Trading: Calculating Profits and Paying VAT Flashcards
What are the two types of profit businesses make?
Income and capital.
How are trading profits calculated?
By subtracting deductible expenditure and capital allowances from chargeable receipts.
The formula is:
Chargeable receipts LESS deductible expenditure LESS capital allowances = trading profit/ loss.
Define chargeable receipts.
Money received on the sale of goods/ services.
The receipts must derive from the business’s trade and be income (ie recurring) rather than capital in nature.
How is income profit generally differentiated from capital profit?
General principle is that income profit is when a business buys something to sell on at a profit. If they sell something which has been used in trade, it will be classed as capital profit.
Define income in nature.
Expenditure incurred so the business can sell the item at a profit. also where the expenditure has the quality of reoccurrence (eg utility bills), this would be income in nature.
How are each of the following taxed:
a) Sole traders;
b) General Partnerships;
c) LLPs;
d) Private Limited Companies;
e) Public Limited Companies
a) Income tax;
b) Income tax;
c) LLPs not taxable as an entity (members pay income tax on their share of the profits).
d) Corporation tax
e) Corporation tax
Define deductible expenditure.
Must be of an income nature and incurred wholly and exclusively for the trade. the deduction must not be prohibited by statute (eg client entertainment and leasing of cars with high emissions).
Give examples of things commonly deemed deductible expenditure (incurred wholly and exclusively for the purposes of the trade).
- salaries;
- rent on commercial properties;
- utility bills;
- stock ;
- contributions to approved pensions schemes for employees;
- interest payments on borrowings
Define capital allowances.
Businesses are entitled to a capital allowance, allowing them to deduct a proportion of capital expenditure from chargeable receipts. The main type of capital asset permitted for these purposes is plant and machinery.
Define plant and machinery.
Goods and chattels kept by a business for permanent use, but not stock in trade.
Examples include manufacturing equipment, tools, PCs etc.
Explain the writing down allowance (WDA) process.
Plant and machinery will be valued at the start of each financial year. 18% of its total value will be deducted from chargeable receipts when calculating trading profits or that accounting period.
Explain the Annual Investment Allowance (AIA).
AIA allows businesses to deduct whole cost of expenditure of [plant and machinery from their shareable receipts. The total deductible amount currently sits at £1,000,000 meaning that the first 1 million spent on plant and machinery is wholly deductible.
How does AIA apply to group companies?
The AIA allowance applies to the whole group (ie each company does not get an AIA allowance). The group can allocate this as it sees fit, but the amount will be £1,000,000 for the whole group.
What is full expensing?
allows companies to deduct 100% of the cost of plant and machinery (purchased in that accounting period) from its chargeable receipts. This amount is uncapped but only applies to brand new assets.
Can companies claim both AIA and full expunging allowances?
Yes.
Full expensing allowance will apply to brand new assets and the AIA will be used for second hand/ refurbished assets.
Which business mediums are entitled to:
a) AIA;
b) Full expensing
a) both companies and aunicorpated businesses;
b) companies only (only applies to brand new assets).
Explain key principles of start-up loss relief (aka early trade loss relief).
- Available if taxpayer suffers a loss in any of the four tax years of a new business.
- Loss can be carried back against the taxpayers total income in the three tax years immediately prior to tax year of the loss.
- Taxpayer can therefore claim back from HMRC some income tax paid in previous business/ employment;
- The loss must be set against earlier years before later years;
- Claim for the relief must be made on or before the first anniversary of `Jan 31st following end of the tac years in which the loss was assessed.
Define carry-across/ one-year carry back relief for trading losses.
Where trading losses in an accounting period are treated as losses of the tax year in which the accounting period ends.
List the four available options for the carry-across relief.
1) set against total income from the same tax year;
2) set against total income from the tax year preceding the tax year of the loss;
3) set against total income from same tax year until that income is reduced to 0, with the balance of the loss being set against total income from the tax year preceding thew tac year of the loss;
4) set against Toal income from the tax year preceding the tac year of the loss until that income is reduced to 0, with the balance of the loss being set against total income from the tax year of the loss.
Explain set-off against capital gains tax relief.
Taxpayer can set trading losses against chargeable gains in same tax year, and applied when they have claimed carry-across relief but this has not absorbed the total losses.
Explain carry-forward tax relief.
Taxpayer can carry forward trading loss for a tax year and set against subsequent profits which trade produces in subsequent years, taking earlier years first. these losses can be carried forward indefinitely until the loss is exhausted.
Is there a time limit on claiming carry-forward tax relief?
Yes. Taxpayer should notify HMRC of their intention to claim the relief no more Ethan four years after the end of the tax year in which the loss was incurred.
Explain carry-back of terminal trading loss.
Loss incurred by taxpayer in final 12 months of trading can be carried across and set against trading profits in final year of tax, and then carried back and set against trading profit in the three years preceding the year of the loss.
Define VAT.
- VAT is charged every time a business supplied goods and services.
- Current rate is 20%.
- Business deducts form amount it collects in output tax, anything Vat it has paid on the goods or services received. The difference is then paid to HMRC.
