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Questions and Answers
What condition must be met for unrelieved trading losses to be carried forward when a trader incorporates a business?
What condition must be met for unrelieved trading losses to be carried forward when a trader incorporates a business?
Under what circumstance can a taxpayer set a capital loss from newly-issued shares against total income as if it were a trading loss?
Under what circumstance can a taxpayer set a capital loss from newly-issued shares against total income as if it were a trading loss?
What is the maximum amount of specified tax reliefs that can be deducted from total income in a tax year?
What is the maximum amount of specified tax reliefs that can be deducted from total income in a tax year?
Which of the following is NOT considered a main loss relief that applies to the income limit?
Which of the following is NOT considered a main loss relief that applies to the income limit?
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What happens to costs related to remedying defective work done while the business was operating?
What happens to costs related to remedying defective work done while the business was operating?
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Which of the following categories of capital expenditure does NOT qualify for capital allowances?
Which of the following categories of capital expenditure does NOT qualify for capital allowances?
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What is a key characteristic of plant and machinery according to the provided definition?
What is a key characteristic of plant and machinery according to the provided definition?
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What happens to capital expenditure if a GAAP election has been made?
What happens to capital expenditure if a GAAP election has been made?
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Which of the following statements accurately describes the difference between the main pool and special rate pool?
Which of the following statements accurately describes the difference between the main pool and special rate pool?
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Which of the following does NOT qualify as plant and machinery?
Which of the following does NOT qualify as plant and machinery?
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Which of the following is a general principle regarding capital allowances?
Which of the following is a general principle regarding capital allowances?
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What is a common misconception about fixtures to buildings in terms of capital allowances?
What is a common misconception about fixtures to buildings in terms of capital allowances?
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What is an important consideration when calculating losses in the context of self-employment?
What is an important consideration when calculating losses in the context of self-employment?
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What annual percentage does capital expenditure on patent rights attract as a writing down allowance?
What annual percentage does capital expenditure on patent rights attract as a writing down allowance?
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Which of the following qualifies for a first year allowance of 100%?
Which of the following qualifies for a first year allowance of 100%?
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What triggers the receipt of terminal trade loss relief?
What triggers the receipt of terminal trade loss relief?
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Which relief allows a trading loss to be set against total income for both the current and previous tax year?
Which relief allows a trading loss to be set against total income for both the current and previous tax year?
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A non-active trader can claim sideways loss relief limited to which amount?
A non-active trader can claim sideways loss relief limited to which amount?
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What is the time limit to claim for early trade losses relief?
What is the time limit to claim for early trade losses relief?
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Which category of capital expenditure does NOT qualify for capital allowances?
Which category of capital expenditure does NOT qualify for capital allowances?
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What happens to unrelieved trading losses after a tax year?
What happens to unrelieved trading losses after a tax year?
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When can a claim be made to set trading losses against capital gains?
When can a claim be made to set trading losses against capital gains?
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What is a necessary condition for claiming carry-forward trade loss relief?
What is a necessary condition for claiming carry-forward trade loss relief?
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Which of the following correctly describes 'know-how'?
Which of the following correctly describes 'know-how'?
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Which tax relief allows losses to be set against profits of prior years?
Which tax relief allows losses to be set against profits of prior years?
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What defines the cessation of a trade for the purpose of terminal trade loss relief?
What defines the cessation of a trade for the purpose of terminal trade loss relief?
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Which of the following is NOT a form of trading loss relief mentioned?
Which of the following is NOT a form of trading loss relief mentioned?
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Study Notes
Principles of Taxation - Week 6 Lectorial 1
- Topic: Self-employment, capital allowances, and losses.
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Overview:
- Capital allowances
- Losses
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Textbook topics not relevant:
- All topics are relevant this week but, as usual, ignore Scotland.
Capital Allowances
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Technical content today:
- General principles
- Qualifying expenditure (plant and machinery, patent rights, know-how, research and development)
- Plant and machinery (statute, case law, definition, machinery of all types, motor vehicles, office furniture and equipment)
- Fixtures to Buildings (active function vs. passive function)
- Expenditure qualifying as plant and machinery by statute (thermal insulation, personal security assets, integral building features, computer software, building alterations for plant installation)
- Main pool and special rate pool (plant and machinery pooled, special rate pool for items like lifts/escalators, cars by emission levels)
- Writing down allowance (WDA): cost of plant and machinery in period added to pool, disposal of plant subtracted, lower of sale proceeds/original cost is deducted, writing down allowance calculated on pool balance, rates of WDA (18% main pool, 6% special rate pool, scaled up/down for periods less than/more than 12 months))
- Example –Main pool & SRP (business has £25,000 WDV in a main pool, sells a machine for £10,000 with an original cost of 20000, and then the special rate pool is £35,000, accounting period is 9 months)
Losses
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Technical content today:
- Trading loss relief
- Carry-forward trade loss relief
- Capital allowances
- Trade loss relief against total income
- Early trade losses relief
- Terminal trade loss relief
- Post-cessation trade relief
- Transfer of a business to a company
- Losses on shares in unlisted trading companies
- Limit on income tax reliefs
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Trading Losses:
- If a self-employed person makes a trading loss, trading income for that tax year is nullified.
