Common tax terms and what they actually mean

Common accounting terms and what they actually mean | Easy As VAT | UK financial coach for female business owners

When you file your tax return, or if you use an accountant, there are a lot of words and phrases you'll hear that you may not understand, but feel awkward asking about.

That's why I'm here to help you avoid nodding along and frantically Googling random accountancy terms later, with a list of common tax terms and what they mean in plain English.

Turnover

The amount of money your business has made.

Profit

The amount of money your business has made minus its expenses. This is the amount you pay tax on.

Deductible expense/allowable expense/tax write-off

Something you purchase for your business (an expense). HMRC allow you to deduct most of your business expenses from your profits so the amount you pay tax on is lower, which is also known as claiming an expense.

There are certain expenses which you can't claim, so check my guides here and here if you aren't sure.

Capital allowance

Capital allowances are very similar to expenses, but for "assets" which you use in your business. The best way of working out whether something is an expense or a capital allowance is by thinking about whether it will be used for over a year.

So long-term purchases such as computers would count as a capital allowance item rather than an expense. Most capital allowance items except cars are claimed using your Annual Investment Allowance of £200,000.

If you use cash basis accounting (more on that later), you don't need to worry about capital allowance, as you only claim expenses.

Tax relief

Similar to expenses and capital allowances, tax relief allows you to deduct some payments you make throughout the year from your turnover, so you pay tax on a smaller amount. These include:

  • business expenses

  • Capital allowances

  • charity donations

  • some loan payments

Bookkeeping

Keeping records of your business's financial transactions to track your business income and expenses.

This will help you with your tax return as well as giving you an idea of how well your business is doing financially.

Traditional/accrual accounting

Recording your business transactions based on when you’ve sent an invoice or received a bill, rather than when payment has been made.

A lot of people are confused or annoyed when their accountant files their tax return and they get taxed on money they haven’t received yet - this will be because your business uses traditional accounting, also known as accrual accounting.

Cash basis accounting

Recording your business transactions based on when you’ve received payment or paid an expense, rather than when you invoiced or received the bill.

This method of accounting can suit small businesses better than traditional accounting as it's much simpler, you won't have to pay tax on income you haven't received yet and you don't need to worry about capital allowance.

I'll leave it there for now, as those are the basic terms you'll need to be able to complete your tax return properly or talk to your accountant about tax.

 


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