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SQE 1 > Chapter 7 - Trading profits and VAT > Flashcards

Chapter 7 - Trading profits and VAT Flashcards

1
Q

Why are trading profits and corporation tax important?

A

Because are needed for the calculation of income tax

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2
Q

Who gets income tax?

A

Individuals and individual partners

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3
Q

Who gets corporation tax?

A

Companies

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4
Q

What is the basis for a business’s financial record keeping and accounting?

A

The calculation of trading profits

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5
Q

What is VAT?

A

VAT forms a key record-keeping and disclosure requirement for most businesses

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6
Q

What is required to know for SQE?

A

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.

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7
Q

For how long a business is preparing accounts?

A

For 12 months

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8
Q

Why is a business preparing accounts?

A

To show whether a profit or loss has been made

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9
Q

What can income include?

A

Trading profits
Interest received
Rent received

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10
Q

Is the principle of calculation same for unincorporated business as well as incorporated?

A

Yes

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11
Q

What is the formula?

A

Chargeable receipts -
Deductible expenses -
Capital allowances = Trading profit or loss

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12
Q

What are chargeable receipts?

A

Means something of an income nature rather than a capital nature that is derived from the trade

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13
Q

What is the most common example of chargeable receipts?

A

Sale of goods
Or services

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14
Q

What does the sum be like to be deductible?

A

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.

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15
Q

Explain what it means the sum not prohibited by nature

A

It means for example business entertainment expenses are not prohibited

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16
Q

Explain the sum of be of an income nature (not a capital nature)

A

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.

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17
Q

What is the sum be incurred wholly and exclusively for the purpose of the trade mean?

A

For example utility bills when working from home

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18
Q

How do capital allowances serve?

A

Serve to encounter investment

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19
Q

What would happen without capital allowance?

A

Without them the cost of machinery and plant would not be deductible

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20
Q

What is capital allowance, is it income in nature?

A

No

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21
Q

What does plant and machinery stand for?

A

These are assets that help carry out the business.

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22
Q

Does plant and machinery include items that are bought to be sold?

A

No

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23
Q

How many types of capital allowances there are?

A

Two

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24
Q

Which are the two capital allowances?

A

Writing down allowance
Annual Investment allowance

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25
Q

How much of the total value is the percentage of the writting down of the allowance of the plant and machinery?

A

18% of the total value each year

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26
Q

Where is the WDA Writing down allowance deducted from?

A

Chargeable receipts

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27
Q

How to find out chargeable receipts? How to calculate?

A

The total value of plant and machinery in the first year times X 18% = chargeable receipts

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28
Q

How to calculate the WDA - Writting down allowance?

A

Total value of machinery and plants minus chargeable receipts

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29
Q

What mean that the items are pooled?

A

Pooling means that the WDA each year is calculated on the value of all of the assets pooled together.

30
Q

What do you need to calculate first to find out the WDA?

A

First calculate the chargeable receipts with the times 18 and then calculate the WDA

31
Q

Why does pooling makes it all easier?

A

Because the proceeds are deducted from the total value of the pool.

32
Q

What happens if one of the assets are on sale?

A

The sale price exceeds WDA

33
Q

Where is the balance going to be included if items are on sale?

A

As a chargeable receipts

34
Q

How much charge is added as a chargeable receipt of the business ?

A

1K

35
Q

How to calculate WDA?

A

Total of machinery nd plants minus the chargeable receipts which you get from the total times 18%

36
Q

What is the shortcut for the Anual Investment Allowance?

A

AIA

37
Q

What is AIA?

A

A type of a capital allowance

38
Q

What can a business do under AIA?

A

Under AIA the business can deduct the entire cost of a newly purchased plant and machinery in that accounting period from chargeable receipts

39
Q

What is the amount of cap that a business can deduct from machinery and plant?

A

1 million each year

40
Q

How many AIA do group companies have?

A

1

41
Q

What happens if the cost of the machinery exceeds the AIA - Anual Investment allowance?

A

WDA - writing down allowance can be claimed on the balance over the cap

42
Q

What is likely to change for the SQE revision regarding the AIA?

A

The cap for AIA

43
Q

What happens if an unincorporated business makes a trading loss during the accounting period?

A

There will be no need to pay tax

44
Q

What is available for the trading loss?

A

Tax relief

45
Q

How many types of tax relief are?

A

5

46
Q

What are the 5 tax reliefs?

A

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

47
Q

Learn that table on relief on losses

A
48
Q

When is VAT charged?

A

When a business supplies goods or services

49
Q

What is the main value statute?

A

VATA - Value Added Tax Act 1994

50
Q

When is a supply taxable?

A

Unless is exempt

51
Q

Which are the main exempt supply?

A

Education
Health Services
Residential Land
Insurance

52
Q

How does a taxable person charge VAT?

A

On the value of the supply of goods or services

53
Q

Who is a taxable person?

A

Is someone who makes taxable supplies

54
Q

Where does a taxable person must register with VAT?

A

They must register at HMRC if the their taxable supplies exceed 85K in the previous year.

55
Q

What happens to the taxable person if the taxable supplies do not exceed 85K?

A

Then registration is voluntary

56
Q

When is a VAT number assigned to the business?

A

When. is registered

57
Q

What VAT does the business deduct?

A

Can deduct any VAT paid on the goods and services it uses

58
Q

What happens if the deducted VAT found any difference?

A

it must account to HMRC for any difference

59
Q

How to calculate you are due to HMRC?

A

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

60
Q

How much is the current normal rate for VAT?

A

20%

61
Q

What is the zero rated supply?

A

Non-catering food, books and water

62
Q

What is the rate for zero-rated supply?

A

0%

63
Q

How much is VAT for leisure, entertainment and hospitality?

A

IS 12.5% - cut from March 2022

64
Q

Can a person who only makes exempt supplies register for VAT?

A

No

65
Q

What happens to the person who makes 0 rated supplies?

A

They can register for VAT and recover input tax paid

66
Q

Where is a VAT return submitted?

A

to HMRC

67
Q

When does the business need to pay the VAT?

A

Must be paid within one month from the end of each quarter

68
Q

When is a rebate going to be paid?

A

A rebate will be payable if input tax exceeds output tax and full records must be kept

69
Q

To whom do the VAT invoices need to be provided for?

A

Must be provided for a taxable supply for a taxable person

70
Q

Why are VAT invoices important?

A

They are required to deduct input tax

71
Q

What are the penalties if they fail to adhere to the legislation?

A

Repayment with interest
Unlimited fine and imprisonment for up to 7 years for tax evasion
fixed financial penalties for failing to keep records

SQE 1 (12 decks)

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