts incurred wholly and exclusively for the purpose of the trade are deductible .,2.3.6 Unpaid remuneration and employee benef
13、it contributions,If earnings for employees are charged in the accounts but are not paid within 9 months of the end of the period of account, the cost is only deductible for the period of account in which the earnings are paid. Similar rules apply to employee benefit contributions.,2.3.7 Entertaining
14、 and gifts,The general rule is that expenditure on entertaining and gifts is non-deductible. Entertaining for and gifts to employees are normally deductible. Gifts to customers are deductible if(a) costing no more than 50 per donee per year, and (b) carry a conspicuous advertisement for business, an
15、d (c) are not food, drink, tobacco or vouchers exchangeable for goods. Gifts to charities may also be allowed. But if a gift aid declaration is made in respect of gift, tax relief will given under the gift aid scheme, not as a trading expense.,2.3.8 Lease charges for cars with CO2 emissions exceedin
16、g 160g/km,Leasing costs will normally be an allowable expense. There is a restriction on the leasing costs of a car with CO2 emissions exceeding 160g/km. 15% of the leasing costs will be disallowed in the calculation of taxable profits.,2.3.9 Patent royalties and copyright royalties,Patent royalties
17、 and copyright royalties relating to individuals trade are deductible as trading expense.,2.3.10 National insurance contributions,No deduction is allowable except for employers contribution for NIC, such as Class 1 secondary contributions and Class 1A contributions. (chapter 12),2.3.11 Penalties and
18、 interest on tax,Penalties and interest on late paid tax are not allowed as a trading expense.,2.3.12 Appropriation,Salary or interest on capital paid to a proprietor, are not deductible. Salary paid to a member of traders family is allowed as long as it is not excessive in respect of the work perfo
19、rmed by that family member. The private proportion of payments for motoring expenses, rent, heat and light and telephone expenses of a proprietor is not deductible. Where the payments are to or on behalf of employees, the full amount are deductible but the employees are taxed under the benefits code
20、. (chapter 4) Payments of the proprietors income tax and national insurance contributions are not deductible.,2.3.13 Subscriptions and donations,Subscriptions and donations are not deductible unless the expenditure is for the trade purpose. The following are the main types of subscriptions and donat
21、ions.trade subscriptions are generally deductiblecharitable donations are deductible only if they are small and to local charitiespolitical subscriptions and donations are generally not deductible,2.3.14 Legal and professional charges,Legal and professional charges relating to capital or non-trading
22、 items are not deductible. Charges are deductible if they relate directly to trading.,2.3.15 Interest,Interest paid by an individual on borrowing for trade purposes is deductible as a trading expense on an accruals basis, so no adjustment to the accounts figure is needed.（business interest） business
23、 interest and deductible interest,2.4 Income taxable as trading income but excluded from the accounts,The usual example is when a proprietor takes goods for his own use. In such circumstances the normal selling price of the goods is added to the accounting profits. Supplies of services, which are tr
24、eated as sold for the amount actually paid (but the cost of services to the trader is not deductible).,2.5 Accounting profits not taxable as trading income,Capital receipts: capital gains (taxable on capital gains tax) Income taxed in another way, not assessed under trading income: interest income （
25、 taxed as savings income）, rental income (taxed as property business income) Income that is exempt from tax,2.6 Deductible expenditure not charged in the accounts,Deductible expenditure not included in profit and loss account:(a) Capital allowances (chapter 8)(b) An annual sum of premium paid for a
26、short lease which can be deducted by a trader that has paid a lease premium to a landlord who is taxable on the premium as property business income. (chapter 6),Example,Lawrie prepares accounts to 31 March. On 1 April 2011 he paid a premium of 25,200 for the grant of a 21-year lease on business prem
27、ises. Calculate the deduction Lawrie can claim in his tax-adjusted trading profit.,Answer,The amount of the lease premium paid that will be assessed on the landlord as property business income is: Premium 25,200 Less (25,2002%20) (10,080)15,120 The trading deduction for Lawrie is therefore 720 (15,1
28、201/21) each year. This would have been time apportioned for the year ended 31 March 2012, if the premium had not been paid at the start of the accounting period.,Questions: Deductible expenditure not charged in the accounts,Sam is in business as a central heating engineer. She uses one room of her
29、five-room house as an office, and no adjustment has been made in her accounts for the year ended 5 April 2012 in respect of this.Sam has listed her household expenses relating to the year ended 5 April 2012 as follows: Electricity 400Gas 250Water rates 450Television repairs 50Groceries 600Video rent
30、al 200Mortgage interest on 20,000 mortgage 900What amount can Sam claim as a deduction for her use of an office at home?,Answer:,Sam uses one room out of five as an office and therefore it is appropriate to allow one fifth of her expenses that relate to running the home. Sams television repairs, gro
31、ceries and video rental are all of a private nature. The total of the remaining items is 2,000 (400+250+450+900). One fifth of this is 400, and this will be Sams deduction for the use of the office.,3 Pre-trading expenditure,Pre-trading expenditure incurred within the seven years prior to the commencement of trade is allowable if it would have been allowable had the trade already started.,
