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Business Taxation Week 2 Tutorial

The document provides example questions and answers for calculating tax adjusted trading profits for sole traders. It includes multiple choice questions testing understanding of adjustments made to sole trader profit figures, such as allowable expenses, personal use of business goods, and salary payments. Worked examples are also provided to illustrate key concepts.

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12 views6 pages

Business Taxation Week 2 Tutorial

The document provides example questions and answers for calculating tax adjusted trading profits for sole traders. It includes multiple choice questions testing understanding of adjustments made to sole trader profit figures, such as allowable expenses, personal use of business goods, and salary payments. Worked examples are also provided to illustrate key concepts.

Uploaded by

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© © All Rights Reserved
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Business Tax

Tutorial #2 Questions – Sole Traders – Adjustments to Profit

Tutorial Q1 (guided)

Peter runs a gardening business as a sole trader. His profit and loss account for
the year ended 31 December 2021, together with supporting notes, is set out
below:

£ £
Gross Profit 90,000

Expenses:
Depreciation 10,600
Rates for storage 2,000
Business Development (note 1) 1,500
Sundry Expenses (note 2) 8,200
(22,300)
Net Profit 67,700

Notes

1. Business development costs relate to annual golf membership fees to help


Peter get more gardening jobs from new clients.

2. Sundry Expenses consist of the following:


Gifts to clients: £
Christmas chocolates, cost £10 per person 500
Diaries bearing the company logo, cost £6 per person 300
Donations to National Charities 6,400
Donations to Local Charities in return for
1,000
advertisement at fundraising events
8,200

*Diaries <£50*
Required: Calculate Peter’s tax adjusted trading profit (before capital
allowances) for the year ended 31 December 2021.

Tutorial Q2

Alpa runs a sole trade business and has the following net profit for the year
ended 31 July 2022:

£ £
Gross Profit 500,000

Expenses:
Depreciation 25,000
Advertising 3,500
Business Development (note 1) 2,300
Motor expenses (note 2) 5,600
(36,400)
Net Profit 463,600

Notes

1. Business development costs relate to entertaining new clients.

2. Motor expenses relate to Alpa’s car. During the year she drove 8,000 miles,
6,000 of which were business miles.

Required: Calculate Alpa’s tax adjusted trading profit (before capital


allowances) for the year ended 31 July 2022.
Tutorial Q3 (ILLUSTRATION EXAMPLE FROM LECTURE 2 – attempt this for
yourselves to check understanding)

Required: Calculate the tax adjusted trading profit (before capital


allowances) for the year ended 31 December 2021.
Business Tax

Tutorial #2 MCQs – Sole Traders – Adjustments to Profit

MCQ question practice – refer to Lecture 2 Slides

Q1 Which one of the following gifts is allowable in computing tax adjusted


trading profits:

a) Food hampers to clients costing £30 each with company logo on the
baskets.
b) Calendars to clients with business name and address printed on the
cover, costing £4.50 each.
c) Bottles of wine to customers at Christmas at £12 per bottle.
d) Leather bags with company logo on gifted to VIP customers, costing £55
each.

Q2 Which one of the following expenses is not allowable when computing


tax adjusted trading profits?

a) A £250 donation to a local charity in return for advertising


b) Legal costs on the sale of business premises *Capital Transaction*
c) Costs of preparing annual accounts
d) Costs of an employee’s parking fine incurred whilst on business

Q3 A sole trader leased a car with CO2 emissions of 112g/km throughout his
year ended 31 December 2022. The car was used 100% for business purposes
and the annual lease costs were £5,000.

How much of the lease costs are allowable for tax purposes when calculating
the tax adjusted trading profit?

a) £NIL
b) £5,000
c) £750
d) £4,250

Q4 Arjun runs a sole trade business and takes some goods out of his business
for his own use. The goods had a retail value of £1,200 and cost £500. The
accounts have been adjusted for the costs of the goods taken.

The following adjustment should be made when calculating the tax adjusted
trading profit figure:

a) Add back £1,200


b) Add back £700 profit
c) Deduct £1,200
d) Deduct £500

Q5 A sole trader’s accounts include annual salary costs of £25,000 paid to his
wife as an administration assistant. This role usually earns an average salary
of £22,000. The following adjustment should be made when calculating the
tax adjusted trading profit figure:

a) Add back £25,000


b) Deduct £22,000
c) Add back £3,000
d) Deduct £3,000

Q6 In relation to the deductibility of sole trader expenses, which of the


following statements is correct:

a) Expenses must be incurred wholly for the purposes of the trade.


b) Expenses must be incurred wholly and exclusively for the purposes of
the trade.
c) Expenses must be incurred wholly, exclusively & necessarily for the
purposes of the trade.
d) Expenses must partly relate to the trade.
Q7 True or False? Accounting depreciation is never allowable when
calculating tax adjusted trading profit.

Q8 A sole trader incurs rent & utilities expenses of £15,000 on his business
premises. He lives in a flat above the business premises and 20% of the
£15,000 expenses relate to the flat. The required adjustment to profit for tax
purposes is:

a) Add back £15,000


b) Add back 12,000
c) Add back £3,000
d) Deduct £3,000

Q9 A sole trader takes some goods out of his business for his own use. The
goods had a retail value of £850 and cost £420. The accounts have been
adjusted for the costs of the goods taken.

The following adjustment should be made when calculating the tax adjusted
trading profit figure:

a) Add back £430


b) Add back £850
c) Deduct £850
d) Deduct £430

Q10 True or false? When calculating the tax adjusted trading profit for a sole
trader, we should always start with the gross profit figure from the accounts.

*Tutorial answers are released on Moodle at 6pm each Tuesday evening


after all tutorial sessions. You should review your answers against the model
answers and revisit lecture notes where required to check your
understanding of the topic. Once you are happy with all the Week 2 tutorial
Q&As, you should get started on part 2 of the assignment brief requirements.

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