ACCA SKILLS LEVEL

Subject Taxation (TX/F6)

Uditha Jayasinghe
Lecturer B.Sc.(AFM), MBA, FCA, ACMA, FICM(SL), MAA

Module Presentation 11 - Trading Income

Code TX/UJ/11
Trading Income
by Uditha Jayasinghe
 Contents
▪ The Badges of Trade
▪ Adjustment of Profit
▪ Expenditure not Deductible for Tax
▪ Other Adjustments of Profit
▪ Calculation of Taxable Profits under the Cash Basis
▪ References

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The Badges of Trade
. Buy & sell Profit

How is the profit taxed?

Apply badges of trade

Deem to be Non-trading
TRADING PROFIT (potential) CAPITAL GAIN

IT and NIC CGT (usually preferable)

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The Badges of Trade
▪ The main tests:
• Subject matter
• Frequency of transactions
• Length of ownership
• Profit motive
• Supplementary work and marketing
• Manner in which assets were acquired

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Adjustment of Profit
.
Description Amount
Net profit in accounts XX
Add: Expenditure not deductible for tax X
Any non-trading expenditure X
XX
Less: Income assessable under other categories (X)
Non-taxable income (X)
Deductible expenditure not shown in the accounts (X)
Adjusted profit XX
Less: Capital allowance on plant and machinery (X)
Adjusted trading income/loss XX

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Expenditure not Deductible for Tax
▪ Any item not incurred wholly and exclusively for trade purposes is disallowable
expenditure.
• Capital expenditure including:
✓ Depreciation
✓ Legal/professional fees on capital transactions. However, fees incurred in the
renewal of short leases (less than 50Y) of land and buildings are deductible.
✓ Losses on disposal of non-current assets should be added back and gains
should be deducted.

• Adjustment to general provisions/allowances and bad debts:

✓ Loans to employees written off are not deductible.
✓ Impairment losses on trade are deductible.

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Expenditure not Deductible for Tax
• Employee remuneration not paid within nine months of year-end.

• Entertaining, gifts to customers unless:

✓ Cost <£50 per recipient per annum. (if the total exceeds £50, full cost is
disallowable)
✓ Bear a conspicuous company logo.
✓ Are not food, drink, tobacco or vouchers.

• Staff entertaining and gifts are allowable.

• Appropriations of the trade profit – private expenditure of the owner. E.g.

owner's salary, drawings or tax/NIC.
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Expenditure not Deductible for Tax
• Subscriptions, charitable and political donations (unless small donations to a local
charity).

• Leased motor cars with CO2 emissions exceeding 50 grams per kilometre: 15% of
leasing costs is not deductible.

• Interest eligible for relief under ‘qualifying interest’ rules must be disallowed.
Interest paid on borrowings for trade purposes is deductible as trading expense
on an accrual basis.

• Fines and penalties are disallowed.

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Expenditure not Deductible for Tax
• Legal and professional charges on capital or non-trading items are disallowable
except:
✓Incurred defencing the taxpayer’s title to non-current assets.
✓Charges connected with an action for breach of contract.
✓Renewal of a short lease for less than 50 years.
✓Charges for the trade debt collection.
✓Normal charges for preparing accounts and assessing tax liabilities.

• Any other expenditure not wholly and exclusively for the purpose of the trade.

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Expenditure not Deductible for Tax
▪ Practice Question: (P11.1)
Kim is a sole trader. He prepares accounts for the year ended 5th April 2024 and has
deducted the following items of expenditure in the statement of profit or loss:
Depreciation £3,000
Accountancy fees for preparing accounts £1,000
Entertainment of:
Staff (party at £300 per person for 6) £1,800
Customers £2,400

How much should be added back to Kim’s net profit to arrive at his adjusted taxable
profit?

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Other Adjustments of Profit
▪ Note if the owner withdraws goods for own use, the profit element should be added
back. E.g. selling price of goods if sold less amount paid by the trader.

