Chapter 7: Trading

Question 1

What is the difference between income profit and capital profit?

Answer 1

Income profits are recurring in nature e.g. trading profit and capital profits are one-off items

Question 2

How is a company’s income tax charged?

Answer 2

Corporation tax

Question 3

How is a sole trader/partnership’s income tax charged?

Answer 3

Income tax

Question 4

How are trading losses / profits calculated?

Answer 4

Chargeable receipts - deductible expenditure - capital allowances = trading profit / loss

Question 5

What are chargeable receipts?

Answer 5

Money from the sale of goods and services

Question 6

If a business buys something to sell on at a profit, will this be income or capital profit?

Answer 6

Income

Question 7

What is the annual investment allowance?

Answer 7

A business can deduct the entire cost of newly purchased plant and machinery up the value of £1m per year

Item can be used

Question 8

What is full expensing?

Answer 8

Similar to AIA but for companies only, with no £1m cap (for main rate assets). For limited companies buying new (not second-hand) plant & machinery.

A balancing charge will apply when the asset is disposed of. A balancing charge is a way of adding back some tax if you’ve already had full relief and then get money back from selling the asset Since full expensing gave you 100% tax relief upfront, you can’t also keep the tax benefit when you sell the asset for money — otherwise, you’d be getting double benefit.

Question 9

What is a balancing charge?

Answer 9

👉 The balancing charge = the sale price (the disposal value) of the asset.

Without the balancing charge, the company would have had 100% tax relief on the asset and kept the money from selling it — meaning 0 tax ever paid on that part of income.

HMRC obviously doesn’t want that 😅 — so the balancing charge ensures the company effectively pays tax on the amount it recovers from selling the asset.

Question 10

What is deductible expenditure?

Answer 10

Expenditure incurred ‘wholly and exclusively’ for the trade.

Question 11

What is the writing down allowance?

Answer 11

Allows 18% of the total value of plant and machinery to be deducted from chargeable receipts when calculating trading profits for that accounting period

Question 12

What is pooling?

Answer 12

Pooling means that the writing down allowance each year is usually calculated on the value of all of the assets pooled together. If one of the assets sells, the sales proceeds are deducted from the pool

Question 13

What is start- up loss relief (also known as early trade losses relief)?

Answer 13

If a new business loses money in its first four years, HMRC allows them to reduce the tax they pay on their other income by using that loss.

Example

• Alice has a day job in retail, but also has a side hustle which is separate to the day job
• In the first year of Alice’s business as a sole trader, she made a trading loss of £8,000
• Alice also earned £12,000 from her day job in retail

Without relief: Alice pays tax on the full £12,000.
With start-up loss relief: Alice can subtract the £8,000 loss from her £12,000 job income Alice would only pay tax on £4,000.

✅ Relief = less tax to pay.

Question 14

Does start- up loss relief (also known as early trade losses relief) apply to companies?

Answer 14

No, sole traders and partnerships only

Question 15

Is start- up loss relief (also known as early trade losses relief) an automatic exemption?

Answer 15

No, a claim must be made

Question 16

What other options are available for reducing tax when a loss has been made (carry- across/ one- year carry- back relief)?

Answer 16

1. Same-year relief – offset the loss against all other income in the same year.
2. One-year carry-back – offset the loss against all income from the previous tax year.
3. Split, starting with same-year – first reduce current year income to zero, then any leftover can reduce previous year income.
4. Split, starting with previous year – first reduce previous year income to zero, then any leftover can reduce current year income.

Question 17

Is it possible to offset loss against capital gains?

Answer 17

Yes, a taxpayer can use trading losses to reduce capital gains in the same tax year. To get this relief, the taxpayer must claim it by 31 January one year after the tax year ends

Question 18

Is it possible to carry forward trading loss for a tax year and set it against subsequent
profits?

Answer 18

Yes, it is possible for a taxpayer to carry forward trading losses to offset future profits from the same trade, using earlier years first. Losses can be carried forward indefinitely until fully used—there’s no time limit for waiting for future profits

Question 19

When should a person be vat registered?

Answer 19

If earning more than £90,000 in a 12 month period

Question 20

What is the difference between zero-rated and exempt supplies?

Answer 20

The VAT paid on zero-rated supplies (e.g. books, certain food and water) can be reclaimed from HMRC. If a person only makes exempt supplies, they cannot register or reclaim vat

Question 21

Can a partnership be registered for VAT in the name of the partnership itself?

Answer 21

Yes

Question 22

If a company earns less than £90,000 a year, can they still become vat registered?

Answer 22

Yes, a business may voluntarily elect to do so to reclaim input tax