M2 - Trading Profits

Question 1

What are Capital Allowances?

Answer 1

A way to offset capital expenditure (specifically plant & machinery, vehicles, and equipment) against taxable profits, reducing tax liabilities.

Question 2

How is a capital allowance calculated?

Answer 2

1. Determining price of asset bought (or market value if gifted)
2. apply government determined rate to cost of the asset for that particular category
3. Deduct capital allowance from total taxable profit

Question 3

What is the tax equivalent of depreciation?

Answer 3

Capital Allowances

Question 4

The business equivalent of gift aid donations for individuals

Answer 4

Qualifying Charitable Donations

Question 5

How do QCDs affect TTP?

Answer 5

full gross value of donations is deducted from total profits

Question 6

Are dividends received by one company to another taxable?

Answer 6

No, since they are post-tax

Question 7

Definition of a disallowable expense?

Answer 7

Items which were included in the financial accounts as expenses but should not be classified there for tax purposes

Question 8

Examples of disallowable expenses

Answer 8

• depreciation
• amortisation
• Fines
• Certain gifts
• Donations
• Entertainment
• Capital expenditure
• Lease premiums

Question 9

What is AIA?

Answer 9

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

Question 10

Is non-trading income taxed along with trading income?

Answer 10

No, it is removed before the TTP

Question 11

are bad debt provisions an allowable expense?

Answer 11

Only ones specific and not general ones

Question 12

do you add rental income from the TTP?

Answer 12

ignore it, it will be taxed in a separate tax computation

Question 13

What makes a hamper (as a gift to customer or client) not business allowable?

Answer 13

The fact that it contains food. If it is under £50 it does not matter

Question 14

are trade debts written off business allowable?

Answer 14

Yes, and trade debts recovered are taxable

Question 15

What is the purpose of IR35?

Answer 15

To remove the tax advantages when an employee leaves and returns as a limited company

Question 16

What qualifies expenditure for R&D tax relief?

Answer 16

• 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

Question 17

What aspects of staff costs are acceptable as R&D expenditure?

Answer 17

all the staff costs (gross wages, er pension and NIC) except for taxable benefits

Question 18

When is software not applicable as R&D expenses

Answer 18

when it’s not used for the R&D

Question 19

is water and power acceptable R&D expenses?

Answer 19

Yes

Question 20

Are expenses covered by a grant allowed to be included on an R&D claim?

Answer 20

No

Question 21

Are donations to other independent research organisations allowed as R&D expenses?

Answer 21

No

Question 22

What R&D benefits do large businesses obtain?

Answer 22

1. Can deduct full amount of R&D expenditure from profit as business allowable
2. 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)

Question 23

What are the capital allowances for green tech?

Answer 23

100% of expenditure is an allowance (deducted against TTP).

12.67% of the expenditure is paid in cash if it is within a loss

Question 24

What happens if green tech is disposed of within 4 years of the accounting period end?

Answer 24

any payment issued must be returned and the loss reinstated

Question 25

What is QRE?

Answer 25

Qualifying Replacement Expenditure

Question 26

What happens with QRE?

Answer 26

Expenditure worth more than 50% the original capital expenditure qualifies for 6% ‘writing down allowance’

Question 27

how to apportion a capital gain across two CAPs?

Answer 27

it belongs with the CAP where the disposal took place

Question 28

What is WDV?

Answer 28

written down value. Also known as net book value

Question 29

What are the options a company has for loss relief?

Answer 29

1. Use loss relief for current period profit figure (before QCDs). Immediate benefit
2. 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)
3. Carry forward. Use trading losses and offset against all profit types together in current and future periods.

Question 30

What is Terminal Loss Relief?

Answer 30

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

Question 31

is trading loss relief available before or after QCDs have been added to the calculation of TTP?

Answer 31

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

Question 32

if a capital purchase is used for private use, does this affect the capital allowance?

Answer 32

No, privately used assets are still 100% eligible for CA

Question 33

when do large companies have to pay corp tax?

Answer 33

14th day on the 7, 10, 13, and 16 months after the start of the accounting period

Question 34

what makes a company large?

Answer 34

£1.5m revenue per annum (or proportional equivalent)

Question 35

What happens to lease premium during calculation of TTP?

Answer 35

1. Remove amortisation on lease from profits
2. Calculate capital element of lease (2% x (n-1) x premium)
3. Calculate revenue element of lease (premium - capital element)
4. Calculate annual amount of lease and apportion according to number of months in that CAP
5. Deduct revenue element from profits

Question 36

What happens to an R&D expense for a small/medium business?

Answer 36

1. Normal deduction of expense in profit calculation like other business allowable expenses
2. Extra 30% is deducted from profits as R&D relief.
3. if this creates a loss, 14.5% of the loss can be paid in cash to claimant (loss can no longer be carried forward)

Question 37

in which computation is there no private use of an asset in a company?

Answer 37

Capital allowances. It’s chargeable gains where that is to be considered

Question 38

can you choose how much of a business loss is applied to each period?

Answer 38

Only when carrying losses forward. Not when carrying back

Question 39

Does a company have to pay corp tax on account?

Answer 39

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