Chapter 7 - Trading profits and VAT Flashcards
Why are trading profits and corporation tax important?
Because are needed for the calculation of income tax
Who gets income tax?
Individuals and individual partners
Who gets corporation tax?
Companies
What is the basis for a business’s financial record keeping and accounting?
The calculation of trading profits
What is VAT?
VAT forms a key record-keeping and disclosure requirement for most businesses
What is required to know for SQE?
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.
For how long a business is preparing accounts?
For 12 months
Why is a business preparing accounts?
To show whether a profit or loss has been made
What can income include?
Trading profits
Interest received
Rent received
Is the principle of calculation same for unincorporated business as well as incorporated?
Yes
What is the formula?
Chargeable receipts -
Deductible expenses -
Capital allowances = Trading profit or loss
What are chargeable receipts?
Means something of an income nature rather than a capital nature that is derived from the trade
What is the most common example of chargeable receipts?
Sale of goods
Or services
What does the sum be like to be deductible?
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.
Explain what it means the sum not prohibited by nature
It means for example business entertainment expenses are not prohibited
Explain the sum of be of an income nature (not a capital nature)
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.
What is the sum be incurred wholly and exclusively for the purpose of the trade mean?
For example utility bills when working from home
How do capital allowances serve?
Serve to encounter investment
What would happen without capital allowance?
Without them the cost of machinery and plant would not be deductible
What is capital allowance, is it income in nature?
No
What does plant and machinery stand for?
These are assets that help carry out the business.
Does plant and machinery include items that are bought to be sold?
No
How many types of capital allowances there are?
Two
Which are the two capital allowances?
Writing down allowance
Annual Investment allowance
How much of the total value is the percentage of the writting down of the allowance of the plant and machinery?
18% of the total value each year
Where is the WDA Writing down allowance deducted from?
Chargeable receipts
How to find out chargeable receipts? How to calculate?
The total value of plant and machinery in the first year times X 18% = chargeable receipts
How to calculate the WDA - Writting down allowance?
Total value of machinery and plants minus chargeable receipts
What mean that the items are pooled?
Pooling means that the WDA each year is calculated on the value of all of the assets pooled together.
What do you need to calculate first to find out the WDA?
First calculate the chargeable receipts with the times 18 and then calculate the WDA
Why does pooling makes it all easier?
Because the proceeds are deducted from the total value of the pool.
What happens if one of the assets are on sale?
The sale price exceeds WDA
Where is the balance going to be included if items are on sale?
As a chargeable receipts
How much charge is added as a chargeable receipt of the business ?
1K
How to calculate WDA?
Total of machinery nd plants minus the chargeable receipts which you get from the total times 18%
What is the shortcut for the Anual Investment Allowance?
AIA
What is AIA?
A type of a capital allowance
What can a business do under AIA?
Under AIA the business can deduct the entire cost of a newly purchased plant and machinery in that accounting period from chargeable receipts
What is the amount of cap that a business can deduct from machinery and plant?
1 million each year
How many AIA do group companies have?
1
What happens if the cost of the machinery exceeds the AIA - Anual Investment allowance?
WDA - writing down allowance can be claimed on the balance over the cap
What is likely to change for the SQE revision regarding the AIA?
The cap for AIA
What happens if an unincorporated business makes a trading loss during the accounting period?
There will be no need to pay tax
What is available for the trading loss?
Tax relief
How many types of tax relief are?
5
What are the 5 tax reliefs?
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
Learn that table on relief on losses
When is VAT charged?
When a business supplies goods or services
What is the main value statute?
VATA - Value Added Tax Act 1994
When is a supply taxable?
Unless is exempt
Which are the main exempt supply?
Education
Health Services
Residential Land
Insurance
How does a taxable person charge VAT?
On the value of the supply of goods or services
Who is a taxable person?
Is someone who makes taxable supplies
Where does a taxable person must register with VAT?
They must register at HMRC if the their taxable supplies exceed 85K in the previous year.
What happens to the taxable person if the taxable supplies do not exceed 85K?
Then registration is voluntary
When is a VAT number assigned to the business?
When. is registered
What VAT does the business deduct?
Can deduct any VAT paid on the goods and services it uses
What happens if the deducted VAT found any difference?
it must account to HMRC for any difference
How to calculate you are due to HMRC?
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
How much is the current normal rate for VAT?
20%
What is the zero rated supply?
Non-catering food, books and water
What is the rate for zero-rated supply?
0%
How much is VAT for leisure, entertainment and hospitality?
IS 12.5% - cut from March 2022
Can a person who only makes exempt supplies register for VAT?
No
What happens to the person who makes 0 rated supplies?
They can register for VAT and recover input tax paid
Where is a VAT return submitted?
to HMRC
When does the business need to pay the VAT?
Must be paid within one month from the end of each quarter
When is a rebate going to be paid?
A rebate will be payable if input tax exceeds output tax and full records must be kept
To whom do the VAT invoices need to be provided for?
Must be provided for a taxable supply for a taxable person
Why are VAT invoices important?
They are required to deduct input tax
What are the penalties if they fail to adhere to the legislation?
Repayment with interest
Unlimited fine and imprisonment for up to 7 years for tax evasion
fixed financial penalties for failing to keep records
