You calculate your taxable profits by deducting allowable business expenses from your 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.
If you incur a loss on your business activities you can either:
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:
A business can claim for certain pre-trading expenses when calculating trading income.
Examples of pre-trading expenses are:
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.
The general rule is that you cannot claim for any private expenses such as:
You cannot deduct capital expenditure in calculating your taxable profits. However you can claim capital allowances.
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.
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.
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.
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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