Trading Profits and VAT Flashcards

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1
Q

The basic calculation of trading profits is chargeable receipts, less deductible expenses. True or false?

A

False, it should be chargeable receipts, less deductible expenses, less capital allowances.

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2
Q

The cost of purchasing new plant and machinery will be a deductible expense when calculating a business’ trading profit. True or false?

A

False, as it is of a capital nature, not of an income one.

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3
Q

Explain the purpose of capital allowances.

A

Allow businesses to deduct some of the cost of plant and machinery from chargeable receipts, to reduce tax liability.

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4
Q

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?

A

True

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5
Q

When is VAT registration compulsory?

A

Only if a person makes taxable supplies, and if the value of taxable supplies exceeded 85,000 in the previous year.

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6
Q

Formula for calculating trading profits

A

Chargeable receipts
LESS
Deductible Expenses
LESS
Capital Allowance

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7
Q

What are chargeable receipts?

A

Something of an income nature, rather than a capital nature. For example, income from sales or services.

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8
Q

What are deductible expenses?

A
  • 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.
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9
Q

What are the two types of capital allowances that can be claimed?

A
  • The writing down allowance
  • Annual Investment Allowance
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10
Q

What is the Writing Down Alloance?

A

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)

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11
Q

Is the writing down allowance calculated on the value of all assets, or individually?

A

All assets “pooled” together.

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12
Q

What is annual investment allowance?

A

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)

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13
Q

If an incorporated business makes a trading loss during an accounting period, what is their tax liability?

A

Nil

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14
Q

What is the Start-up Loss Relief (early trade losses relief)?

A

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.

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15
Q

What is Carry Across/back one year relief?

A

The amount of the loss may be deducted from any other income taxable in that tax year and/or the preceding tax year.

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16
Q

What is Carry Forward Relief?

A

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

17
Q

What is terminal loss relief?

A

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 tax year.

18
Q

What is carry forward relief on incorporation of business?

A

Allows trading losses to be set off against any income received from the company.

19
Q

What is a taxable person?

A

Someone who makes taxable supplies and must register for VAT if value is over £85k.

20
Q

Sertab is a sole trader. She buys goods for £100 plus VAT and sells them for £200 plus VAT. What will be her VAT liability?

A

Sertab has paid input tax of £20 (£100 x 20%), which she can deduct from the output tax received of £40 (£200 x 20%). The total due to HMRC here will be £20 (£40 -£20).

21
Q

Difference between tax exempt supplies and zero-rated tax supplies?

A

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

22
Q

In an accounting period, a company buys stock totalling £750k, which it sells for £2m. It pays wages of £100k and other bills of £80k
and buys new freehold premises and cars for £200k and £50k respectively.

Ignoring any capital allowances, what are the company’s trading profits?

A. £820k.

B. £1.07m.

C. £1.25m.

D. £1.02m.

E. £870k.

A

B. £1.07m. (wages and bills are deductible expenses)

23
Q

A sole trader buys new plant and machinery costing £2m and has an existing pool of plant and machinery with a written down value of
£1m in the previous financial year.

Ignoring any ‘super deduction’, which of the following best describes the capital allowances the sole trader will be able to
claim?

A. The sole trader will be able to claim 18% of the cost of the new plant and machinery and 18% of the written down value of the
existing pool.

B. The sole trader will be able to claim the cost of the new plant and machinery and 18% of the written down value of the existing pool.

C. The sole trader will be able to claim the cost of the new plant and machinery up to £1m and 18% of the written down value of the existing pool.

D. The sole trader will be able to claim the cost of the new plant and machinery up to £1m and 18% of both the written down value of
the existing pool and the remaining cost of the new plant and machinery.

E. The sole trader will be able to claim the cost of the new plant and machinery up to £1m and 18% of the remaining new plant and
machinery cost.

A

D. The sole trader will be able to claim the cost of the new plant and machinery up to £1m and 18% of both the written down value of
the existing pool and the remaining cost of the new plant and machinery.

24
Q

A sole trader makes a trading loss in the first year of trade, a profit in their second year of trade and a loss in their final year of trade.
Prior to setting up the business, they had salary income for several years and they continue to receive a salary of £10k per annum for
consultancy work.

Which of the following best describes the reliefs that may be available for the trading losses?

A. Start-up loss relief, carry across relief, carry back relief and carry forward relief.

B. Start-up loss relief and terminal loss relief.

C. Start-up loss relief, terminal loss relief and carry forward relief on incorporation.

D. Carry across relief, carry back relief and carry forward relief.

E. Start-up loss relief, carry across relief, carry back relief, carry forward relief and terminal loss relief.

A

E. Start-up loss relief, carry across relief, carry back relief, carry forward relief and terminal loss relief.

25
Q

A client sets up business as a private medical doctor and works exclusively in providing medical diagnosis and treatment. In their first
year of business, the client made trading profits of £100k.

Which of the following best describes the client’s VAT position in their second year of business?

A. The client must register for VAT as their taxable profits in the previous year exceeded £85k.

B. The client does not need to register for VAT as they make only exempt supplies. The client will be unable to recover any input tax
paid.

C. The client does not need to register for VAT as they make only zero-rated supplies.

D. The client does not need to register for VAT as they make only exempt supplies. The client will be able to recover any input tax paid.

E. The client must register for VAT as their taxable profits in the previous year exceeded £85k. The client will be able to recover any
input tax paid.

A

B. The client does not need to register for VAT as they make only exempt supplies. The client will be unable to recover any input tax
paid.

26
Q

A client, who is a taxable person and registered for VAT, buys raw materials for £100 plus VAT and sells the finished products for £300
plus VAT.

Assuming VAT is chargeable at the standard rate, which of the following best describes the client’s VAT liability?

A. £40.

B. £60.

C. £80.

D. £35.

E. £25.

A

A. £40.