BLP 7 - Trading Calculating Profits and paying VAT Flashcards
(19 cards)
Sole traders & partners must pay:
companies must pay:
Income tax & Capital gains tax
Corporation Tax
BOTH VAT
What is income tax?
What is captial profit?
Those profits which are recurring in nature e.g rent or trading profit
one-ff items such as an office building increasing in value
How are trading profits or losses calculated?
chargeable receipts LESS deductible expenditure LESS capital allowances = trading profit/loss
What are chargeable receipts?
Money from the sale of goods and services (derives from businesses trade and income) (excludes those things purchased for use in trade)
What is deductible expenditure?
Must be of an income nature and incurred wholly and exclusively for the trade (not prohibited by statute e.g client entertainment or car leasing)
Examples = salaries, rent, utilities, stock, pension contributions, interest on borrowings
What are capital allowances?
Further - what is pooling?
Items the business is able to deduct from its chargeable receipts as a proportion e.g plant and machinery that the business uses to carry on the business.
To a writing down allowance of 18% e.g 18% of the machineries total will be deducted from chargable reciepts. when calculating trading profit.
Pooling - the 18% is on plant and machinery as a whole not individually. If asset is sold no balancing charges/allowances should be needed until the whole pool is sold.
What is an annual investment allowance?
It allows businesses to deduct the whole cost of plant and machinery purchased in a particular accounting period from chargeable receipts (not just 18% of the value) e.g first £1 millions is wholly deductible (only one allowance per group of companies) (New, second hand or refurbished assets)
What is full expensing?
It allows companies to deduct 100% of the cost of plant and machinery purchased in a particular accounting period from chargeable receipts (uncapped amount) On disposal the a balancing charge is applied of 100% of the disposal value where expensing has been claimed (Brand new assets only)
What is start-up loss relief?
Available what the taxpayer suffers loss in first four tax years of new business.
The loss can be carried back and set against the taxpayer’s total income in the three tax years immediately prior to the tax year of the loss.
Must be set against earlier years before elater years.
What is Carry-across/one-year carry-back relief form trading losses generally
Four options - Trading losses in an accounting period are treated as losses of the tax year in which the accounting period ends.
- set against total income from same year
- set against total income from tax year preceding the tax year of the loss
- set against the total income from the same tax year until that income is reduced to zero, with the balance of the loss being set against total income from the tax year preceding the tax year of the loss
- set against the total income from the tax year preceding the tax year of the loss until that income is reduced to zero, with the balance of the loss being set against the total income from the tax year of the loss.
MUST set loss against total income often reducing to 0 so losing personal allowance benefit.
Explain set off against capital gains
Allows the taxpayer to set trading losses against chargeable gains in the same tax year and applies when a tax payer has claimed carry-across relief but not all the loss has been absorbed.
What is carry-forward relief?
Taxpayer may carry-forward their trading loss for a tax year and set it against subsequent profits which the trade produces in subsequent years, taking the earlier years first.
Losses can be carried forward indefinitely until the loss is exhausted.
Must notify HMRC of intention to claim relief no more than four years after end of tax year in which loss was incurred.
What is Carry-back of terminal trading loss?
Any loss incurred on the final 12 months of trading can se carried across and set against trading profits in the final tax year and then carried back and set against trading profit in the tree years proceeding the year of the loss, starting with the year preceding the year of the loss and moving back year by year until the loss in fully absorbed or the three-year limited is reached (whichever is first).
Loss must be made no more than four years after the end of the tax year to which the claim relates.
What is carry-forward relief on incorporation of business
If incorporates business by transferring it to company wholly or mainly (80% or more) in return for shares any trading losses which have not been relived can be carried forward and set against any income they receive form the company such as salary or dividends.
What is the cap on reliefs?
Start-up and carry-across/carry-back are cap of the greater of £50,000 or 25% of the taxpayer’s income in the tax year but only applies to income from sources other than trade which produced the loss.
What is output tax?
VAT - 20% that a business charges a customer
What is input tax?
Any VAT the business has paid itself
Who must register for VAT?
Anyone making taxable supplied of over £90,000 in any 12 month period must register and charge VAT
What is VAT?
It is charged on any supply of goods or services made in the united kingdom where it is a taxable supply made by a taxable person in the course or furthermore of any business carried on by him.
