TAXABLE PROFITS

CartoonHow do I calculate my taxable profit?

You calculate your taxable profits by deducting allowable business expenses from your turnover.

What is my turnover?

Your turnover is the gross amount of income earned by your business before deducting any business expenses i.e. total amounts earned from sale of goods, or provision of services. If you are registered for VAT your figures in your accounts should be shown excluding VAT.

What happens if my business incurs a loss?

If you incur a loss on your business activities you can either:
  • Set off the loss against other taxable income in that year

    or

  • Carry the loss forward against future profits of the same business.

What expenses can I claim for?

You can claim for any business expenses which you have incurred in order to earn your profits. These expenses are normally referred to as revenue expenditure. Revenue expenditure is your day to day running costs and covers such items as:
  • Purchase of goods for resale
  • Wages, rent, rates, repairs, lighting, heating, etc.
  • Running costs of vehicles or machinery used in the business
  • Accountancy, certain legal and other professional fees
  • Interest paid on monies borrowed to finance business expenditure or items
  • Leasing charges in respect of plant/equipment or vehicles used for the business

What about pre trading expenses?

 

A business can claim for certain pre-trading expenses when calculating trading income.

Examples of pre-trading expenses are:

  • Accountancy fees
  • Advertising
  • Costs of feasibility studies
  • Costs of preparing business plans
  • Rent paid for the premises from which the business operates

The allowable amounts are treated as having been incurred at the time the business commences. Allowable amounts cannot be offset against income other than that income from that business but can be carried forward and set against future profits of the business.

What expenses can I not claim for?

The general rule is that you cannot claim for any private expenses such as:

  • Any expense, not wholly and exclusively paid for the purposes of the trade or profession
  • Any private or domestic expenditure e.g. your own wages, food, clothing (except protective clothing) income tax etc.
  • Business entertainment expenditure such as food and drink or other hospitality expenses.

You cannot deduct capital expenditure in calculating your taxable profits. However you can claim capital allowances.

What about expenses which are partly business and partly private?

Where expenditure relates to both business and private use, only that part which relates to your business will be allowed. In such circumstances the expenses will need to be apportioned to exclude the private use.

What about motor expenses?

You can claim a deduction for the running expenses in respect of a vehicle used for business purposes. There are restrictions applying if you are claiming expenditure for a car.

What if I use my car for private travel?

When you use a vehicle for both business and private purposes, a split of both the capital allowances (allowance for wear and tear)and running expenses has to be made.

Note journeys between your home and regular place of work are treated as private and not business.

What is capital expenditure?

Expenditure is regarded as "capital" if it has been spent on acquiring or altering assets which are of a lasting use in the business, for example, the purchase of premises, or the cost of plant, machinery or vehicles. You cannot deduct this type of expenditure in arriving at your taxable profit.

You can however, claim capital allowances on capital expenditure incurred on items such as office furniture & equipment, plant & machinery, vehicles and certain buildings. Capital allowances account for the wear & tear on these items and are deducted from your profit before you are taxed on it. Currently you can claim all the expenditure in the year up to a maximum of £1,000,000 per year and any in excess is calculated at 18% per annum on the cost of the asset on a reducing balance method. There are special rules on the amount you can claim on cars.

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