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If you start a business and end up making £1,000,000 in 1 tax year, are you supposed to pay tax on the whole £1,000,000, or do you pay tax on the money you have left over after spending on your living costs, business costs, expenses etc etc?

If yes, what classifies as expenses. I'm assuming you can't classify a Ferrari as an expense...

  • Added UK tag based on currency. – sdg May 3 '11 at 17:15
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It's not quite clear what you are asking, so I'll answer a few possible interpretations.

Businesses pay taxes on their profits. So if your business took a million pounds in revenue (e.g. sold a million pounds worth of stuff) then you would subtract (roughly speaking) everything the business spent on making and selling that stuff, and pay taxes only on the profit. VAT however is a different matter, and you would have to pay VAT on all of that income (technically the VAT portion isn't even income - it's tax you are forced to collect on behalf of the government). If your business made a million pounds pounds profit, it would pay tax on all of that million (subject to what a tax accountant can do to reduce that, which ought to be considerable).

You can't subtract your personal living expenses like that. However the company can pay you a salary, which counts as an expense and the company doesn't pay tax on that. You might also take some money from the company as dividends. Both salary and dividends count as personal income to yourself, and you will need to pay personal income tax on them.

As for the Ferrari, it depends on whether you can justify it as a business expense. A lot of companies provide cars for their employees so that they can use them for business - however you have to be able to show that IS for business, otherwise they are taxed like salary. The rules for company cars are quite complicated, and you would need an accountant.

If this is a real rather than hypothetical situation, definitely get a tax accountant involved.

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The answer, as usual, is "it depends".

Essentially, you'll have to pay VAT on your turnover, and if you have a million turnover, you'll have to be VAT registered. In that case, you'll either charge VAT on top of the million, or you'll have to send 200k to HMRC straight away. OTOH, being VAT registered means you can offset the VAT on company expenditure against the VAT on the company's income.

After that, you'll deduct all allowable expenditure from the income of the company. That doesn't include your living expenses (those are your problem, not the company's) but basically anything that makes the company tick. Company expenditure also includes salaries paid to the company's employees etc.

The company will then pay corporation tax on the remainder.

Oh, and once all that's done and you get some dividends from the company on top of your salary, you get to pay income tax on those, once it becomes your money. But the money in the company isn't yours, it's the company's. Big difference.

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What do you mean by 'make'? I am in the US, but I'm sure it's typical that any business has a "bottom line", the profit after all costs including paper losses for things like depreciation. This is then taxed, either at the business level or to the individual. The individual's person expenses don't come into play, unless those expenses are tied to the business, e.g. Some kind of function at their house which includes clients/customers.

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