7. Trading: Calculating Profits and Paying VAT

Question 1

DEF: Income Profits

Answer 1

Profits recurring in nature (eg. rent)

Question 2

DEF: Capital Profits

Answer 2

One-off items (ie. office building increasing in value)

Question 3

How is trading income calculated for unincorporated businesses?

Answer 3

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

Question 4

Trading Profits Calculation

Answer 4

= Chargeable receipts - deductible expenditure - capital allowances

Question 5

DEF: Chargeable receipts

Answer 5

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

Question 6

DEF: Deductible Expenditure

Answer 6

Must be of an income nature and incurred ‘wholly and exclusively’ for the trade, and its deduction cannot be prohibited by statute

Question 7

Items that are commonly deductible:

Answer 7

1. salaries
2. rent on commercial premises
3. utility bills
4. stock
5. contributions to approved pension scheme
6. interest payments on borrowings

Question 8

What items are prohibited as being deductible by statute

Answer 8

Hospitality expenses such as money spent entertaining clients etc.

Question 9

Types of Capital Allowances

Answer 9

1. Plant and Machinery Allowance (Writing Down Allowance)
2. Annual Investment Allowance
3. Full Expensing

Question 10

Writing Down Allowance

Answer 10

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

Question 11

‘Pooling’ for WDA

Answer 11

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

Question 12

Annual Investment Allowance

Answer 12

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

Question 13

Annual Investment Allowance for a ‘group of companies’

Answer 13

Each group has 1 AIA (1M) in each period

Question 14

Full Expensing

Answer 14

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

Question 15

If a taxpayer wants to get relief for a trading loss, does this automatically apply?

Answer 15

No, tax payer must always apply

Question 16

Start-up Loss Relief (early trade loss relief): When is it available

Answer 16

available when taxpayer suffers a loss in any of the first four tax years of the new business

Question 17

Start-up Loss Relief (early trade loss relief): What is the effect

Answer 17

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

Question 18

Start-up Loss Relief (early trade loss relief): When must the taxpayer claim this?

Answer 18

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

Question 19

Carry-across/ one-year carry-back relief for trading losses generally: Four Options

Answer 19

Four Options for this relief, the losses can be:

1. Set against total income from the same tax year; or
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 zero, with balance of the loss being set against total income from the tax year preceding the tax year of the loss; or
4. 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

Question 20

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?

Answer 20

No

Question 21

Carry-across/ one-year carry-back relief: When must a taxpayer claim this

Answer 21

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

Question 22

Set-off against capital gains: What happens

Answer 22

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

Question 23

Set-off against capital gains: When must taxpayer apply for this

Answer 23

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

Question 24

Carry-forward relief: Process

Answer 24

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)

Question 25

Carry-forward relief: When must it be claimed?

Answer 25

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