Chapter 7 - Trading profits and VAT

Question 1

Why are trading profits and corporation tax important?

Answer 1

Because are needed for the calculation of income tax

Question 2

Who gets income tax?

Answer 2

Individuals and individual partners

Question 3

Who gets corporation tax?

Answer 3

Companies

Question 4

What is the basis for a business’s financial record keeping and accounting?

Answer 4

The calculation of trading profits

Question 5

What is VAT?

Answer 5

VAT forms a key record-keeping and disclosure requirement for most businesses

Question 6

What is required to know for SQE?

Answer 6

The calculation of trading profit and VAT from a practical perspective
How are trading profits calculated
What reliefs may be available for trading losses
Apply the rules to problem-based
KEy principles and practical requirements of VAT and its operation in England and Wales.

Question 7

For how long a business is preparing accounts?

Answer 7

For 12 months

Question 8

Why is a business preparing accounts?

Answer 8

To show whether a profit or loss has been made

Question 9

What can income include?

Answer 9

Trading profits
Interest received
Rent received

Question 10

Is the principle of calculation same for unincorporated business as well as incorporated?

Answer 10

Yes

Question 11

What is the formula?

Answer 11

Chargeable receipts -
Deductible expenses -
Capital allowances = Trading profit or loss

Question 12

What are chargeable receipts?

Answer 12

Means something of an income nature rather than a capital nature that is derived from the trade

Question 13

What is the most common example of chargeable receipts?

Answer 13

Sale of goods
Or services

Question 14

What does the sum be like to be deductible?

Answer 14

The sum must not be prohibited by statute (for example business entertainment expenses are prohibited)
Be of an income nature ( for example rent, bills, salaries and business rates, usually the expenses that are necessary to make a profit) - to recognise it, it usually reoccurs
be incurred wholly and inclusively for the purpose of the trade - for example the cost of eating out when away from home on business would not be included, as people need to eat in any event.

Question 15

Explain what it means the sum not prohibited by nature

Answer 15

It means for example business entertainment expenses are not prohibited

Question 16

Explain the sum of be of an income nature (not a capital nature)

Answer 16

For example goods purchased to sell for profit and expenses such as rent, bills and salaries- usually these are reoccurring. their benefit spreads over long period of time, like freehold premises, machinery or cars.

Question 17

What is the sum be incurred wholly and exclusively for the purpose of the trade mean?

Answer 17

For example utility bills when working from home

Question 18

How do capital allowances serve?

Answer 18

Serve to encounter investment

Question 19

What would happen without capital allowance?

Answer 19

Without them the cost of machinery and plant would not be deductible

Question 20

What is capital allowance, is it income in nature?

Answer 20

No

Question 21

What does plant and machinery stand for?

Answer 21

These are assets that help carry out the business.

Question 22

Does plant and machinery include items that are bought to be sold?

Answer 22

No

Question 23

How many types of capital allowances there are?

Answer 23

Two

Question 24

Which are the two capital allowances?

Answer 24

Writing down allowance
Annual Investment allowance

Question 25

How much of the total value is the percentage of the writting down of the allowance of the plant and machinery?

Answer 25

18% of the total value each year

Question 26

Where is the WDA Writing down allowance deducted from?

Answer 26

Chargeable receipts

Question 27

How to find out chargeable receipts? How to calculate?

Answer 27

The total value of plant and machinery in the first year times X 18% = chargeable receipts

Question 28

How to calculate the WDA - Writting down allowance?

Answer 28

Total value of machinery and plants minus chargeable receipts

Question 29

What mean that the items are pooled?

Answer 29

Pooling means that the WDA each year is calculated on the value of all of the assets pooled together.

Question 30

What do you need to calculate first to find out the WDA?

Answer 30

First calculate the chargeable receipts with the times 18 and then calculate the WDA

Question 31

Why does pooling makes it all easier?

Answer 31

Because the proceeds are deducted from the total value of the pool.

Question 32

What happens if one of the assets are on sale?

Answer 32

The sale price exceeds WDA

Question 33

Where is the balance going to be included if items are on sale?

