What is your Profit for Tax is this week’s I Hate Numbers podcast theme. Last week we looked at how you should budget for your tax bill.
Firstly, your money in your bank account is not the same as your tax profit. Secondly, your accounting profit is not the same as your tax profit. However, they are both important numbers. It may sound confusing.
Listen to find out more.
In the words of Mark Twain "I shall never use profanity except in discussing house rent and taxes."
Firstly, when you look at how your business is performing, then profit is still a key financial measure. Secondly, you consider what you are doing to generate and earn those profits.
For example, money invested and spent on training, equipment looking after your customers and suppliers will all be relevant.
The tax authorities in the UK look at things differently. They are not entirely interested in how your business is performing. It’s tax they want to collect, and they have a different rule book to go by.
In this podcast I showcase some examples.
Listen to find out more.
Tax is an expense, and it is one you need to plan for an be aware of. How you calculate it is what we looked at last week.
In conclusion the numbers are easier to get your head around, once you know the reasoning. Let me tell you, there is reasoning,
Want a quick and easy way to know how much to pay? Use our free tax calculator, designed for the self-employed and companies? Get in touch with us to see how we can help you with your accounting and business needs. Press subscribe so you don't miss an episode of I Hate Numbers. For more business and finance, news, advice and tips.
In This Episode
You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.::
What is your profit for tax? That's a theme of this week's podcast, episode 49 of I Hate Numbers. Hi folks. My name is Mahmood. I run my own accounting firm and trading company, have done for the last 26 years, and the purpose of this podcast is part of my overall mission to improve your business mindset, for your business to make money,::
for your business and you to have a good blend of lifestyle and enjoying what you're doing, serving your customers well, and building a sustainable and thriving business. In last week's podcast, we talked about how you should budget for your tax bill. I recommend you guys check it out there. Putting that money aside to pay for your future tax bill is a definite::
must. There's some other tips that we shared in last week's podcast, so I recommend you check it out, and there's also a bit of a freebie in there, which I'll mention again at the end of this podcast. This week's podcast, what is your profit for tax has come out because in the course of my business, when I'm preparing tax returns, when I'm advising clients of what to do, what typically happens is the figure that they think is the profit they've made in their business doesn't tend to be the one that the taxman wants to take a slice out of. What the taxman's view of profit is not going to be the same as your business.::
In this episode, we are going to explore what is the notion of profit, or actually is it for your business? How does the tax man see it differently? I'm going to showcase some examples of where there's a different view taken by the tax authorities and your own business, share some tips, and then put those into practice into your business.::
So, let's crack on with the broadcast. Now, the first question is, what is profit? And it's most simple, profit is the difference between the income or the sales that your business generates, so what's the value of what you are selling, whether it's a commodity, whether it's your services, and from that, we deduct the expenses that we have in our business that helps us create that value that helps us generate and support the business.::
Think of it, if you are exercising, if you want to get healthy, one measure of your health progress would be your blood pressure, perhaps your heart rate. It may be the weight that you've got. That would be a measure of activity in that context. In your business, profit is still a key measure of your business activity. In the world of numbers and accounting,::
they call that matching, where you look at a time period, you look at the value of what you've created by sales, you deduct the expense of that same time period and bingo, there's your profit, or in some unfortunate cases, there might be your loss. For the taxman, what you have deducted by way of expenses may not be items that they will permit you to take into account when they work out your tax profit.::
Fundamentally, what we're going to think in terms of, we've got two different hats we're wearing and two different viewpoints that we're adopting. Now, let's start from the viewpoint of your business. Now, when you put your business hat on and you want to see how your business is progressing, profit is still a very valuable measure of that progress.::
We will take into account what is considered good business practice, so keeping your customers happy, keeping your suppliers on board is an absolutely vital part of that business process. So there may be monies that you are expanding on entertaining those customers, entertaining those suppliers. And I don't mean juggling or anything of that nature, even though that might be your thing,::
but actually, perhaps buying them lunch, taking them out somewhere, finding out how their business is developing, and keeping it a good business relationship. You may decide to join a sports club, join some form of society where you can also potentially network and meet new potential clients as well as look after your current clients.::
Now, when it comes to the taxman, when we put that hat on, in the main, in those tax jurisdictions, entertaining, if I can use that term, would not be a permitted tax deduction. Makes it sound like the tax ban is quite a mildly old thing. That may be true, but from their rules, entertaining of that nature would not be permitted.::