▪ Profits which must be excluded from the trading profit:

✓ Capital gain on disposal of assets
✓ Income taxed as another source
✓ Income exempt from tax

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Other Adjustments of Profit
▪ Amounts not charged in the accounts that are deductible, must be deducted when
computing the adjusted trading income. E.g.
✓ Capital allowances
✓ Pre-trading expenses

▪ Pre-trading expenditure incurred within seven years prior to commencement of

trading, treated as a trading expense incurred on the first day of trading providing it
would have been a deductible expense.

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Calculation of Taxable Profits under the Cash Basis
▪ Cash basis = Cash receipts less deductible business expenses actually paid.

▪ Unincorporated business with revenue which does not exceed £150,000 (given in tax
rates and allowances) has option to compute trading profit using a cash basis as
opposed to the normal accruals basis.

▪ Business can continue to use cash basis until their receipts in the previous tax year
exceeded £300,000 and receipts for the current year exceed £150,000 or its
commercial circumstances change, and it elects to use accruals basis.

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Calculation of Taxable Profits under the Cash Basis
▪ Capital expenditures on plant and machinery (except cars) are business expenses.

▪ When using the cash basis for TX – UK, certain expenses can be computed on a flat
rate basis: (rather than the usual actual expenditure incurred)
• Approved mileage allowance to compute the deduction for business miles (given
in tax rates and allowances)
• If a business premises are used partly for private purposes, private use
adjustment can be made on number of occupants (this will be given in an exam
question)

▪ If cash basis produces a trading loss: the only relief available is to carry the loss
forward against future trading profits.
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Calculation of Taxable Profits under the Cash Basis
▪ Practice Question: (P11.2)
Mary is a sole trader who prepares accounts to the 5th April each year using the cash
basis of accounting. Her results for the period of account to 5th April 2024 show the
following:
Cash sales £41,000
Invoice sales £4,000
Cash expenses £20,200
The figure for invoice sales includes an invoice for £1,500 which was paid on 10th April
2024. In addition to the cash expenses of £20,200, Mary incurred motoring expenses of
£2,800 for driving 8,000 miles of which 6,500 miles were for business purposes. Mary
wishes to use approved mileage allowances for motoring.
What is Mary’s taxable trading income for the tax year 2023/24?

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Calculation of Taxable Profits under the Cash Basis
▪ Practice Question: (P11.3)
Steve is a trader and the summary of his trading profit and loss account as at 31st
December 2023 is as follows;
Revenue £98,250
Purchases (cost of goods) (£52,750)
Salary (£12,000)
Depreciation (£3,000)
Bad debts/Provision (£2,000)
Entertainment expenses (£3,500)
Legal and professional expenses (£5,450)
Car expenses (£1,800)
Bank interest (£1,200)
Employees’ parking fine (£500)
Interest income £450
Net profit
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£16,500
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Calculation of Taxable Profits under the Cash Basis
▪ Practice Question: (P11.3) Continue…
1. Salary includes £7,000 paid to Steve.
2. The composition of bad debts/provision is as follows; general bad debt provision of
£1,200, a specific bad debt written off £500 and the balance represents a written
off amount of a loan given to an employee.
3. Entertainment expenses consist of £1,500 customer entertainment and the balance
for the staff.
4. The breakdown of legal and professional expenses are as follows;
1. Legal charges for trade collection £1,450
2. Preparation of accounts £1,000
3. Legal charges on acquiring new capital assets £3,000
5. Steve uses the car 50% privately

Required: Calculate Steve’s adjusted trading profit.

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References
▪ BPP Learning Media Ltd, 2023. ACCA Applied Skills - Taxation (TX-UK) FA 2023. 4th ed.
London: BPP Learning Media Ltd.
▪ Kaplan Financial Limited, 2023. ACCA Taxation (TX-UK) FA23 Study Text. 3rd ed.
Berkshire: Kaplan Publishing UK

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.

Thank You

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