Trading: Calculating Profits and Paying VAT

This set of vocabulary flashcards covers key concepts in UK business taxation, including trading profit calculations, capital allowances, loss reliefs for unincorporated businesses, and the VAT system.

Trading profit

The amount of income a business generates from trading after deducting chargeable receipts less deductible expenditure and capital allowances.

Chargeable receipts

Recurring income generated from trading activities, such as the sale of goods or services, rather than capital receipts from the sale of fixed assets.

Deductible expenditure

Expenses that are income in nature, incurred wholly and exclusively for the purposes of trade, and not prohibited by statute.

Capital Allowances

Tax deductions for capital expenditure on plant and machinery that cannot be deducted as a standard business expense.

Plant and machinery

Apparatus used in business operations, including equipment, tools, and computers, as defined through case law.

Writing Down Allowance (WDA)

An annual deduction for the pool of plant and machinery, typically calculated at a standard rate of $18\%$ of the written-down value (WDV).

Annual Investment Allowance (AIA)

A relief allowing a $100\%$ deduction for qualifying plant and machinery expenditure up to a current limit of $£1,000,000$ per year.

Full Expensing

A relief available to companies only that allows a $100\%$ deduction of the cost of brand-new plant and machinery with no cap.

Start-up loss relief

Relief applied to losses in the first 4 tax years, where the loss is set against total income from the 3 preceding tax years, earliest year first.

Carry-across / one-year carry-back

A relief for trading losses that can be set against total income from the same tax year and/or the preceding tax year.

Terminal trading loss relief

Relief for losses incurred in the final 12 months of trading, set against profits of the final tax year and the previous three tax years, latest year first.

Losses on incorporation

Relief allowing unused losses to be carried forward and offset against income from a company when a business is transferred wholly or mainly for shares ($\geq 80\%$ shares).

Cap on certain reliefs

A limit on start-up and carry-across/back relief restricted to the higher of $£50,000$ or $25\%$ of income.

Output tax

The VAT charged by a business to its customers on taxable supplies.

Input tax

The VAT paid by a business on its purchases, which can be reclaimed against output tax.

Exempt supplies

Supplies where no VAT is charged and no input tax can be reclaimed, such as residential land or health services.

Zero-rated supplies

Supplies where VAT is charged at $0\%$ but the business is still permitted to reclaim input tax.

VAT Registration Threshold

The amount of taxable supplies a business must exceed in 12 months ($£90,000$) to trigger compulsory registration.