Trading: Calculating Profits and Paying VAT

Question 1

How long is a typical accounting period for a business?

Answer 1

12 months

Question 2

How are trading profits or losses calculated?

Answer 2

Chargeable receipts
LESS deductible expenditure
LESS capital allowances
= Trading profit/loss

Question 3

What are chargeable receipts?

Answer 3

Money received for the sale of goods and services, derived from the business’s trade, and recurring (income) rather than capital in nature.

Question 4

What is the nature of chargeable receipts?

Answer 4

They must derive from the business’s trade and be recurring income, not capital.

Question 5

What is deductible expenditure?

Answer 5

Expenditure of an income nature, incurred wholly and exclusively for the trade, and not prohibited by statute

Question 6

What does “wholly and exclusively for the trade” mean in deductible expenditure?

Answer 6

The expense must be entirely for the purpose of the business’s trade to qualify as deductible.

Question 7

What are examples of expenses prohibited by statute which are NOT deductible?

Answer 7

Client entertainment and leasing cars with emissions over a certain level.

Question 8

When is expenditure considered income in nature?

Answer 8

When it is incurred so the business can sell an item at a profit (e.g., stock) or has the quality of recurrence (e.g., utility bills).

Question 9

When is expenditure considered capital in nature?

Answer 9

When it is spent on items that help the business trade, such as purchasing an office building.

Question 10

Can expenditure of a capital nature be deducted?

Answer 10

No, capital expenditure is not deductible.

Question 11

Why was eating in a restaurant while working away from home not considered “wholly and exclusively” for trade?

Answer 11

Because the person would have needed to eat regardless, giving the expense a dual purpose.

Question 12

What is a dual-purpose expense?

Answer 12

An expense that serves both business and personal purposes.

Question 13

Does HMRC allow any dual-purpose expenses to be partially deducted?

Answer 13

Yes, some expenses can be apportioned, with the business-related part being deductible.

Question 14

What is an example of an apportioned expense allowed by HMRC?

Answer 14

When a taxpayer works from home, part of the cost of heating and lighting the home is deductible for tax purposes.

Question 15

what are some examples of deductible expenditure?

Answer 15

• salaries (as long as they are not excessive given the services that the person carries out);
• rent on commercial premises;
• utility bills;
• stock;
• insurance
• contributions to an approved pension scheme for directors/employees; and
• interest payments on borrowings.

Question 16

What is plant and machinery?

Answer 16

plant includes apparatus used by business people to carry on their business, including goods and chattels kept for permanent use in the business (excluding stock in trade)

Question 17

What are examples of plant and machinery?

Answer 17

Manufacturing equipment, tools, computers, and other office equipment.

Question 18

What is the rate of the writing down allowance (WDA)?

Answer 18

18% of the value of the business’s plant and machinery, valued at the start of the financial year

Question 19

How often is the value of plant and machinery assessed for WDA purposes?

Answer 19

At the start of each financial year.

financial year 1 - WDA 18%
financial year 2 - WDA 18%
financial year 3 - WDA 18%

Question 20

How is the writing down allowance (WDA) calculated when pooling is used?

Answer 20

WDA is calculated annually based on the total value of the entire pool of plant and machinery - not each individual item.

Question 21

What happens when an asset in the pool is sold?

Answer 21

The proceeds of the sale are deducted from the value of the whole pool, not from the individual item.

Question 22

What is the Annual Investment Allowance (AIA)?

Answer 22

A tax allowance that allows businesses to deduct the full cost of qualifying plant and machinery purchased in an accounting period from chargeable receipts, up to a cap.

Question 23

What is the current cap for AIA?

Answer 23

£1 million for qualifying expenditure in each accounting period.

Question 24

How is the AIA allocated within a group of companies?

Answer 24

A group of companies receives one AIA of £1 million per accounting period, which can be allocated among the companies as they choose.

Question 25

what is the AIA applied to?

Answer 25

AIA is applied to:
both companies and unincorporated businesses.
- New,
- second-hand
and refurbished plant and machinery.

Question 26

What is full expensing?

