Trading income

Badges of trade
1. The subject matter
Where the subject matter of a transaction is such as would not be held as an investment, it
will be considered as trade
2. Frequency of transactions
The more transactions an individual carries out, the more likely he is engaging in a trade
3. Existence of similar trading transactions or interests
If an individual is engaging in similar transaction repeatedly, it may indicate he is
engaged in trade
4. Length of ownership
Normally inventory will be sold soon after buying
5. The organization of activity as trade
If transactions are carried out in the same manner as someone who is trading, it is
more likely that the individual is engaged in trading
6. Supplementary work and marketing
7. When work is done to make an asset more marketable, its more likely the individual is
trading
8. Profit motive
9. The way in which the sold was acquired
10. Method of finance
11. The taxpayers intention
Adjustment of profit
Net profit
Add: Expenses not allowed but charged in accounts
Income taxable as trading pr0fit which are not included in accounts
Less: profits included in the accounts but which are not taxable as trading profits
Expenses which allowed but not included
Adjusted taxable trading profit

xxxxx
xxxxx
(xxxx)
(xxxx)
xxxxx

Deductible & Non-deductible expenditure

1. Fines & penalties incurred in breaking the law (except those incurred by employees while on
performance of duties ) are not deductible
2. Capital expenditure is not deductible
3. Depreciation/amortization is not deductible
4. Profit on the disposal of assets are not allowed & losses are not deductible
5. Repairs
Cost of restoration of an asset, replacing a subsidiary part of the asset is revenue
expenditure and is deductible
The cost of initial repairs to make an asset fit to earn profits is not deductible
Initial repairs to remedy normal wear and tear is deductible

6. The cost of registering patents & trademarks are deductible

7. Incidental costs of obtaining loan finance are deductible
8. Expenditure not wholly & exclusively for the purposes of trade. Any expenses which is
include both private and business part, the business part of the expense is deductible
9. Bad debts are deductible
10. if earnings of employees are not paid to them for nine months after the end of the
accounting period, then those expenses will only be deductible when they are actually paid
11. entertaining for & gifts to employees are deductible
12. gifts to customers costing not more than 50/customer/year are allowed if the gift are not
food, drink, tobacco or vouchers exchangeable for goods & the gift carries advertisement for
business are deductible
13. if a car with emission exceeding 130g/km is leased 15% of the lease cost is not allowed
14. patent & copyright royalties associated with business are deductible
15. no deduction is allowed for national insurance contributions except the employer
contribution
16. penalties and interest on late paid tax are not allowed
17. appropriations
salary or interest on capital paid to a trader are not deductible. If its paid to a family
member, then it is allowed if the amount is not excessive
18. Subscriptions & donations are deductible if they are related to trade. ( political contributions
are not allowed )
19. Legal & professional charges related to capital or non-trading items are not deductible. If
they are related to the business(revenue expenditure) then its allowed
20. Interest on borrowings are allowed if the borrowing is related to trade
21. Miscellaneous items
Educational courses for staff are allowable
Educational courses for trader is only allowed if that is refresher course to update
existing knowledge & not learn new ones
22. Removal expenses are allowed
23. Travelling expenses to the traders place of business is not allowed
24. Counselling services for staff leaving the business is allowed
25. Pension contributions are allowed
26. Premiums for insurance is allowed if its against an employees death or illness
27. Improving an individuals personal security
28. Expenditures not wholly or exclusively for trade is not deductible.
29. Gifts to charities is deductible if the charity is required to do advertising for the business.
Income taxable as trading income but excluded from the accounts
If a trader takes goods for his own use then the market value of the items taken should be added
back to the accounting profit

Accounting profits not taxable as trading income

The following receipts of income should be excluded from taxable trading profits.
1. Capital receipts
2. Income taxed in another way (at source or another type of income )
3. Income specifically exempt from tax
Deductible expenditure not charged in the accounts
Amounts not charged in the accounts but which are deductible such as capital allowances should be
deducted when computing taxable trading income.
Pretrading expenditure
Expenditures incurred within seven years prior to the commencement of trade is allowable if those
expenses are allowable trading expenses.