- Tax relief can be claimed.
- Several forms of loss relief are available by offsetting the trading loss against the taxpayer's other income/gains.
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Trading loss reliefs:
- Carry-forward trade loss relief
- Trade loss relief against total income
- Early trade losses relief
- Terminal trade loss relief
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Carry-forward trade loss relief:
- A trading loss can be carried forward and set against the first available profits of the same trade.
- The loss can be carried forward indefinitely.
- Relief is given only against trading profits arising from the same trade.
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Capital Allowances:
- Capital allowances are included automatically in the calculation of a trading loss.
- It is possible to claim less than maximum capital allowances in order to adjust the amount of a trading loss.
- Unclaimed capital allowances aren't lost; higher pool balances are carried forward resulting in higher capital allowances in future years.
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Trade loss relief against total income:
- A trading loss incurred during the basis period for a tax year may be relieved against the taxpayer's total income of that tax year and/or the previous tax year
- The relief may be claimed for one of the available years, for both years, or for neither.
- Partial claims are not possible.
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Time limit:
- A claim to set a trading loss against total income must be made by 31 January in the second tax year following the tax year in which the loss was incurred (for 2024-25, this would be 31 January, 2027).
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Personal allowances:
- Trading loss relief is set against total income before personal allowances are deducted.
- Personal allowances are only used in the tax year they're related to, but unrelieved losses can be carried forward for later years.
- Small total incomes might not benefit from loss relief.
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Relieving trade losses against capital gains:
- If a trading loss is claimed against total income, any unrelieved portion may be set against any capital gains of that year.
- Losses against capital gains are treated as if they were capital losses of the year.
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Early trade losses relief:
- Losses incurred in the early years of trade can sometimes be brought back against the total income of earlier years.
- Claims are subject to a restriction on the total amount.
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Non-active traders:
- A "non-active trader" is someone who carries on a trade but isn't personally engaged for at least 10 hours a week.
- Limited sideways loss relief (£25,000).
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Terminal trade loss relief:
- A trading loss incurred in the last 12 months of trading can be set against the trading profits from the tax year of the cessation or the three preceding tax years.
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Post-cessation trade relief:
- Certain categories of unrelieved post-cessation expenses can be set against the taxpayer's income in the year they occur, including remediation of defective work done in operation, and bad debts not provided for in the business's accounts.
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Transfer of a business to a company:
- If a business is transferred to a company, unrelieved losses can be carried forward and set against income from the company, if certain conditions are met:
- the business is transferred mostly in exchange for shares.
- the vendor of the business continues to hold shares in the company.
- the company continues to operate the transferred trade.
- If a business is transferred to a company, unrelieved losses can be carried forward and set against income from the company, if certain conditions are met:
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Losses on shares in unlisted trading companies:
- A taxpayer who loses money on shares of unlisted trading companies can set that capital loss against their total income as if it were a trading loss.
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Limit on income tax reliefs:
- The maximum total for allowable tax relief for losses is £50,000 or 25% of the taxpayer's income, whichever is higher.
Miscellaneous Capital Allowances
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Patent rights:
- Pooled, subject to a 25% annual writing-down allowance.
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Know-how:
- Defined as industrial information, defined by method of use (manufacturing, working of mineral deposits, agricultural, fishing, forestry).
- Pooled, with a 25% annual writing-down allowance.
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Research and development:
- Incurred expenditure attracts a 100% first-year allowance.
Structures and Buildings
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SBAs (Structures and Buildings Allowances):
- Claimed in relation to construction costs of new commercial structures and buildings used for trade.
- SBAs are available at 3% p.a., on cost of the structure-based work.
- Land costs and dwellings don't qualify.
- SBAs cease after 33 1/3 years (400 months) or when demolished/converted to residential use.
- If sold, the buyer takes over any remaining SBAs
References
- Melville (2024) Taxation Finance Act 2024. 30th ed. Harlow: Pearson Education Limited.
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Description
This quiz covers self-employment, capital allowances, and losses from the Principles of Taxation course. You will delve into key concepts such as qualifying expenditures, plant and machinery, and different pools for capital allowances. Enhance your understanding of taxation principles and their practical applications.
