Business costs and tax, for a dummy

[itannum990]

Am I right in understanding that businesses pay no tax / get tax rebated from running costs?

Investments in property, equipment, training, whatever = no tax on these? Or more so, the taxed amount is deducted from profit so an effectively higher tax bracket is in use?

(Clearly, I'm not an accountant or business owner, please work around my thickness)

[Du1point8]

running costs are just that.

turnover per year = £100k
Costs/expenses = £20k
Salary = £10k (inc PAYE and NI)
pre tax Profit = £70k
Corp tax on £70k = 20% of £70k = £14k

Left in company = £56k

You can then take out dividends (at the moment) up to circa £43k with out tax.

Salary + Dividends = £43k

Left in Company = £23k

That can then be taken out as well but you will go onto higher rate of tax for it.

Lots of other things that need to be looked at, I just lumped them under Costs/Expenses.

Pension
Insurance
Accountancy fees
etc, etc...

Then you have VAT to look at if you are registered and or FRS, etc. <<< this point HMRC will pay you back but not sure if its just deducted from Profit or not...

Eric will be along shortly to correct all my mistakes.

[essayer]

Broadly speaking a business pays taxes on its profits which come after cost of sales and qualifying expenses are deducted.

Investment into things like plant and machinery and R&D can be deducted from the profits to reduce the tax due. Google 'capital allowances'

Speak to an accountant

[itannum990]

essayer said:

..

Speak to an accountant

Won't take long before I get a fustrated slap from said accountant!

[Eric Mc]

Businesses themselves only pay tax if they are operated through limited companies.

If you are running a business as an individual i.e. a self employed individual/sole trader, it is YOU as a person who pays Income Tax (and Class 4 NI) on the profits your business makes.

To arrive at your taxable business profits, you deduct your normal business costs from your overall sales. You can also make additional claims for certain types of capital expenditure using the HMRC Capital Allowance system. What's left over, if a profit, is added to your overall personal income for the year and you will pay tax on the total. You will also pay Class 4 NI on the taxable business profits if they are over around £5,000.

If your allowable costs and Capital Allowances claims EXCEED your sales, you will end up with a tax loss which means you will have no tax or NI arising from your business income. If you have other taxable income, such as employment income, you may be able to offset your business loss against that income and obtain a tax refund if you have already paid tax. This is not that unusual for people who set up a business when they still have a full time employment which is taxed under PAYE.

In a business' first year it is not rare for such early year's of trading to produce tax losses, especially if there has been a large outlay on capital items, such as computers, equipment, etc.

[itannum990]

Thanks, nice post!

Couple of questions. Mortgage/rent? A gym owner was explauning to me a while back that he rented his property rather than buy it, as it was effectively free due to the tax offset.. I basically didn't understand so didn't question further.

Starting a business from home, home will need work done to accommodate this - is this tax deductable? The business cannot exist without the improvements, but is building a driveway for example a business cost or a home improvement?

VAT - where does one stand regarding this?

And another one.. Would a slightly naughty owner be able to reduce his paye tax by running a cash losing business? (Not considering doing this!)