BL - 7 Trading profits and VAT Flashcards
What is the basic formula to calculate trading profits?
TRADING PROFITS =
Chargeable receipts - deductible expenses - capital allowances
What are chargeable receipts?
Income form sales or services
What are deductible expenses?
Expenses can be deducted when they are:
- not prohibited by statute (e.g. business entertainment)
- an income of nature (not capital)
- incurred wholly and exclusively for the purposes of the trade
What are capital allowances?
Deductible costs of plant and machinery
What are plant and machinery?
Assets used to help carry on the business (e.g. office equipment)
What types of capital allowances may be claimed?
(a) writing down allowance
(b) annual investment allowance
What is the writing down allowance?
18% of the total value of plant an machinery in each financial year may be deducted from chargeable receipts
What is pooling?
It means grouping all the writing down allowance together.
What is the benefit of pooling?
It allows for simpler calculation. When an asset is sold, the proceeds are deducted from the total value of the pool.
What is the annual investment allowance?
Up to a cap of 1M, a business can deduct the entire cost of newly purchased plant and machinery in that accounting period from chargeable receipts
What tax will be chargeable if a business makes a trading loss during an accounting period?
Nil
What tax reliefs are available when a company incurs a loss?
- Start-up loss relief/early trade relief
- carry across/back one year relief / trade loss relief against general income
- carry forward relief
- terminal loss relief
- carry forward relief on incorporation of business
What is start-up loss / early trade losses relief?
Losses made during the first four years of trade may be set off against any other income in the three tax years before the loss
Is there a cap to start-up loss / early trade losses relief?
Yes
What is carry across/back one year relief / trade loss relief against general income?
A loss made from a business may be deducted from any other income taxable
(a) in that year (carry across)
and/or
(b) in the preceding tax year
Can a business that only sell zero-rated supplies deduct VAT for items they purchase?
Yes
Is there a cap on carry across/back one year relief / trade loss relief against general income?
Yes
What is the carry forward relief?
A loss may be deducted from future income profits of the same trade
Is there a cap for carry forward relief?
No
What is a terminal loss relief?
A loss made during the last year of trade may be set off against trading profits connected to the same trade in the final tax year and in the three tax years prior to that final tax year.
What is carry forward relief on incorporation of business?
Trading losses can be set off against any income received from the company when an unincorporated business is transferred to a company wholly or mainly in return for shares (shares at least 80%)
What is VAT?
It is a tax charged on any supply of goods or services made in the UK
What is a taxable supply?
Any supply unless it is tax exempt
Can a business that only sell exempted goods/services deduct VAT for items they purchase?
No
What are examples of tax exempt supplies?
- education
- health services
- residential land
- insurance
Who is a taxable person?
It is someone who makes taxable supplies and he must register for VAT with HMRC
What is the threshold for VAT registration
85k in the previous year
Is voluntary VAT registration possible?
Yes
What are zero-rated supplies?
Goods, for which the VAT rate is
(a) 0% (e.g. non-catering food, books, water)
(b) 5% (e.g. domestic fuel)
Can a business that only sell exempted goods/services register for VAT?
No
Can a business that only sell zero-rated supplies register for VAT?
Yes
What is the time limit for a VAT return?
One month from the end of each quarter
