Corporation tax

Holly

Hi all,

Please can someone help?

I am doing a question from Kaplan where you have to work out adjusted trading profits. In the answer the salary of the Managing Director has been disallowed, but I'm not sure why. I thought this was an allowable expense?

Thanks

meibaker

Holly wrote: »

Hi all,

Please can someone help?

I am doing a question from Kaplan where you have to work out adjusted trading profits. In the answer the salary of the Managing Director has been disallowed, but I'm not sure why. I thought this was an allowable expense?

Thanks

i thought directors' salaries are allowed too!

Monsoon

Directors' salaries are allowable expenses for corporation tax.

I've never heard of a situation where they were disallowable.

I suspect the book is wrong, but would be happy to be corrected if there is a rational explanation.

Note: partner or proprietor salaries and drawings are disallowable for partnerships and sole traders, but that is not the case here.

A-Vic

If you look on Kaplan Site there is a corrections sheet there for the books i used it a lot

jewels.p

A-Vic wrote: »

If you look on Kaplan Site there is a corrections sheet there for the books i used it a lot

Are you saying Kaplan books are crap? lol


I thought they were allowable when I read this thread, but as I am still learning this subject I didnt feel I should comment as I am not too sure about much for BTC at the moment!

P.S In my notes I have it as allowable and Partners disallowable

Gem7321

jewels.p wrote: »

Are you saying Kaplan books are crap?

They're not as bad as BPP!

Holly

Its ok, I was getting confused. It was not corporation tax but actually income tax for a sole trader. Therefore I think it is disallowable as the salary taken by the owner is equivalent to a dividend being paid.

This tax stuff is blowing my mind!!

Monsoon

Holly wrote: »

Its ok, I was getting confused. It was not corporation tax but actually income tax for a sole trader. Therefore I think it is disallowable as the salary taken by the owner is equivalent to a dividend being paid.

This tax stuff is blowing my mind!!

It's REALLY important to know if you're dealing with a sole trader or a Ltd Co as the tax treatments can be very, very different.

A sole trader's drawings are correctly disallowable from profit. If it helps you to equate it to a dividend that's fine, but remember a sole trader IS the business, so the profit is all his money, he doesn't need to draw from profit, he can draw from a loss if he has the cashflow and it doesn't affect his tax.

Remember, a sole trader or a partner is a person and will pay Income Tax.

A Company is a Corporation and therefore pays Corporation Tax.

A Company does not pay income tax, and an individual person does not pay corporation tax.

Hope that helps!

Holly

Thanks Monsoon, that is very helpful. I think I am struggling doing business tax and personal tax at the same time!

jewels.p

Holly wrote: »

Thanks Monsoon, that is very helpful. I think I am struggling doing business tax and personal tax at the same time!

Thats why I didnt do the two taxes at the same time. Its bad enough trying to learn all the different rules for BTC without learning the rules for PTC at the same time.

Saying that Income Tax and Corporation Tax are both covered in BTC and it is confusing me!

Monsoon

jewels.p wrote: »

Saying that Income Tax and Corporation Tax are both covered in BTC and it is confusing me!

<tax geek mode>
Ok, why? What is it about them that's confusing you?

Sometimes I think it's confusing to separate business and personal tax, especially for sole traders, because the two are inextricably linked. You can't do a tax computation for a sole trader (and by sole trader I also mean partner) without looking at their personal tax situation as well, simply because they are a person.

Equally you may well have to do a BIK calculation on a car when working on business tax, for the director of a Ltd Co, but BIKs are covered in PTC...

But yeah, what is confusing you about it?
</tax geek mode>

jewels.p

[But yeah, what is confusing you about it?
</tax geek mode>[/QUOTE]

Everything you just said for a start! lol

This is probably just me but I cant get my head around calculating overlap profits

eg Zorah started in business on 1/2/09. She made accounts up to 31st Dec each year with first set of accounts relating to 11 months. Her adj profits (aft Cap Allowances) for first two accounting periods are: 1/2/09-31/12/09 = £33,000 and 1/1/10-31/12/10 = £48,000

"Calc trading income assessments for first three years"

Answer is: 2008/09 - Basis Period 1/2/09 - 5/4/09 £33,000 x 2/11 = £6,000
2009/10 - Basis Period 1/2/09 - 31/1/10 £33,000 + £48,000x1/12 = £37,000
2010/11 - Basis Period 1/1/10 - 31/12/10 = £48,000

Overlap Profits are £10,000.

What I dont get is WHY is there two overlap profits I thought there was only one when calculating tax!

Its calculating dates I get most confused with when it comes to tax. Its the apportionment bit.

meibaker

that question rings the bell, are they the june 2010 past exam? i got that question complete wrong in my exam.
yes, you can have 2 overlap jewels, there should be a example on the osborne book with 2 overlap.

Monsoon

Ah ok. First point, personal tax year runs from 6th April. This is irrelevant for Corporation Tax which, if there is a change in rate or policy, will be from 1st April, not 6th. Just a little note on the side.

Basis periods such as you're describing are only for sole traders and partnerships and not for limited companies (i.e. for income tax not for corporation tax).

To be honest, basis periods are a pain the arse and the only way to get them is to keep practicing. Same as with date apportionments, once you get used to doing them they get easier. Then once you pass, you can forget all about it like me

Why are there 2 overlap profits? It all depends on the actual dates, sometimes you will get one, sometimes you will get 2.

Work out your accounting periods, then work out your basis periods. Then look at them and where dates overlap, there are your overlap profits.

jewels.p

meibaker wrote: »

that question rings the bell, are they the june 2010 past exam? i got that question complete wrong in my exam.
yes, you can have 2 overlap jewels, there should be a example on the osborne book with 2 overlap.

That is the example from the Osbourne Book AK! Boy I hope I dont get two overlaps in the exam one is bad enough! lol

jewels.p

Monsoon wrote: »

Ah ok. First point, personal tax year runs from 6th April. This is irrelevant for Corporation Tax which, if there is a change in rate or policy, will be from 1st April, not 6th. Just a little note on the side.

Basis periods such as you're describing are only for sole traders and partnerships and not for limited companies (i.e. for income tax not for corporation tax).

To be honest, basis periods are a pain the arse and the only way to get them is to keep practicing. Same as with date apportionments, once you get used to doing them they get easier. Then once you pass, you can forget all about it like me

Why are there 2 overlap profits? It all depends on the actual dates, sometimes you will get one, sometimes you will get 2.

Work out your accounting periods, then work out your basis periods. Then look at them and where dates overlap, there are your overlap profits.

Thanks Monsoon. Why do they not make things simple when it comes to Tax! lol

Monsoon

jewels.p wrote: »

Thanks Monsoon. Why do they not make things simple when it comes to Tax! lol

Because then we wouldn't be able to charge the public a lot of money for our headaches while studying....

Londina

jewels.p wrote: »

Saying that Income Tax and Corporation Tax are both covered in BTC and it is confusing me!

This reminds me my post about the director's return! I have found difficult too that both taxes were covered in BTC, as I said previously, I would prefer BTC to cover only LTD stuff (including the director, even if he/she is a person) and PTC to cover the sole trader (even if he/she is considered a business too).