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Tax Glossary

Simplifying Essential Tax Terminology for Your Understanding A Comprehensive Guide by Ultra Tax Ltd

ULTRA TAX GLOSSARY

A

Accounting Equation: The fundamental accounting equation that states assets = liabilities + owner's equity.

Accounting Period: An accounting period is the time frame for which financial statements are prepared, typically a year or a quarter.

Accounting Records: Accounting records include all the documents and data related to a company's financial transactions, which are used to prepare financial statements.

Accounts Payable: Accounts payable are amounts owed by a business to its suppliers or creditors for goods or services received on credit.

Accounts Receivable: Accounts receivable are amounts owed to a business by its customers for goods or services provided on credit.

Accruals: Accrued expenses or revenues that have been incurred but not yet recorded in the financial statements.

Accrual Basis: Accrual basis accounting recognises revenues and expenses when they are earned or incurred, rather than when cash is received or paid.

Additional Rate Tax Band: The additional rate tax band is the portion of an individual's income subject to the highest income tax rate.

Adjusting Entries: Journal entries made at the end of an accounting period to ensure that revenues and expenses are properly recognised.

Allowance for Doubtful Debts: A contra-asset account used to estimate the portion of accounts receivable that may not be collected.

Amortisation: Amortisation is the process of spreading the cost of an intangible asset, like a patent or copyright, over its useful life.

Annual Report: A comprehensive report that provides an overview of a company's financial performance and operations during the fiscal year.

Appraisal Value: The estimated value of an asset, typically used for financial reporting or taxation purposes.

Asset: An asset is something of value that is owned by an individual or business. Assets can include tangible items like property, equipment, and inventory, as well as intangible assets like patents, trademarks, and goodwill.

AIA (Annual Investment Allowance): AIA is a tax relief that allows businesses to deduct the full cost of qualifying assets from their profits before tax.

Audit: An independent examination of a company's financial records and statements to verify their accuracy and compliance with accounting principles.

AVCO: AVCO (Average Cost) is a method of valuing inventory by taking the weighted average of the cost of all items in inventory.

B

Bad Debts: Bad debts are unpaid debts that a business is unable to collect from its customers and must be written off as a loss.

Basic Rate Tax Band: The basic rate tax band is the portion of an individual's income subject to the basic income tax rate.

Bookkeeping: Bookkeeping is the process of recording financial transactions and maintaining financial records of a business.

C

Capital Introduced: Capital introduced refers to additional funds or assets contributed by the owner or partners to the business.

Cash Basis: Cash basis accounting recognises revenues and expenses only when cash is received or paid, regardless of when the income is earned or expenses are incurred.

Companies House: Companies House is the UK government agency responsible for registering and maintaining company information.

Corporation Tax: Corporation Tax is a tax levied on the profits made by UK companies and some foreign companies that have a UK presence.

 

Businesses must report their taxable profits, and the corporation Tax rate is applied to determine the amount owed to HMRC.

Credit: In accounting, a credit is an entry on the right side of a ledger that represents an increase in liabilities or equity or a decrease in assets or expenses.

D

Debit: In accounting, a debit is an entry on the left side of a ledger that represents an increase in assets or an expense or a decrease in liabilities or equity.

Depreciation: The allocation of the cost of a tangible asset over its useful life to account for its wear and tear or obsolescence.

Director: A director is an individual appointed to manage and oversee the operations of a company.

Dividends: Dividends are payments made to shareholders of a company, representing a portion of the company's profits.

Double Entry: The accounting principle that every transaction has two effects, a debit and a credit, which must balance.

Drawings: Drawings refer to the withdrawals of cash or assets made by the owner of a business for personal use.

E

Earned Income: Earned income is income derived from wages, salary, or self-employment.

Employee: An employee is an individual who works for a company and receives a salary or wages in exchange for their services.

Employment Income: Employment income is income earned from employment, including wages, salaries, bonuses, and benefits.

Equity: Equity is the value of an individual's or business's ownership interest in assets after deducting liabilities.

Expense: An expense is a cost incurred by a business in the process of generating revenue.

 

Expenses include items such as rent, utilities, salaries, and office supplies.

F

FIFO: FIFO (First In, First Out) is a method of valuing inventory where the oldest items in inventory are assumed to be sold first.

Filing Deadline: The due date for submitting tax returns and other required documents to HMRC.

Financial Statements: Reports summarizing a company's financial performance and position, including the balance sheet, income statement, and cash flow statement.