Other areas that we might get a difference. One major area is when you have to buy equipment for your business. Typically, you'll need to invest in infrastructure, you'll need to buy IT equipment, you may need to invest in a whole range of manufacturing equipment. Those items that are necessary to support your business, the infrastructure in order you to deliver your services, that's a legitimate business expense,::
but when we prepare the business accounts, we typically take in this weird and wonderful thing called depreciation. So, for example, if I buy a piece of IT equipment that typically costs me, say, 3,000 pounds, I have to say to myself, how long do I expect to use the item for, and I have to spread the cost over the lifetime expectancy of that item.::
Now, that figure called depreciation is what gets taken into account in working out your business profits. Now, when we put our other hat on and we put the hat on of the tax authorities, typically, depreciation would not be allowed as a tax deductible. The tax ban is not completely wisely, by the way. They will allow you to deduct the cost of that equipment, and it's not the purpose of the podcast to explore the minutia and the different rules, but in certain situations, you are allowed to deduct the entire cost of that item against your tax bill.::
That's not bad, and the policy there for the tax authorities is to encourage you to invest in that item. Another example where you might see a discrepancy when it comes to cars, motor vehicles. You may have invested in a vehicle for yourself or for your staff. You typically would not be allowed to make a complete deduction for that, for tax purposes.::
There are exceptions. If it's electric, you are allowed that, but in your accounts, you'll still be spreading the cost of that item over the period of its life expectancy to your business. Let's share another example where we might see a difference in the profits that your business creates and where the tax man might wave their finger at you and say, I'm sorry guys,::
you can't have that, and that might be in the area of training. Now, absolutely key in your business, if you want to sustain, there is no such thing that you know everything. Life and business is a continual learning exercise. There may be courses that you see are valuable to your business that you participate on.::
There may be different areas of your business that you wish to move into, and therefore, you need to acquire that skill and knowledge. Money that you invest in training, and an absolutely critical thing, and I am slightly biased coming from an educational background, but I can still see the value of learning all the time and none of us stops learning or certainly shouldn't do.::
Now, when you invest in a training course, you invest in a training product, you do that to keep up to date, you can maintain your professional expertise, or you acquire new skills, and that's perfectly allowable. For tax, however, if you are acquiring a brand new skillset, moving into an area where you didn't have that requisite, then the taxman typically would not allow it.::
However, in your business, it would be permitted. It's a business expense. The last area I want to talk about is in terms of your own personal interaction with the business. Now, running a business is a wonderful thing. I, I think it's exciting, I love it, but also I recognise that it does take its toll, and therefore, what we might do occasionally is to take a respite.::
We want to relax, we want to take some time off, and we might decide to unwind and we think it's a necessary business expense that we go and actually enjoy a spa, we go out, maybe take a short break. Now, that quite legitimately will be considered a business expense in your profit or loss statement, but the tax plan would wave their finger at you and say a definite no-no.::
The other area that interacts is the money, the rewards that you give yourself for taking the risk, expending the effort, and running your business. We might call that drawings, we might call that wages. So, money that you withdraw from your business, depending how it's structured, you might represent that in your profit statement or not,::
but for the taxman, there'll be certain specific rules that govern what will be allowed or not. One of the most obvious ones are things like dividends, which are not a tax deductible expense, even though you might see that as quite legitimate. Now, rounding this up, we've got this idea: what is your profit for tax?::
Why is it important? Well, tax is a business cost. We need to make sure we put enough money aside. It's important to also recognise that the figure that we might see on our profit statement will not necessarily be the same one that the taxman takes the slice out of. It's also important to remember and focus on what you spend in your business::
has to have a business case behind it. So, does it add value to your business? Does it support the business? Does it give you greater opportunity? Do not let tax be the deciding factor. It's certainly an influencing factor, but it's not the decisive one. Another thing to conclude is that money in your bank account is not the profit that you're making in your business.::
And in all these things, it's key to have an understanding of how much profit your business is actually making. Okay, folks, in terms of picking up from last week as well, we've got a tax calculator that we'd love to share with you guys. Check out the show notes. There'll be a link to a free tax calculator. Whether you are self-employed, a sole trader, or a corporate entity, there'll be a tax calculation built in. Any listers from the US and outside the UK,::
thank you very much for sharing your time. This is built in with UK rates, but the principle is still a good one. Hope you've got some value from the show, folks. I'd love it if you could share it amongst with your friends, colleagues, and your enemies perhaps. Give us some feedback. And in three weeks’ time, it's going to be one year since the I Hate Numbers::
Podcast was launched, so episode 52. If there are topics that you want me to discuss and air and go through in future episodes, drop me a line. Until then, have a great week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.::
We look forward to you joining us next week for another I Hate Numbers episode.