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Dear tutor,
I have 2 questions related to this exercise of computing taxable profit using cash basis:
1. Why is the cost Food, utilities, etc. £25,000, instead of £16,250 (£25,000*65%), when the private use percenttage is 35%?
2. Why the running cost of the car £3,000 is not deducted from the revenue?
3. Why calculating business mileage is: 10,000 miles at 45p/mile and 1,000 miles at 25p/mile, without considering the private use of 40%?Thank you in advance!
“Ega commenced trading as a sole trader, operating a small bed and breakfast business, on 6 April 2023.
For the year ended 5 April 2024, Ega had the following transactions:Total income of £74,500 during the year, of which £10,000 remained unpaid at 5 April 2024.
She incurred £25,000 in expenditure on food, utilities, and other household costs. Ega lives in part of the business premises with her husband and two children, and 35% of these costs relate to private use. The applicable HMRC flat rate private use adjustment for four occupants of business premises is £7,800.
On 1 June 2023, Ethel purchased a car for £14,000 by cheque. The vehicle has CO? emissions of 40 grams per kilometre. During the year, she also incurred £3,000 in running costs. The car was used 40% for private purposes, and she travelled 11,000 miles for business during the year.
On 1 March 2024, Ethel bought kitchen equipment costing £350 on credit. The supplier’s invoice was settled on 15 April 2024.
Required:
(a) Calculate Ethel’s tax-adjusted trading profit for the year ended 5 April 2024, assuming the cash basis and HMRC flat rate expense adjustments.”
1. Why is the cost Food, utilities, etc. £25,000, instead of £16,250 (£25,000*65%), when the private use percenttage is 35%?
Because the business is claiming flat rate expenses. When business premises are partly used as a home (like a B&B), all expenses are claimed and then a flat rate ADDITION is added in to reflect the private use element of the expenses, which is given in the question as £7,800.
So claim the full £25,000 initially, then add in £7,800, giving a net allowable expense of £17,200.
2. Why the running cost of the car £3,000 is not deducted from the revenue?
Because flat rate expenses for the car are being claimed, and this replaces ALL costs of the car (with the exception of parking and toll roads).
3. Why calculating business mileage is: 10,000 miles at 45p/mile and 1,000 miles at 25p/mile, without considering the private use of 40%?
Because the BUSINESS miles are 11,000, so the total miles must be 11,000/60 x 100 = 18,333, of which 60% (11,000) are for business.
I see.
So, it means for question 3 “Why calculating business mileage is: 10,000 miles at 45p/mile and 1,000 miles at 25p/mile, without considering the private use of 40%?”, if they use the total miles instead of business miles, we have to consider the business use (60%) in calculating the car expenses (capital – and running expenses) using the flat rate method?
Item 1 and 2 are clear to me. Thanks!
Correct. Read the question as sometimes you’re given total miles and sometimes (as in this question) you’re given the business miles (and you can only claim for the business miles).
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