Fixed Costs: Costs that do not vary with the level of production or sales.

Flat Rate VAT: Flat rate VAT is a simplified VAT scheme where businesses pay a fixed percentage of their turnover as VAT.

G

Going Concern: Going concern is the assumption that a business will continue to operate indefinitely.

Gross Income: Gross income is total income before any deductions or taxes.

Gross Loss: Gross loss is the amount by which total revenue is less than the cost of goods sold.

Gross Profit: Gross profit is total revenue minus the cost of goods sold.

H

Higher Rate Tax Band: The higher rate tax band is the portion of an individual's income subject to a higher income tax rate, typically applicable to higher earners.

HMRC: Her Majesty's Revenue and Customs is the UK government department responsible for collecting taxes and administering various social and economic programs.

 

HMRC ensures that individuals and businesses comply with tax laws and regulations, conducts tax audits, and provides guidance and support to taxpayers.

I

Income: Income is the money or revenue earned by an individual or business from various sources, such as wages, sales, investments, and rental income.

Indirect Expense: Indirect expenses are costs that cannot be directly attributed to a specific product or project.

Indirect Tax: Indirect tax is a tax imposed on goods and services, such as value-added tax (VAT) and excise duty.

Input Tax: Input tax is the VAT paid by a business on goods and services purchased.

Intangible Assets: Assets that lack physical substance, such as patents, trademarks, and copyrights.

Inventory: The goods and materials held for resale in the normal course of business.

L

Leverage: The use of borrowed funds to finance investments or operations.

Liability: A liability is a financial obligation or debt that a business or individual owes to others.

 

Liabilities can include loans, accounts payable, and other outstanding obligations.

Limited Company: A limited company is a legal entity with limited liability, separate from its owners.

LIFO: LIFO (Last In, First Out) is a method of valuing inventory where the most recently acquired items are assumed to be sold first.

Liquidation: Liquidation is the process of winding up a company's affairs and selling its assets to pay off its debts.

Liquid Assets: Assets that can be quickly converted into cash, such as cash itself and short-term investments.

M

Malpractice: Malpractice refers to professional negligence or improper conduct by a professional, such as an accountant or lawyer.

Mark-Up: Mark-up is the amount added to the cost price of a product to determine the selling price.

Market Value: Market value is the current worth of an asset or security based on its current market price.

Merger: A merger is the combining of two or more companies to form a new entity.

Mileage: Mileage refers to the number of miles traveled, often used in business for reimbursement purposes for business-related travel.

N

Net Income: Net income is the amount of income left after all deductions and taxes have been subtracted.

Net Loss: Net loss is the amount by which total expenses exceed total revenue.

Net Profit: Net profit is total revenue minus all expenses, including cost of goods sold, operating expenses, and taxes.

Net Working Capital: Net working capital is the difference between a company's current assets and current liabilities.

Net Worth: The difference between an individual's or company's total assets and total liabilities.

Noncurrent Liabilities: Long-term obligations, such as long-term loans and deferred tax liabilities.

O

Ordinary Shares: Ordinary shares represent common ownership in a company and entitle shareholders to voting rights and dividends.

Output Tax: Output tax is the VAT charged by a business on goods and services sold.

P

Partner: A partner is a co-owner of a partnership and shares in the profits and losses of the business.

PAYE: Pay As You Earn (PAYE) is a system used by employers to deduct income Tax and National Insurance contributions from employees' pay before they receive it.

Employers are responsible for calculating and remitting these Taxes to HMRC on behalf of their employees.

Payroll: Payroll refers to the process of calculating and processing employee wages and salaries.

Payroll Tax: Payroll tax is a tax paid by employers on their employees' wages to fund social security and other benefits.

Pension: A pension is a regular payment made to a person, typically after retirement, to provide financial support.

Penalties: Penalties are fines or charges imposed for non-compliance with tax or legal regulations.

Personal Allowance: Personal allowance is the amount of income an individual can earn tax-free.

Prepaid Expenses: Expenses paid in advance but not yet consumed or used up.

Profit and Loss Account: The financial statement that shows a company's revenues, expenses, and profits or losses over a specific period.

Property Tax: Property tax is a tax imposed on real estate, typically based on the property's value.

R

Return on Investment (ROI): A measure of profitability that indicates the return earned on an investment relative to its cost.

S

SA100: SA100 is the main tax return form used by individuals to report their income and expenses to HMRC.

SA302: SA302 is a form provided by HMRC that shows an individual's income and tax calculations for a specific tax year.

