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yourtax by R. H. Grimsley Bcom.FIAc
2 The way business profit is taxed
THE starting point for finding the tax liability for the road haulage business is its ordinary annual accounts, normally consisting of trading accounts, profit and loss account and balance sheet. The accountant will send a copy of these documents to the Inspector of Taxes and he will include with them a statement of adjustment of profit for tax purposes. Usually it is the accountant who prepares this statement but it is most reasonable that the managing director or owner of the business should expect to have a look at it before it is posted.
A lot can be learned from this statement; sometimes the director will be surprised and disappointed at some of the adjustments, perhaps to the extent of deciding to arrange matters differently in future years so as to avoid repeating the same tax position. At other times he will find that the statement is wrong because entries in the company's books have not been clearly described and the accountant has not been aware of the real nature of some expenses or income. This is when the director's study of the statement really pays off as he will explain the point and have the figures corrected.
The example shows a shortened form of typical statement to arrive at the amount of trading profit as adjusted for tax purposes assessable under Case 1 of Schedule D. This Schedule applies to all trading income whether for a business run by a limited company, a sole trader or a partnership, but the treatment after this stage is slightly different.
For the present it will be assumed the business is a limited company because these are most numerous and the sole trader or partnership rules will be dealt with in future instalments. This series of articles will also explain which kinds of expense are disallowed (and why) and the rules by which capital allowances are calculated and made to replace depreciation. It will be seen that no matter how large or small the company's rate of depreciation on its fixed assets, it will have no bearing on the company's tax liability. In some years the taxable figure will be larger than the profits shown in the profit and loss account, and in others smaller.
The adjusted trading profit of a company could then be increased by adding any capital gains made during the year plus taxable income from rents, interest and other possible (but improbable) odd sources. The final figure shown in the example as £23,300 is liable to Corporation Tax (the year covered by the annual accounts is called an accounting period. It is divided into chargeable accounting periods, of which there will be two, except for companies whose accounts end on March 31 when there will be only one.)
The first chargeable accounting period (C.A.P.) starts with the date on which the accounts began and ends on March 31. The second C.A.P. starts on April 1 and runs to the close of the accounting year. The distinction is important because the rate of Corporation Tax payable by the company is the rate fixed for a "financial year" which runs from April 1 to March 31 and the two C.A.P.s fall in different financial years. In the present example the division is: C.A.P. Oct. 1 1970 to March 311971. Six twelfths of the adjusted profit of £23,30( =£11,65( This is taxable at the 40% rate fixed by the 1971 Budget 4,66( C.A.P. April 1 1971 to Sept. 30 1971. Six.
twelfths of the adjusted profit =£11,65( Tax at the unknown rate to be fixed at the 1972 Budget, assume provisionally unchanged at 40% . . 4,66( Corporation Tax liability on the total is £9,32( The whole of this will be payable on one date
Note the way the true percentage is neve] known until the Budget at the end of the financial year, so at the time the accounts are being prepared, it is necessary to guess thal the rate will stay unchanged. The actual liability could prove larger or smaller.
The date on which the tax must be paid depends on: 1) For companies newly formed since April 1965 or older companies which have changed their accounting date. The interval in the present example that would be 9 months from September 30 1971, due date July 11972.
2) For companies which were formed before 1965 and have not changed their accounting date, the tax is payable on January 1 in the financial year next following the financial year in which the accounting period had ended. In this example again if this had been an older company, the payment date would have been January 11973, making a gap of 15 months between the end of the accounting period and the due date for the tax.
Next week: Disposing properly of the company's profit.