7. Trading: Calculating Profits and Paying VAT Flashcards
DEF: Income Profits
Profits recurring in nature (eg. rent)
DEF: Capital Profits
One-off items (ie. office building increasing in value)
How is trading income calculated for unincorporated businesses?
Cash Basis: taxing difference between money received and money paid during accounting period
(smaller businesses only, larger ones will need to show traditional accounts)
- Cash basis prevents companies getting certain reliefs
Trading Profits Calculation
= Chargeable receipts - deductible expenditure - capital allowances
DEF: Chargeable receipts
Money received for the sale of goods and services, derived from businesses trade and are income profits (recurring) rather than capital
- if a business buyers something to sell at a profit on purpose, proceeds of sale are income
DEF: Deductible Expenditure
Must be of an income nature and incurred ‘wholly and exclusively’ for the trade, and its deduction cannot be prohibited by statute
Items that are commonly deductible:
- salaries
- rent on commercial premises
- utility bills
- stock
- contributions to approved pension scheme
- interest payments on borrowings
What items are prohibited as being deductible by statute
Hospitality expenses such as money spent entertaining clients etc.
Types of Capital Allowances
- Plant and Machinery Allowance (Writing Down Allowance)
- Annual Investment Allowance
- Full Expensing
Writing Down Allowance
Each financial year, the business is entitled to a ‘writing down allowance’ (WDA) which is 18% of the value of the business’s plant and machinery, valued at the start of the financial year
- reduced value of P+A is ‘written down value’ of the asset) and this is the value which the subsequent year’s WDA will be calculated off of
‘Pooling’ for WDA
Plant and machinery is generally pooled and WDA calculated each year on the basis of the value of the whole pool
- if an asset is sold, proceeds of sale are deducted from the value of the whole pool *not individual item
Annual Investment Allowance
AIA allows businesses (incorporated and unincorporated) to deduct the whole cost of plant and machinery purchased in that particular accounting period from chargeable receipts
- currently at 1M
- Can be new, second hand or refurbished assets
Annual Investment Allowance for a ‘group of companies’
Each group has 1 AIA (1M) in each period
Full Expensing
Applies to companies only
- allows them to deduct 100% of the cost of BRAND NEW plant and machinery purchased in that period from chargeable receipts, deductible amount is uncapped
If a taxpayer wants to get relief for a trading loss, does this automatically apply?
No, tax payer must always apply
Start-up Loss Relief (early trade loss relief): When is it available
available when taxpayer suffers a loss in any of the first four tax years of the new business
Start-up Loss Relief (early trade loss relief): What is the effect
The loss will be carried back and set against taxpayer’s total income in the 3 years prior to the tax year of the loss
- therefore, can claim back from HMRC some of the income tax they paid in previous business or employment in the three tax years prior to the tax year of the loss (some or all of it which they may have paid at a higher rate)
- must be set against earlier years before later years
Start-up Loss Relief (early trade loss relief): When must the taxpayer claim this?
claim must be made on or before the first anniversary of 31 January following the end of the tax year in which the loss is assessed
Carry-across/ one-year carry-back relief for trading losses generally: Four Options
Four Options for this relief, the losses can be:
- Set against total income from the same tax year; or
- set against total income from the tax year preceding the tax year of the loss
- set against total income from same tax year until that income is reduced to zero, with balance of the loss being set against total income from the tax year preceding the tax year of the loss; or
- set against total income from the tax year preceding the tax year of the loss until that income is reduced to zero, with balance of the loss being set against total income from the tax year of the loss
If a taxpayer is using carry-across / one-year carry-back relief, and this relief reduces their total income from a tax year to zero, do they get to keep the benefit of their personal allowance?
No
Carry-across/ one-year carry-back relief: When must a taxpayer claim this
claim must be made on or before the first anniversary of 31 January following the end of the tax year in which the loss is assessed
Set-off against capital gains: What happens
Allows taxpayer to set trading losses against chargeable gains in the same tax year and applies when a taxpayer has claimed carry-across relief but not all of the loss has been absorbed
Set-off against capital gains: When must taxpayer apply for this
claim must be made on or before the first anniversary of 31 January following the end of the tax year in which the loss is assessed
Carry-forward relief: Process
Taxpayer carries forward trading loss for a year and set it against ‘subsequent profits which the trade produces’ in subsequent years, taking earlier losses first
- losses can be carried forward indefinitely until loss is exhausted (so does not matter if several years lapse before profit is made)
Carry-forward relief: When must it be claimed?
taxpayer must notify HMRC of its intention to claim the relief no more than 4 years after the end of the tax year in which the loss was incurred
