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The profit and loss account structure of your business accounts,
while more than adequate for the purpose of running the business, is not
sufficient for working out the likely tax due. One of the main areas that needs
to be taken into account is expenses, it is imperative to keep all receipts,
not only for accounting purposes, but also in case the Inland Revenue query
your tax return. Allowable expensesYou will need to ensure that any expense that may have seemed
reasonable in the management accounts meets the more stringent requirements of
the tax authorities. You are generally allowed to set an expense against your
income if it is: - Incurred wholly and exclusively for the purposes of
trade
- Properly charged against income (not, for example, purchase of
a property lease, which is capital)
- Not specifically disallowed by statute
Expenses to be adjustedThe adjustments to be made to the profit, as shown in your profit and
loss account, to arrive at your taxable profits include the following: - Any depreciation on fixed assets needs to be added back to
profits, as these are not an allowable business expense
- Deduct a writing down allowance for any new capital expenditure
made in the period; the rate is changed in the annual budget and varies from
25% to 100% depending on the particular item purchased
- Deduct the writing down allowance for capital expenditure made
in earlier years, this may be at a lower rate or be a diminishing sum (motor
vehicles are written down at 25% on the declining balance)
- Add back personal telephone charges if business and personal
telephone use overlap, mobile phone calls also come under this
heading
- Any use of stock for personal use, for example food products if
you run a grocery outlet, also need to be added back to profits
- Add back entertainment expenses to profits
- Add back drawings made during the year
- Heating, lighting and other property charges if the business is
run from home need a proportion added back to profits
Note that charging back proportionate costs (heating/gas/electricity
etc) if the business is run from home may result in your Local Authority
re-calculating your Council Tax liability, to take account of that part of the
dwelling that would then be considered as commercial premises. In order to
escape re-valuation by your Council you must be able to demonstrate that the
part of the building used for the business does (or can) revert to domestic use
for some part of the day. Working out the tax billAfter you have made these adjustments you will have arrived at the
taxable profits. The tax due will be the prevailing rate applicable to your
business. - Sole traders and partners will be taxed at their marginal tax
rate which varies between 10 and 40%
- Companies are taxed according to the amount of profit they
make. If you make less than £10,000 per year the tax rate is zero, if you make
between £10,000 and £300,000 the tax rate is 19%. Thereafter it increases to a
maximum of 30%
- Directors of limited companies pay tax on PAYE
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