Navigating your business as a new company director can be tricky, so we have put together an A-Z Tax Glossary which is essential for new business owners. From allowable expenses to VAT returns, it breaks down and explains the key terms directors and business owners need to know to stay compliant, prepare accurate annual accounts, and maximise available tax reliefs while successfully running their business.
A-Z Tax Glossary
Accounting Period
An accounting period is a defined span of time used for financial reporting. All transactions that occur within that date range are recorded and included in the annual accounts or reports for that period.
Allowable Expenses
Expenses that are incurred wholly and exclusively for business purposes. Allowable expenses can then be deducted from the businesses income, reducing any tax due and providing an immediate form of tax relief.
Annual Accounts
Annual accounts, also referred to as 'statutory accounts' are the official financial statements that show the businesses profit and loss accounts and balance sheet. These accounts will explain how the business performed and its financial position at the end of the year.
Associated Companies
Associated companies are companies that are under the control of the same person or group of people, where control means owning more than 50% of the company.
Capital Allowances
Capital allowances are tax reliefs businesses can use to allow them to deduct the cost of certain long-term assets from its taxable profits over time, or all at once - depending on the allowance claimed.
Capital Losses
Capital losses are losses made when an asset is sold or disposed of for less than the purchase value. Typically this can usually be used to reduce any capital gains tax.
Chargeable Gains
Chargeable gains refer to the profits made when selling an asset. For example, if you purchased a van for £3,000 and sold it for £10,000 there would be a gain of £7,000. This £7,000 gain is therefore subject to capital gains tax.
Companies House
Companies House is the official UK register for companies. All limited companies must register and file documents such as annual accounts, confirmation statements, company directors updates and other required legal documents.
Corporation Tax
Corporation tax is the tax businesses pay on their profits. Corporation tax rates range from 19% - 25%, depending on the amount of profit made.
CT600
CT600 is the name of the tax return itself, this is what is sent to HMRC by the business. The CT600 will outline the businesses profit/losses (taken from the annual accounts) and calculate any tax they may owe. This must be submitted to HMRC annually if requested.
Deferred Tax
Deferred tax is a tax that a business will pay or reclaim in the future. It happens because the profit shown in the company accounts (accounting profit) is calculated differently from the profit used for tax purposes (taxable profit). These differences mean the company might owe tax later or be able to get some back, even if no tax is due right now.
Dividends
Dividends are payments made from the companies profits to its shareholders. This is a way of sharing the company's earnings with its owners. Dividend tax rates range from 10.75% - 39.35%, depending on the amount of dividends paid.
Directors Loan
This is a loan to the company from a director, or, a loan from the company to the company director. This loan is not considered an expense and will not be tax deductible. However, if the company director has received a loan from the Company and this is outstanding at the end of the accounting period, it will be taxed. This tax is repayable, once the loan has been repaid to the company.
Depreciation
Depreciation is the reduction in the value of an asset, such as machinery or vehicles, over a specified period of time, often referred to as its 'useful life'. Depreciation is a disallowable expense and cannot be used to reduce the businesses tax bill. However, tax reliefs can be claimed on most capital items.
Disallowable
Disallowable expenses appear in the annual accounts but cannot be deducted from a businesses profits. Examples include depreciation and entertainment.
Employers National Insurance Contributions (NICs)
These refer to payments that a business makes to the Government based on their employees earnings. These payments fund state benefits such as pensions and healthcare.
Employment Allowance
The UK Employment Allowance is a government tax relief that allows eligible employers to reduce their Class 1 National Insurance contributions by up to £10,500 per year.
Financial Year
The financial year, also known as the tax year, runs from 6th April to 5th April.
Full Expensing
A tax relief that allows businesses to deduct 100% of the cost of qualifying new plant and machinery. The cost is deducted from the companies taxable profits - reducing any tax liability for the period.
Gross Profit
The businesses earnings after deducting the the direct costs of producing the goods or service (cost of sales) from the turnover, before tax is calculated.
HMRC
His Majesty's Revenue & Customs (HMRC) - Government department responsible for collecting tax and enforcing tax and customs law.
Investment Allowance
A tax relief that allows businesses to subtract some or all of the cost of certain assets, such as plant or machinery from its taxable profits; this can lower the tax it has to pay. Depending on the type of allowance, this can be done all at once or spread out over time.
Marginal Rate Relief (MRR)
Tax relief scheme created by HMRC to provide tax relief for smaller businesses. This means the tax rate is between 19% and 25%, depending on the profits. Only valid for companies with taxable profit between £50,000 (lower limit) and £250,000 (upper limit).
Net Profit
The amount of profit made after all expenses have been deducted in the annual accounts. This includes the cost of sales, operating expenses, tax, etc.
PAYE (Pay As You Earn)
A system used by UK employers to automatically deduct income taxes, national insurance and pensions from wages, before they are paid to employees. The deductions are sent directly to HMRC. As a director you must ensure all PAYE obligations are met.
R&D Tax Relief
Tax relief for businesses investing and innovating in science and technology. Allows companies to claim back a portion of costs incurred on qualifying R&D projects. The claims can either reduce any corporation tax due or provide a cash repayment.
Salary
A salary is a fixed regular payment from the business to an employee or company director. These payments can be paid weekly, monthly, annually, etc. Salary costs are included as an expense in the annual accounts.
Self Assessment
Self Assessment is a system where you report your income and expenses, work out the tax you owe, and submit it to HMRC each year, instead of having tax automatically deducted. All company directors must complete a self assessment return if they receive dividends from the company.
Small Profits Rate
The small profits rate is the lower rate of tax that applies to businesses with smaller taxable profits. In the UK it is currently set at 19% and is designed to provide tax relief to help smaller businesses pay less tax than the main rate, which is 25%.
Statutory Accounts
These are the same as the annual accounts, which were addressed at the start of the article.
Taxable Profits
Taxable profits are the amount a business is left with after taking off allowable expenses and any tax reliefs. This figure is then used to work out how much tax needs to be paid for the period.
Trading Losses
Trading losses (which are different from capital losses) occur when expenses exceed income in the annual accounts. These losses can usually be carried forward to reduce tax in future years, or carried back to claim a tax refund for earlier periods.
VAT (Value Added Tax)
VAT is a tax charged on most goods and services in the UK. Businesses add it to their prices, collect it from customers on behalf of HMRC, and then pay it over to the government.
VAT Return
A VAT return is a report which outlines how much VAT a business has charged its customers and how much it has paid on its own purchases. This is then used to work out whether there is an outstanding VAT amount owed to HMRC or if a refund is due. VAT returns are separate from the annual accounts.
Looking For More Information?
Hopefully this article has helped to give you a better understanding of the key terms every director should know, including how different tax reliefs can help reduce your businesses tax bill. For more information on topics related to supporting your role as a company director, feel free to explore our Knowledge Base. If you are looking for any further information, do not hesitate to contact us.
