Trading profits and VAT

Question 1

What are the steps to calculating trading profits/loss?

Answer 1

Chargeable receipts LESS deductible expenses LESS capital allowances = trading profits/loss

Question 2

What is a chargeable receipt?

Answer 2

Something of an income nature rather than a capital nature that is in respect of/derived from the trade. Most common are income from the sale of goods (sales) or services (profit costs).

Question 3

To be a deductible expense the sum must what?

Answer 3

• not be prohibited by statute
• be of an income nature: for example stock, rent, utility bills, salaries (expenses necessary to facilitate making a profit)
• be incurred wholly and exclusively for the purposes of the trade

Question 4

What are capital allowances?

Answer 4

They allow a business to deduct some of the cost of plant and machinery from chargeable receipts, to reduce tax liability

Question 5

What do capital allowances serve to encourage?

Answer 5

Investment

Question 6

What are the two types of capital allowance that may be claimed?

Answer 6

The writing down allowance and the annual investment allowance

Question 7

What does the writing down allowance allow?

Answer 7

18% of the total value of the plant and machinery in each financial year to be deducted from chargeable receipts. The 18% is then deducted from the total value of the of the plant and machinery to give the written down value

Question 8

What is the annual investment allowance?

Answer 8

A business can deduct the entire cost of newly purchases plant and machinery in that accounting period from chargeable receipts.

Question 9

What is the annual investment allowance cap?

Answer 9

£1,000,000 each year

Question 10

What happens for tax purposes if an unincorporated business makes a trading loss during an accounting period?

Answer 10

There will be nil liability to tax and there may be tax relief available

Question 11

What tax reliefs are available for unincorporated businesses if they make a loss?

Answer 11

• start up loss relief
• carry across/back one year relief
• carry forward relief
• terminal loss relief
• carry forward relief on incorporation of business

Question 12

What is start up loss relief?

Answer 12

Losses made during the first four years of trade may be set off against any other income in the three years before the loss

Question 13

What is carry across/back one year relief?

Answer 13

The amount of the loss may be deducted from any other income taxable in that tax year (carry across) and/or the preceding tax year (carry back)

Question 14

What is carry forward relief?

Answer 14

The amount of the loss may be deducted from future income profits of the same trade

Question 15

What is terminal loss relief?

Answer 15

A loss made during the last year of trade may be set off against trading profits connected to the same trade in the final year and in the three tax years prior to the final year

Question 16

What is carry forward relief on incorporation of business?

Answer 16

Allows trading losses to be set off against any income received from the company when an unincorporated business is transferred to a company wholly or mainly in return for shares

Question 17

What does VAT stand for?

Answer 17

Value added tax

Question 18

What is VAT charged on?

Answer 18

Any supply of goods or services made in the UK where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him

Question 19

What does taxable supply mean?

Answer 19

A supply is taxable unless it is exempt. The main exempt supplies are education and health services, residential land and insurance

Question 20

What is a taxable person?

Answer 20

Someone who makes taxable supplies. They must register with HMRC if the value of their taxable supplies exceeded £85k in the previous year. Otherwise registration is voluntary. It is not possible to register if the business only makes exempt supplies

Question 21

What is the current normal rate of VAT?

Answer 21

20%

Question 22

What is the difference between exempt supplies and zero-rated supplies?

Answer 22

A person who makes only exempt supplies cannot register for VAT and cannot recover input tax paid. However, a person who makes only zero-rated supplies can register for VAT and recover input tax paid.