More profit more tax

More profit more tax

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My company spent £1,000 on a pc and £20,000 on our website.  Our other cost was wages and our total costs this year were £52,000. Turnover was £52,100 so we just about made £100 for the year. But our accounts have just been done and they show a profit of about £3,000. That shocked us. The accountant says that some of our costs have been capitalized so they are in the balance sheet and only some of the cost is really being counted against our profit. The corporation tax due on the alleged profit is more than the profit we really made! How can this be right?

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By User deleted
03rd Dec 2012 17:11

We also don't know ...

... if the accounts cover a full year.

If not the pro-rated AIA may not cover all capital expenditure

As to whether it was a good bit of business, how much were the salaries, were they to the owner (or his wife).

We have gleaned since the OP it was a website to promote an exhibition stand, how much did that cost?

We really don't have enough information to comment on the validity of the enterprise, only the accounting treatment!

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By petersaxton
05th Dec 2012 14:57

Peter?

What did the accountant say when you queried the accounts & tax?

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By User deleted
05th Dec 2012 15:33

PeterS:

What did the accountant say when you queried the accounts & tax?

Given his fee level, my money is on, "I don't know the answer to this, I'll go and ask those good folks on Accounting Web for their opinion."

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By WhichTyler
05th Dec 2012 15:39

From PeterLev's mouth...

.. to George Osborne's ear?

From the Autumn statement

A simpler income tax scheme for small unincorporated businesses will be introduced for the tax year 2013-14 to allow:

Eligible self employed individuals and partnerships to calculate their profits on the basis of the cash that passes through their business. They will generally not have to distinguish between revenue and capital expenditureAll unincorporated businesses will be able choose to deduct certain expenses on a flat rate basis

Won't help here as PL has a company, but could mean a significant change in those 'should I incorporate or not' calculations....

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Replying to carnmores:
By petersaxton
05th Dec 2012 15:59

Sounds like a disaster

WhichTyler wrote:

.. to George Osborne's ear?

From the Autumn statement

A simpler income tax scheme for small unincorporated businesses will be introduced for the tax year 2013-14 to allow:

Eligible self employed individuals and partnerships to calculate their profits on the basis of the cash that passes through their business. They will generally not have to distinguish between revenue and capital expenditureAll unincorporated businesses will be able choose to deduct certain expenses on a flat rate basis

Won't help here as PL has a company, but could mean a significant change in those 'should I incorporate or not' calculations....

Taxing cash movement will be madness. Businesses will make payments before the end of the year to reduce their tax bill but how often can they keep doing that?

What will happen if some customer pays them just before the year end!?

I hope businesses don't get a loan just before the year end!

Why is it simpler if you can choose to deduct on a flat rate basis? Everybody will want to account the normal way and then choose if the alternative is better. This seems more complicated to me.

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By petersaxton
05th Dec 2012 15:39

Or

Answering questions is extra.

Don't know whether it will be £5 or £500, though!

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Stepurhan
By stepurhan
06th Dec 2012 20:03

Reversal of the norm

Customer : Please take my payment now. It will save me tax

Supplier : No! It will cost me more in tax.

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Replying to chatman:
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By DMGbus
06th Dec 2012 20:52

For the (near?) future - cash accounting for self assessment

stepurhan wrote:

Customer : Please take my payment now. It will save me tax

Supplier : No! It will cost me more in tax.

The Chancellor has re-affirmed, this week,  the intention to introduce a form of cash accounting for sole traders and partnerships (not limited companies) , so it really could give a tax benefit such businesses on the scheme to pay suppliers early - and not affect suppliers if they are not on cash accounting.  The announced turnover limits are £77,000 to join cash accounting and then remain in the scheme until £154,000 turnover is achieved.

This proposed scheme of cash accounting could please some business owners (*) who look at cashflow rather than conventional trading results as a fair measure of business performance.   As with all so-called "simplification" schemes there will be detailed rules (how many dozens of pages?)  which will make for some surprising disadvantages for the unwary - for example when I last looked at the proposals I noted that there would be no tax relief for losses to be offset against other income.

(*) Won't be what it seems for some though, like the business owner passed onto me by a senior partner many years ago to deal with - business owner couldn't see why he had to pay tax as he had no money in the bank and as for the profit that he was having to pay tax on... he asked "where is it?".  Easy answer to him: "you've spent the business profit on personal spending such as your children's school fees!".   No further questions on this subject line from the client.

 

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By petersaxton
06th Dec 2012 20:11

Extended credit

I can see all suppliers insisting on giving extended credit!

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By petersaxton
06th Dec 2012 20:53

Well I never

"The Chancellor has re-affirmerd, this week,  the intention to introduce a form of cash accounting for sole traders and partnerships (not limited companies) , so it really could give a tax benefit such businesses on the scheme to pay suppliers early - and not affect suppliers if they are not on cash accounting.  The announced turnover limits are £77,000 to join cash accounting and then remain in the scheme until £154,000 turnover is achieved."

Wow! What a coincidence that we'd suddenly started talking about it and then you come along and give us the news that the very same measures were in the autumn statement!

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Replying to Ruddles:
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By DMGbus
06th Dec 2012 21:37

Thought it was going to fall by wayside

petersaxton wrote:

"The Chancellor has re-affirmerd, this week,  the intention to introduce a form of cash accounting for sole traders and partnerships (not limited companies) , so it really could give a tax benefit such businesses on the scheme to pay suppliers early - and not affect suppliers if they are not on cash accounting.  The announced turnover limits are £77,000 to join cash accounting and then remain in the scheme until £154,000 turnover is achieved."

Wow! What a coincidence that we'd suddenly started talking about it and then you come along and give us the news that the very same measures were in the autumn statement!

Yes, having read original proposals and seen little (apart from criticism) since, I'd thought that the proposals were going to be dropped / quietly forgotten (*), then I find that the propsals are being talked about again by Government.. 

This latest brief announcement is at page 71 of the 93 page Autumn Statement (Full) which can be downloaded from...

http://www.hm-treasury.gov.uk/as2012_documents.htm

(*) That's why I refrained from referring to the cash accounting proposals earlier in this thread - I mistakenly thought they were going into oblivion.

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By petersaxton
06th Dec 2012 21:43

Me too

I suppose it will be similar to the Gordon Brown £10,000 0% company tax rate. The accountants told him not to do it but he went ahead, tried to wriggle out of the mess and a few years later abandoned it.

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By armstrm
10th Dec 2012 20:37

Interesting thread....

Lots of accountants taking a pop at the OP, but some the thread does highlight how classing the website development as a capital expense is still debatable. If a business spent 20k on printing a large number of brochures, or spent 20k on a website, the accounting treatment could  be different, even though the same amount was spent and the same results may be achieved from a business point of view.

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