Answer 33

As a chargeable receipts

Question 34

How much charge is added as a chargeable receipt of the business ?

Answer 34

1K

Question 35

How to calculate WDA?

Answer 35

Total of machinery nd plants minus the chargeable receipts which you get from the total times 18%

Question 36

What is the shortcut for the Anual Investment Allowance?

Answer 36

AIA

Question 37

What is AIA?

Answer 37

A type of a capital allowance

Question 38

What can a business do under AIA?

Answer 38

Under AIA the business can deduct the entire cost of a newly purchased plant and machinery in that accounting period from chargeable receipts

Question 39

What is the amount of cap that a business can deduct from machinery and plant?

Answer 39

1 million each year

Question 40

How many AIA do group companies have?

Answer 40

1

Question 41

What happens if the cost of the machinery exceeds the AIA - Anual Investment allowance?

Answer 41

WDA - writing down allowance can be claimed on the balance over the cap

Question 42

What is likely to change for the SQE revision regarding the AIA?

Answer 42

The cap for AIA

Question 43

What happens if an unincorporated business makes a trading loss during the accounting period?

Answer 43

There will be no need to pay tax

Question 44

What is available for the trading loss?

Answer 44

Tax relief

Question 45

How many types of tax relief are?

Answer 45

5

Question 46

What are the 5 tax reliefs?

Answer 46

Start up loss relief/early trade losses relief Acrry across/ back one year relief/ Carry forward relief Terminal loss relief Carry forward relief on incorporation of business

Question 47

Learn that table on relief on losses

Question 48

When is VAT charged?

Answer 48

When a business supplies goods or services

Question 49

What is the main value statute?

Answer 49

VATA - Value Added Tax Act 1994

Question 50

When is a supply taxable?

Answer 50

Unless is exempt

Question 51

Which are the main exempt supply?

Answer 51

Education Health Services Residential Land Insurance

Question 52

How does a taxable person charge VAT?

Answer 52

On the value of the supply of goods or services

Question 53

Who is a taxable person?

Answer 53

Is someone who makes taxable supplies

Question 54

Where does a taxable person must register with VAT?

Answer 54

They must register at HMRC if the their taxable supplies exceed 85K in the previous year.

Question 55

What happens to the taxable person if the taxable supplies do not exceed 85K?

Answer 55

Then registration is voluntary

Question 56

When is a VAT number assigned to the business?

Answer 56

When. is registered

Question 57

What VAT does the business deduct?

Answer 57

Can deduct any VAT paid on the goods and services it uses

Question 58

What happens if the deducted VAT found any difference?

Answer 58

it must account to HMRC for any difference

Question 59

How to calculate you are due to HMRC?

Answer 59

IF you buy goods for £100 plus VAT 20% = £20 THEN How much you sell the product X VAT £200 x VAT 20% = £40 Therefore how much you buy- hoe much you sell = how much you owe to VAT

Question 60

How much is the current normal rate for VAT?

Answer 60

20%

Question 61

What is the zero rated supply?

Answer 61

Non-catering food, books and water

Question 62

What is the rate for zero-rated supply?

Answer 62

0%

Question 63

How much is VAT for leisure, entertainment and hospitality?

Answer 63

IS 12.5% - cut from March 2022

Question 64

Can a person who only makes exempt supplies register for VAT?

Answer 64

No

Question 65

What happens to the person who makes 0 rated supplies?

Answer 65

They can register for VAT and recover input tax paid

Question 66

Where is a VAT return submitted?

Answer 66

to HMRC

Question 67

When does the business need to pay the VAT?

Answer 67

Must be paid within one month from the end of each quarter

Question 68

When is a rebate going to be paid?

Answer 68

A rebate will be payable if input tax exceeds output tax and full records must be kept

Question 69

To whom do the VAT invoices need to be provided for?

Answer 69

Must be provided for a taxable supply for a taxable person

Question 70

Why are VAT invoices important?

Answer 70

They are required to deduct input tax

Question 71

What are the penalties if they fail to adhere to the legislation?

Answer 71

Repayment with interest Unlimited fine and imprisonment for up to 7 years for tax evasion fixed financial penalties for failing to keep records