Calculating The Profit Of The Business (Info)

Trading income for tax credit purposes is the taxable profit made by the claimant from their trade, professions or vocation without adjustment for averaging claims

The profits of the business for the tax year are the taxable profits of the business for the basis period for that year.

The starting point for taxable profit is the profit shown in accounts drawn up in accordance with UK Generally Accepted Accounting practice. That figure may then need to be adjusted to take into account specific tax reliefs and adjustments provided for by statute and case law.

Accounts should be drawn up on an accrual basis not on a cash basis. It is not simply a matter of cash received less cash spent.

Generally the profit is the amount of money earned less allowable expenses.

Allowable expenses are those incurred wholly and exclusively for the purposes of the trade and not disallowed by statute or case law.

Examples of allowable expenses may include

• Costs of sales or buying goods to sell

• Subcontractor costs

• Employee costs (wages, NI Contributions)

• Premises costs, for example, heat, light, rates, insurance, security to the extent they relate to the business

• Repairs

• General administration

• Business motoring costs

• Travel and subsistence

• Advertising, promotion

• Legal and professional costs, for example, accountancy

• Bad debts

• Interest on bank and other loans

• Costs of business telephone calls

(This list is not exhaustive)

The cost of capital items, for example cars or computers are not included in the profit and loss account. However Capital Allowances may be claimed on these items and deducted from the net profit shown in the profit and loss account to arrive at the net business profit for tax purposes.