Business Tax: Trading Income, Capital Allowances and Reliefs
Scope of business tax
For unincorporated businesses, trading profit is computed from accounting profit by adjusting for disallowable expenditure and non-trading income, then taxed on the tax-adjusted profit for the period. Candidates must know the add-back and deduct rules: depreciation, general provisions, entertaining of customers and capital expenditure are added back; capital allowances and trading income not yet taxed are deducted. Only expenditure 'wholly and exclusively' for the trade is allowable.
Capital allowances
Learn the pools: main pool (plant and machinery, 18% reducing balance), special rate pool (integral features and long-life assets, 6%), and single asset pools. The Annual Investment Allowance gives 100% relief on most plant and machinery up to the annual limit, but not on cars. Cars are allocated to pools by CO2 emissions, with first-year allowances for very low-emission cars. Small pools and the cash basis may simplify computations.
Losses and reliefs
Trading losses can be carried forward against future trading profits (with restrictions on the amount and on the carry-forward of losses where the trade is incorporated), carried back one year, or set against total income of the same or previous year under specific rules. Understand the ordering of reliefs and the difference between relief for unincorporated and incorporated entities.
Traps and worked rule
Common traps: adding back capital expenditure but forgetting to claim the allowance; applying AIA to cars; using the wrong pool rate; ignoring the basis period rules when a business starts or ceases. Rule of thumb: compute the tax-adjusted trading profit first, then deduct capital allowances, then apply loss relief.
Worked example: Accounting profit £80,000 includes £6,000 depreciation and £2,000 customer entertaining. Add back both (£8,000) to get £88,000. Claim AIA on £20,000 machinery and main pool writing-down allowance on £10,000 residual plant at 18% (£1,800). Taxable trading profit = £88,000 − £20,000 − £1,800 = £66,200.