Self-Employment Income: Self-employment income is income earned by individuals who work for themselves rather than for an employer.

Share Capital: Share capital represents the total value of shares issued by a company.

Shares: Shares represent ownership in a company and entitle shareholders to certain rights, such as voting rights and dividends.

Sole Trader: A sole trader is an individual who owns and operates a business as the sole owner.

Stock: Stock refers to the inventory of goods or materials held by a business for resale.

T

Tangible: Tangible assets are physical assets that can be touched or seen, such as buildings, machinery, and equipment.

Taxation for Expats: Taxation for expatriates (expats) refers to the tax rules and obligations that apply to individuals living and working abroad.

 

Expats may be subject to taxation both in their country of residence and in their home country, depending on their citizenship and other factors.

Tax Bracket: A tax bracket refers to a range of income levels that are taxed at the same rate.

Tax Code: A tax code is a series of letters and numbers used by HMRC to determine how much tax should be deducted from your pay.

Tax Credits: Tax credits are payments from the government to people on low incomes or with children, designed to help with living costs.

Tax Deduction: A tax deduction is an expense that can be subtracted from income to reduce the amount of tax owed.

Tax Evasion: Tax evasion is the illegal non-payment or underpayment of taxes. It involves intentionally concealing or misrepresenting financial information to avoid fulfilling tax obligations.

Tax evasion is a criminal offense and can result in severe penalties, including fines and imprisonment.

Tax Exemption: A tax exemption refers to an amount of income or an expense that is not subject to tax. Tax exemptions can apply to specific income sources or activities, reducing the taxpayer's overall tax liability. Certain types of income, organisations, and transactions may qualify for tax exemptions.

Tax Lien: A tax lien is a legal claim on a property or asset to secure payment of unpaid taxes. When a taxpayer fails to pay their taxes, HMRC may place a tax lien on their property, making it difficult to sell or transfer ownership until the tax debt is satisfied.

Tax Loss Harvesting: Tax loss harvesting is a strategy used to offset capital gains tax by selling losing investments to offset gains. By realising losses in certain investments, investors can lower their overall tax liability, potentially saving money on capital gains taxes.

Tax Planning: Tax planning is the process of arranging your finances to minimise tax liability while still complying with tax laws and regulations. It involves strategising various financial decisions to optimise deductions, credits, and other tax benefits.

Tax Refund: A tax refund is money paid back to a person who has overpaid tax. When an individual or business pays more in taxes than they owe, they can claim a refund for the excess amount. Tax refunds are typically issued by HMRC after reviewing the taxpayer's financial information.

Tax Return: A tax return is a document required by HMRC that shows an individual's or business's income, expenses, and tax owed for a given tax year. Taxpayers must submit their tax return by the relevant deadline, accurately reporting their financial information to determine their tax liability.

Taxable Distribution: A taxable distribution refers to a distribution from a retirement account that is subject to income tax. When individuals withdraw funds from their retirement accounts, such as an IRA or 401(k), the amount withdrawn may be taxed as ordinary income.

Taxable Event: A taxable event is an event that triggers a tax liability, such as selling an asset or receiving income. When a taxable event occurs, the taxpayer may be required to report it to HMRC and pay any applicable taxes.

Taxable Gain: A taxable gain refers to the profit made from selling an asset that is subject to capital gains tax. When an individual or business sells an asset for more than its original purchase price, the difference is considered a gain and may be subject to taxation.

Taxable Income: Taxable income is the amount of income that is subject to tax after deductions and exemptions. It represents the portion of an individual's or business's earnings that is taxable under the applicable tax laws.

Taxable Value: Taxable value is the value of an asset that is subject to capital gains tax when it is sold. The taxable value is calculated based on the asset's original cost and any adjustments, such as improvements or depreciation.

Taxable Year: The taxable year is the period used for calculating tax, which can be a calendar year or a fiscal year. In the UK, the tax year runs from 6 April to 5 April of the following year.

Trial Balance: A list of all general ledger account balances to ensure that total debits equal total credits.

Turnover: Turnover is the total revenue generated by a business from its sales or operations.

V

VAT Cash Method: VAT cash method is a VAT accounting scheme where businesses pay VAT only on the cash they receive from customers and claim VAT only on the cash they pay to suppliers.

Value Added Tax (VAT): Value Added Tax (VAT) is a tax on the value added to goods and services at each stage of production or distribution. It is collected at various points along the supply chain and ultimately borne by the final consumer. 

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