Monday, 22 June 2009

"How do you work out what I pay tax on?"

If you're a sole trader or a partner in a partnership or limited liability partnership, you pay income tax.

A limited company pays corporation tax.

But the point is, on what?

The answer is - profit.

That's the business's sales less the business's expenses (travel, staff salaries, website design fees, etc).

BUT - some expenses are what we accountants call "tax-deductible" (that means you can count them as part of your expenses when you're working out the profit to pay tax on), and some aren't.

For example, entertaining anyone other than your employees is not tax-deductible.

Another way of putting that is "you can't claim tax relief on it".

So if the business's profit after all expenses was £15,000, but that was after taking off entertaining of £100, the business would pay tax on £15,100 - because the entertaining isn't tax-deductible.

Some expenses are cut and dried - they either are tax-deductible or they aren't.

But in some cases, there are a lot of complex rules about whether an expense is tax-deductible. Travel is an absolute corker for that.

Did you know that if you take a trip for both business and non-business purposes (e.g. you fly to Dublin for a meeting with a customer, and then have a weekend in the city as a tourist afterwards), NONE of the travel costs for that weekend will be tax-deductible, because the trip wasn't just for business?


You'd do better taxwise not to combine the trips and have your tourist weekend another time!

That's why you need a friendly accountant to guide you through the tax maze!

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