UNIT 1: VAT AND PROFITS

Question 1

2 profits that a business can make?

Answer 1

o Income profits - recurring in nature, ie rent or trading profit.
 Made by sole traders + partnership: form part of total income for the purposes of income tax (or corporation tax for corporate partners)
o Capital profits - one-off terms, ie office building value increase.
 Companies’ income profits and capital profits are charged to corporation tax.

Question 2

What is the cash-basis calculation?

Answer 2

• From 2024/4: default method for unincorporated businesses to calculate trading income for income tax purposes is ‘cash basis’; taxes difference between money received and money paid during accounting period.
• larger business likely to opt out as lender will likely need traditional accounts as certain reliefs cannot be claimed with cash basis.
• Does not apply to LLPs/companies.

Question 3

Trading profit/loss formula?

Answer 3

Chargeable receipts – deductible expenditure – capital allowances = trading profit/loss

Question 4

What are chargeable receipts?

Answer 4

Money received for the sale of goods and services. Receipts must derive from business’s trade and be INCOME (RECURRING) rather than capital in nature.

Trade = operation of a commercial character by which trader provides to customers for reward some kind of goods or services.

Question 5

What is deductible expenditure of an income nature?

Answer 5

Must be of an INCOME nature, incurred ‘wholly and exclusively’ for the trade. Deduction must not be prohibited by statute – ie client entertainment/leasing cars with emissions over certain level prohibited.
Income in nature = if incurring expenditure is so it can be sold at profit (stock) or if expenditure has quality of recurrence (ie utility bills).
Expenditure on items to help business trade ie office building capital and not deductible.

Question 6

What are capital expenses?

Answer 6

Capital items such as plant + machinery cannot in principle be deducted from chargeable receipts when calculating trading profits as not income in nature.
To encourage businesses to invest in essential machinery, entitled to capital allowance, allowing them to deduct a proportion of the cost of most capital items from chargeable receipts, less tax overall.

Question 7

Deductible expenditure must be ‘wholly and exclusively’ incurred for trade purposes. What are examples of this?

Answer 7

wholly and exclusively’ for purposes of trade has STRICT application:
* where taxpayer works from home, part of cost of heating + lighting will be deductible for tax purposes (and apportion identifiable proportion of expense wholly/exclusively in ITTQIA)
* Salaries (as long as not excessive given services person carries out)
* Rent on commercial premises
* Utility bills
* Stock
* Contributions to approved pension scheme for directors/employees
* Interest payments on borrowings

Question 8

What is ‘income in nature’?

Answer 8

Income in nature = if incurring expenditure is so it can be sold at profit (stock) or if expenditure has quality of recurrence (ie utility bills).

Question 9

What is the writing down allowance?

Answer 9

is 18% of the value of the business’s plant and machinery valued at the start of the financial year. Each financial year plant and machinery will be valued + 18% of its total value will be deducted from chargeable receipts when calculating trading profits for that accounting period. Reduced value = written-down value.

• All plant and machinery is generally pooled, and the WDA is calculated each year on the basis of the value of the whole pool. If an asset is sold, the proceeds of sale are deducted from the value of the whole pool, not the individual item. This means that no balancing allowances or charges should be needed until the whole pool is sold, often when the business stops trading

Question 10

What is an annual investment allowance? Who can benefit?

Answer 10

Allows business to deduct whole cost of plant + machinery purchased in that particular accounting period from chargeable receipts (not just 18% of value of assets as with capital allowances).
* Amount of AIA = £1million; first 1mil of ‘fresh’ qualifying expenditure on plant + machinery will be WHOLLY deductible (group of companies will receive only 1 for group in each accounting period, can be allocated as group sees fit

all can benefit - companies and unincorporated.

Question 11

What is the full expensing of plant and machinery? Who can benefit?

Answer 11

Allows companies to deduct 100% of the cost of plant + machinery purchased in that particular accounting period from chargeable receipts
* Amount deductible UNCAPPED.
* On disposal of asset, balancing charge is applied equal to 100% of the disposal value where full expensing has been claimed (full expensing set to end 1 Mar 2026).
* Normal AIA of 100% of cost of asset capped at 1mil is in force in addition to full expensing; for companies AIA relevant for assets which are SECOND HAND OR REBURISHED rather than brand new.
* Sometimes you can choose, ie for company purchasing brand new assets below 1mil.

Question 12

Annual Investment Allowance and full expensing differences?

Answer 12

Full expensing:
- companies only
- allowance is 100% uncapped
- condition of asset brand new

AIA:
- companies + unincorporated business
- allowance is 100% capped at 1mil
- condition of asset new, second-hand and refurbished