Trading Profits and VAT Flashcards
The basic calculation of trading profits is chargeable receipts, less deductible expenses. True or false?
False, it should be chargeable receipts, less deductible expenses, less capital allowances.
The cost of purchasing new plant and machinery will be a deductible expense when calculating a business’ trading profit. True or false?
False, as it is of a capital nature, not of an income one.
Explain the purpose of capital allowances.
Allow businesses to deduct some of the cost of plant and machinery from chargeable receipts, to reduce tax liability.
If an incorporated business makes a trading loss during an accounting period, there will be a nil liability to tax. In addition, tax relief may be available in respect of the loss. True or false?
True
When is VAT registration compulsory?
Only if a person makes taxable supplies, and if the value of taxable supplies exceeded 85,000 in the previous year.
Formula for calculating trading profits
Chargeable receipts
LESS
Deductible Expenses
LESS
Capital Allowance
What are chargeable receipts?
Something of an income nature, rather than a capital nature. For example, income from sales or services.
What are deductible expenses?
- Cannot be prohibited by statute (e.g. business entertainment expenses)
- Be of an income nature (not capital nature)
- Be incurred wholly and exclusively for the purposes of the trade.
What are the two types of capital allowances that can be claimed?
- The writing down allowance
- Annual Investment Allowance
What is the Writing Down Alloance?
It allows 18% of the total value of plant and machinery in each financial year to be deducted from chargeable receipts.
E.g. Company buys £200k worth of machinery year 1.
WVD value after year one = £36k - £200k = £164k
WVD value after year two = £164k x 18% = £29,520 (£164k - £29,520 = £134,480)
Is the writing down allowance calculated on the value of all assets, or individually?
All assets “pooled” together.
What is annual investment allowance?
A business can deduct the entire cost of newly purchased plant and machinery in that accounting period from chargeable receipts. (capped at £1m per year)
If an incorporated business makes a trading loss during an accounting period, what is their tax liability?
Nil
What is the Start-up Loss Relief (early trade losses relief)?
Losses made during the first four years of trade may be set off against any other income in the three tax years before e loss.
What is Carry Across/back one year relief?
The amount of the loss may be deducted from any other income taxable in that tax year and/or the preceding tax year.