Answer 26

A tax allowance allowing companies to deduct 100% of the cost of BRAND NEW plant and machinery purchased in an accounting period from chargeable receipts, with no cap.

Question 27

who can use full expensing?

Answer 27

companies ONLY

Question 28

How do AIA and full expensing interact?

Answer 28

Both allowances are available, but AIA applies to second-hand or refurbished assets, while full expensing applies to brand-new assets.

Question 29

What was the super-deduction introduced during the Covid-19 pandemic?

Answer 29

A temporary capital allowance that allowed companies to deduct 130% (1.3 times) the value of brand new qualifying plant and machinery from chargeable receipts

Question 30

What is start-up loss relief (also known as early trade losses relief)?

Answer 30

A tax relief available when a taxpayer suffers a loss in the first four years of a new business, allowing them to carry back the loss and set it against income in the previous three tax years - starting with earlier years first.

Question 31

How can start-up loss relief benefit taxpayers?

Answer 31

It allows taxpayers to claim back income tax paid on their previous income (from employment or a former business) by offsetting the loss against their total income in the three tax years before the loss year.

Question 32

Can a start-up loss be set against later years?

Answer 32

No, the loss must first be set against earlier years before being applied to later years.

Question 33

What is the deadline for making a claim for start-up loss relief?

Answer 33

The claim must be made on or before the first anniversary of 31 January following the end of the tax year in which the loss is assessed

Question 34

Who can benefit the most from start-up loss relief?

Answer 34

Individuals starting a new business who had previous income from employment or another business, as it allows them to reclaim some of the income tax paid on earlier earnings.

Question 35

what is carrying back or carrying across trading losses?

Answer 35

1. Set the loss against total income from the same tax year.
2. Set the loss against total income from the tax year preceding the loss.
3. Set the loss against total income from the same tax year until income is zero, then carry the balance back to the previous year.
4. Set the loss against total income from the previous year until income is zero, then carry the balance forward to the current year.

Question 36

What happens when a taxpayer claims the ‘carrying back or carrying across trading’ relief and offsets a loss?

Answer 36

The loss is set against total income, often reducing it to zero, which means the taxpayer loses the benefit of their personal allowance.

Question 37

When must a claim for carry-back relief be made?

Answer 37

The claim must be made on or before the first anniversary of 31 January following the end of the tax year in which the loss is assessed.

Question 38

What does the set-off against capital gains relief allow?

Answer 38

It allows a taxpayer to set unused trading losses against chargeable capital gains in the same tax year, after carry-across relief.

Question 39

What is the deadline to claim set-off against capital gains relief?

Answer 39

The claim must be made on or before the first anniversary of 31 January following the end of the tax year in which the loss is assessed.

Question 40

How does the set-off against capital gains relief work with remaining trading losses?

Answer 40

If there are unused trading losses after applying them to income, the remaining loss can reduce capital gains in the same tax year.

Question 41

Example 3: Carla has £40,000 in trading loss, £35,000 in employment income, and £20,000 in capital gains. How is the loss applied? - capital gains relief

Answer 41

Carla applies £35,000 to reduce her income to £0. The remaining £5,000 is used to reduce her £20,000 capital gains to £15,000.

Question 42

What is carry-forward relief?

Answer 42

Carry-forward relief allows a taxpayer to carry forward a trading loss to offset against future profits from the SAME trade in subsequent years.

Question 43

How long can trading losses be carried forward in carry forward relief?

Answer 43

Trading losses can be carried forward indefinitely until the loss is exhausted, meaning there is no time limit for using the loss against future profits.

Question 44

How long does a taxpayer have to notify HMRC of their intention to claim carry-forward relief?

Answer 44

A taxpayer must notify HMRC of their intention to claim carry-forward relief within four years after the end of the tax year in which the loss occurred.

Question 45

Can a taxpayer use other loss reliefs in conjunction with carry-forward relief?

Answer 45

Yes, a taxpayer can use carry-back, carry-forward, and carry-across reliefs for the same loss until it is fully absorbed or exhausted.

Question 46

Example: John has a £10,000 loss in the tax year 2022/23 and expects to earn profits in the following years. What can he do with the loss?

