M2 - Trading Profits Flashcards
What are Capital Allowances?
A way to offset capital expenditure (specifically plant & machinery, vehicles, and equipment) against taxable profits, reducing tax liabilities.
How is a capital allowance calculated?
- Determining price of asset bought (or market value if gifted)
- apply government determined rate to cost of the asset for that particular category
- Deduct capital allowance from total taxable profit
What is the tax equivalent of depreciation?
Capital Allowances
The business equivalent of gift aid donations for individuals
Qualifying Charitable Donations
How do QCDs affect TTP?
full gross value of donations is deducted from total profits
Are dividends received by one company to another taxable?
No, since they are post-tax
Definition of a disallowable expense?
Items which were included in the financial accounts as expenses but should not be classified there for tax purposes
Examples of disallowable expenses
- depreciation
- amortisation
- Fines
- Certain gifts
- Donations
- Entertainment
- Capital expenditure
- Lease premiums
What is AIA?
Annual Investment Allowance - provides tax relief by reducing taxable profit.
If a company purchases plant and machinery and vans and lorries, it can claim 100% tax relief up to £1m
Is non-trading income taxed along with trading income?
No, it is removed before the TTP
are bad debt provisions an allowable expense?
Only ones specific and not general ones
do you add rental income from the TTP?
ignore it, it will be taxed in a separate tax computation
What makes a hamper (as a gift to customer or client) not business allowable?
The fact that it contains food. If it is under £50 it does not matter
are trade debts written off business allowable?
Yes, and trade debts recovered are taxable
What is the purpose of IR35?
To remove the tax advantages when an employee leaves and returns as a limited company
What qualifies expenditure for R&D tax relief?
- it must be revenue expenditure and not capital
- it must be for advancement of science and technology
- it must be relevant to the company’s trade
What aspects of staff costs are acceptable as R&D expenditure?
all the staff costs (gross wages, er pension and NIC) except for taxable benefits
When is software not applicable as R&D expenses
when it’s not used for the R&D
is water and power acceptable R&D expenses?
Yes
Are expenses covered by a grant allowed to be included on an R&D claim?
No
Are donations to other independent research organisations allowed as R&D expenses?
No
What R&D benefits do large businesses obtain?
- Can deduct full amount of R&D expenditure from profit as business allowable
- AND: Including 12% of R&D expenses as taxable income in TTP computation
Then taxing TTP by 19%
Then deducting 12% amount R&D expenses from CT liability (any excess will be paid in cash ignoring tax up to a max of the company’s PAYE + NIC liability for R&D employees in that period)
What are the capital allowances for green tech?
100% of expenditure is an allowance (deducted against TTP).
12.67% of the expenditure is paid in cash if it is within a loss
What happens if green tech is disposed of within 4 years of the accounting period end?
any payment issued must be returned and the loss reinstated
What is QRE?
Qualifying Replacement Expenditure
What happens with QRE?
Expenditure worth more than 50% the original capital expenditure qualifies for 6% ‘writing down allowance’
how to apportion a capital gain across two CAPs?
it belongs with the CAP where the disposal took place
What is WDV?
written down value. Also known as net book value
What are the options a company has for loss relief?
- Use loss relief for current period profit figure (before QCDs). Immediate benefit
- Carry back. After offsetting loss against current period, it may offset the loss against prior 12 months (exception if was during covid period where it can go 36 months)
- Carry forward. Use trading losses and offset against all profit types together in current and future periods.
What is Terminal Loss Relief?
relief specifically for the final trading CAP where the business ceases to trade.
Can be used for carried back 36 months up until the end of the final CAP.
Used against total profits and not just trading
is trading loss relief available before or after QCDs have been added to the calculation of TTP?
Before. QCDs cannot impact the availability of loss relief.
It punishes the business for having donated when it should have spent the money to be more profitable
if a capital purchase is used for private use, does this affect the capital allowance?
No, privately used assets are still 100% eligible for CA
when do large companies have to pay corp tax?
14th day on the 7, 10, 13, and 16 months after the start of the accounting period
what makes a company large?
£1.5m revenue per annum (or proportional equivalent)
What happens to lease premium during calculation of TTP?
- Remove amortisation on lease from profits
- Calculate capital element of lease (2% x (n-1) x premium)
- Calculate revenue element of lease (premium - capital element)
- Calculate annual amount of lease and apportion according to number of months in that CAP
- Deduct revenue element from profits
What happens to an R&D expense for a small/medium business?
- Normal deduction of expense in profit calculation like other business allowable expenses
- Extra 30% is deducted from profits as R&D relief.
- if this creates a loss, 14.5% of the loss can be paid in cash to claimant (loss can no longer be carried forward)
in which computation is there no private use of an asset in a company?
Capital allowances. It’s chargeable gains where that is to be considered
can you choose how much of a business loss is applied to each period?
Only when carrying losses forward. Not when carrying back
Does a company have to pay corp tax on account?
Yes if it is a large company.
The payments will occur on the 14th day of months 7, 10, 13, and 16 after the start of the accounting period
