For calculating the trade profits of a business after setting up a business UK, it is important to consider the deductible and non-deductible expense, and this will be the topic of discussion in this blog. The topics under consideration will be the expense not entirely and exclusively for the trade purposes, bad debts or the impairment losses, unpaid remuneration, entertaining and gifts and the national insurance contributions etc. particularly with the consideration of the scenario when registering a new business UK.
The subtraction of the expense is not done if it is not for the purposes of trade (the remoteness test), or if according to the duality test, more than one purpose is reflected by it. The private portion which is not deductible includes the payments for motoring expenses, telephone expenses, heat and light expenses, rent and the expenses of a proprietor. The relief is provided on the element of business after setting up a business UK in the case of a possibility of the exact apportionment. When the payments are made to the employees or are on the behalf of employees, the deduction of the full amounts is to be done but the taxation of the employees is done according to the benefits code.
The following mentioned cases illustrate the remoteness test:
For the purposes of tax, only the impairment losses where the liability was suffered exclusively and entirely for the trade purposes are to be subtracted. For example, the loans given to employees in a written form are not subtracted until and unless the business is that of making loans, or it can be shown that the written off loan was the payment of earnings made for the trade advantage.
According to the FRS 26 Financial Instruments, the measurement should be carried out which is the review of all trade receivables for the assessment of their fair value at the balance sheet date and any impairment losses written off. The accounting treatment is followed by the tax treatment so there is no requirement of adjustment for the purposes of tax. As a result of FRS 26, it is not much possible that any general provisions will now be noted. In the case that they do occur, the increment or decrement in general provision are not allowable or liable to tax and there will be a need of some adjustment.
If the recovery of an impairment loss is made which was subtracted for the purposes of tax, the recovery is taxable so there is no requirement of adjustment to the recovery amount mentioned in the statement of profit or loss.
If after business registration UK charging of the earnings for employees is done in the accounts but their payment is not made within the duration of nine months of the termination of accounting period, the cost is only to be subtracted for the period of account in which the payment of the earnings is made.
When a computation of tax is made within the period of nine months, an assumption is made initially that the payment of the unpaid earnings will not be made within that period. The adjustment of computation is done if their payment is so made.
The treatment of earnings is done as paid at the same time as their treatment is done as acquired for the purposes of employment income.
As a general rule, the expense incurred on the gifts and entertainment is not to be subtracted. This is applicable to the amounts whose reimbursement has been done to employees for particular gifts and expenses for entertainment, and to round sum the allowances that are meant to meet such expenses exclusively. For the purposes of corporation tax and income tax, there is no difference between the customers of UK and abroad. In the case of value added tax, a different rule is applicable.
Some particular exceptions exist to this rule. These include:
For the leases initiating on or after April 6 2013 (April 1 2013 for companies having business registration UK), there exists a restriction on the leasing costs of a car with carbon dioxide emissions more than 130g/km during the computation of taxable profits, 15% of the leasing prices will be disallowed.
The interest that is permitted in the form of deductible interest is not allowed in the form of a trading expense.
No deduction is permitted for any contributions of national insurance except for the contributions of employer.
The penalties and interest on the payment of tax made late are not permitted in the form of an expense for trade. Income tax, value added tax, capital gains tax and stamp duty land tax are included in the definition of tax.
If a payment constitutes an offence by the person paying it, then it is not deductible. This includes the protection money whose payment is made to the bribes, terrorists and certain similar payments made abroad that would be considered as criminal payments if they were made inside the UK. Statute results in the prevention of any deduction for payments made in response to extortion or blackmailing.
The general rule states that the expenses which are suffered entirely and exclusively for trade purposes are not disallowed and hence most of the expenses will be deductible. Some expenses that might otherwise be disallowed according to the wholly or exclusively rule, or according to one or more of the particular rules mentioned above are exceptionally permitted by the legislation.
The expense which is suffered prior to the beginning of trade is to be subtracted, if it is suffered within the duration of seven years of the commencement of trade and it is of a kind that would have been deductible if the trade had already commenced. Its treatment is done in the form of an expense for trade suffered on the trading’s first day.
There is a deduction in the case of incidental costs of acquiring the loan finance, or of making an attempt to acquire or redeeming it. These exclude discount on issue or a premium in the case of a redemption that are actually the substitutes for the payment of interest. This subtraction for the incidental costs is not applicable to companies because they acquire a subtraction for the borrowing costs in a different manner.
An annual sum may be deducted by a trader in respect of the amount which is taxable on income tax on a lease premium whose payment they made to their landlord. As a normal practice, the amortization of the lease will have been subtracted in the accounts and should be added back in the form of capital expense.
In the case where the replacement or alteration of a tool is done, then the price of alteration or renewal may be subtracted as an expense in particular instances. These are that the prohibition of a deduction would only be done because of the expense being a capital expense and no deduction can be given according to any other provisions, such as according to the legislation of capital allowances.
On the event of an employee leaving their employment, they may accept a limitation on their activities in future in a payment return. The payment is considered as a deductible expense of trade, if the taxation of the employee is done on the payment in the form of an employment income.
The costs of seconding employees to charities or the establishments related to education are also deductible.