Answer 46

John can carry the £10,000 loss forward to offset against profits in future years, for example, using it to reduce £12,000 profits in 2024/25.

Question 47

What is carry-back of terminal trading loss?

Answer 47

It allows a taxpayer to carry back a loss incurred in the final 12 months of trading to offset trading profits from the previous three tax years.”terminal trading loss” occurs when the business is ceasing to trade.

Question 48

Can a terminal trading loss be applied to profits from non-trading income or capital gains?

Answer 48

No, the relief applies only to trading income, not non-trading income or capital gains.

Question 49

Can other sources of income connected to the trade be treated as trading profits for carry-back relief?

Answer 49

Yes, connected income (e.g., income from trade-related assets) can be treated as trading profits for the carry-back relief, even if not actual profits of the trade.

Question 50

When must a claim for carry-back of terminal trading loss be made?

Answer 50

A claim must be made within four years of the end of the tax year in which the loss occurred.

Question 51

What is Carry-Forward Relief on Incorporation of Business?

Answer 51

It allows a taxpayer to carry forward trading losses when they transfer their business to a company in exchange for shares, and set the losses against any income received from the company, like salary or dividends.

Question 52

What percentage of the transfer must be in shares for the ‘carry forward on incorporation of business relief’ to apply?

Answer 52

The transfer must be 80% or more of the consideration in exchange for shares to qualify for the relief.

Question 53

Can losses be set against multiple types of income from the company on ‘carry forward on incorporation of business relief’ ?

Answer 53

Yes, the taxpayer can set losses against salary, dividends, or other income from the company, in any order they choose.

Question 54

How long does a taxpayer have to notify HMRC about their intention to claim the carry-forward on incorporation of business relief?

Answer 54

The taxpayer must notify HMRC within four years of the end of the tax year in which the loss occurred.

Question 55

Example 1: John incorporates his tech business, incurring a £50,000 loss. He receives a £30,000 salary and £10,000 in dividends. How is the loss carried forward?

Answer 55

John can set the £50,000 loss against:

£30,000 salary (leaving £20,000).
£10,000 dividends (leaving £10,000). The remaining £10,000 can be carried forward to future years.

Question 56

What is the current VAT rate in the UK?

Answer 56

20%

Question 57

What is ‘output tax’?

Answer 57

Output tax is the VAT a business charges its customers on the value of the goods or services it supplies.

Question 58

When is VAT charged on a supply of goods or services in the UK?

Answer 58

VAT is charged on any supply of goods or services made in the UK if it is a taxable supply made by a taxable person in the course of a business.

Question 59

What types of supplies are exempt from VAT?

Answer 59

Exempt supplies include residential land, postal services, and education and health services.

Question 60

What defines a “taxable person” for VAT purposes?

Answer 60

A taxable person is someone who makes or intends to make taxable supplies and is or is required to be registered under the Value Added Tax Act 1994. Currently, registration is required if taxable supplies exceed £90,000 in the preceding 12 months

Question 61

How is VAT paid to HMRC?

Answer 61

VAT-registered businesses must submit a return and pay the VAT owed within one month after each quarter.

Question 62

What’s the difference between zero-rated and exempt supplies?

Answer 62

Both zero-rated and exempt supplies are not subject to VAT, but:

1. A business making zero-rated supplies can reclaim VAT paid on business expenses (input tax).
2. A business making exempt supplies cannot register for VAT or reclaim input tax.

Question 63

When must a business register for VAT?

Answer 63

business must register for VAT if taxable supplies exceed £90,000 in a 12-month period. Businesses making less can choose to register but are not required to. Only VAT-registered businesses can reclaim input tax.

Question 64

When must a tax invoice be provided?

Answer 64

A tax invoice must be provided when a taxable supply is made to a taxable person.

Question 65

What information must be included in a tax invoice?

Answer 65

A tax invoice must include the VAT number, value of the supply, and rate of tax charged.

Question 66

What is required for a person to reclaim input tax?

Answer 66

A person must have tax invoices for all the input tax they are reclaiming.