BLP 6 - Tax Flashcards
(136 cards)
1
Q
7 - Calculating Profits and Paying VAT
A
2
Q
Types of profit?
A
Income and capital.
Income - recurring in nature
Capital - Profits on one-off items.
3
Q
Company v sole-trader
A
Company - corporate
Sole-trader/partnership - income
4
Q
Accounting period?
A
Usually of 12 months
5
Q
Trading profit/loss?
A
Chargeable receipts LESS deductible expenditure LESS capital allowances
6
Q
Chargeable receipts?
A
Money received for the sale of goods and services. Must derive from business trade and be income (recurring).
If sold something used in trade e.g. office then capital (capital profit).
7
Q
Deductible expenditure?
A
Income in nature and ‘wholly and exclusively’ for the trade.
Client enterainment and leasing cars with emissions over a certain level excluded.
8
Q
Income in nature?
A
If the item is so the business can sell the item at a profit then income in nature. If expenditure has quality of recurrence also income in nature.
9
Q
Wholly and exclusively for the purposes of trade?
A
Commonly deductible -
salaries
rent on premises
utility bills
stock
contributions to an approved pension scheme
interest payments on borrowings
10
Q
Capital allowances
A
- Allows deduction of a proportion of the coat of most capital items from chargeable receipts.
11
Q
Plant and machinery?
A
Apparatus helping business people use to carry on their business.
12
Q
WDA (Writing Down Allowance)
A
18% of the value of the business’s plant and machinery valued at the start of the financial year.
Each year 18% will be deducted from chargeable receipts.
13
Q
Pooling
A
All plant and machinery is generally pooled. If asset is sold, the proceeds of the sale are deducted from the value of the pool.
14
Q
Annual Investment Allowance (AIA)
A
Allows businesses to deduct the whole cost of plant and machinery from chargeable receipts.
£1m allowance meaning first ‘fresh’ qualifying expenditure on plants and machinery will be wholly deductible.
If group of companies shared between them.
Brand-new, second hand or refurbished.
15
Q
Full expensing - companies only
A
Allows companies to deduct 100% of the cost of plant and machinery in that particular accounting period from chargeable receipts. On disposal, balancing charge equal to 100% of disposal value when full-expensing has been claimed.
Brand new only
16
Q
Super-deduction
A
130% deduction.
Purchase contract must have been entered into after 3 March 2021 and expenditure must have been incurred between 1 April 2021 and 31 March 2023.
Ended on 1 April 2023.
17
Q
Relief for trading loss - unincorporated business
A
18
Q
Relief for unincorporated businesses
A
19
Q
Start-up loss
A
First four years of the business. Loss can be carried back and set against tax payers total income in the three years prior.
On or before the first anniversary of 31 January
20
Q
Carry across
A
Treated in accounting period as losses of tax year in which it ends.
Can be
- set against total income from same tax year
-set against total income form tax year of the loss.
Or
-Set against total income from same tax year until that income is reduced to zero with the balance of the loss being set against total income fro the tax year preceeding the loss
- set against total income from tax year preceeding the tax year of the loss until that income is reduced to zero , with the balance of the loss being set against total income from the tax year of the loss
21
Q
Must set against personal income
A
Means taxpayer loses the benefit of their personal allowance
22
Q
Set-off against capital gains
A
Set trading loss against chargeable gains in same tax year. Applies when tax-payer claimed carry-across relief but not all been absorbed
23
Q
Carry-forward relief
A
Carry forward tax loss for a tax year and set it against subsequent profits which the trade produces in subsequent years.
Indefinitely but most notify HMRC of its intention to claim the relief no more than four year afterward.
24
Q
VAT
A
20%
20% on goods and services ‘output tax’
Business deducts from the amount is collect on any it has itself paid on goods or services received and pays the difference.
25
Exempt supplies
Residential land, postal services, education and health services
26
Taxable person
Person who makes or intends to make taxable supplies and who is or is required to be registered under the Value Added Tax Act 1984.
Value of taxable supplies over £85,000
27
Tax payable
Submit a return to HMRC and pay VAT it owes within one month from the end of each quarter made in that quarter.
They will pay VAT they have charged (output) less any VAT paid in course of business (input tax). If input exceeds output the person will receive a rebate.
28
Zero-rated and exempt
Who makes zero-rated (books, certain food and water) can reclaim VAT they have paid. Only exempt supplies cannot register and will not be able to reclaim.
29
VAT registration
Making supplies of more than 85,000 in 12-month period must register and charge VAT. Those less can but not obliged.
30
Tax invoices
Must show - tax invoice showing VAT number, value of supply and rate of tax charged
31
Income tax
32
First
Chargeable receipts less deductible expenditure and capital allowances
33
Partners
Responsible for their individual share of partnership profits. Apportioned between the partners.
34
PRs and Trustees
PRs - pay deceased outstanding income tax
Trustees - pay income tax on income produced by the trust.
35
Tax year
Runs from 6 April until 5 April
36
Three categories of income
Non-savings non-dividends income
Savings income
Dividends income
37
Calculate
- Total income
-Deduct allowable reliefs
Net income
-Deduct any personal allowances
Taxable income
- Separate NSNDI, savings and dividend. Calculate tax on each type
Add together to get income tax liability.
38
Step 1 - Total income
trading income - profits of trade, profession or vocation.
Property income - rent and other receipts from land
Savings and investment income - interest, annuities, dividends
Miscellaneous income -
39
Exemptions?
Interest on damages for personal
injuries or death, interest on savings certificates, certain state benefits, premium bond
winnings and income from investment in an individual savings account (ISA).
40
Step 2 - Allowable reliefs
Total income less allowable reliefs = net income.
Relief-
Interest payable on qualifying loan - loan to buy a share in partnership, loan to invest in a close trading company and a loan to personal representatives to pay IHT.
41
Step 3 - Personal Allowances
£12,570
Applied in certain order, set against income of any kind-
NSNDI
If surplus - savings
Any remaining dividends.
Cannot be carried forward unless marriage allowance applies.
When income exceeds £100,000. PA reduced by £1 for every £2 (rounded up to nearest £).
42
Marriage allowance
Can transfer £1,260 to their spouse if unused. Not allowed if recipient additional rate taxpayer.
43
Blind person allowance
Allowance if £2,870.
44
Property and trading allowances
Gross property income or gross income below £1,000 income will not be subject to income tax.
45
Personal savings allowance (PSA)
Basic rate taxpayer £0–£37,700 £1,000 tax free
Higher rate taxpayer £37,701–£125,140 £500 tax free
Additional rate taxpayer over £125,140 No allowance
46
Dividend allowance
£1,000. Different rate tax doesnt matter
47
Nil-rate band
Unlike PA PSA and dividend taxed at 0% not deducted.
48
Calculate the tax on each type of income and
Step 5: add together to
give overall income tax liability
Taxable income less savings and dividend income = taxable NSNDI.
49
Order of taxation
Taxed in slices.
NSNDI bottom so first
Savings middle
Dividends top.
50
Income tax rates
Top slice (taxed last) Dividends:
taxed at the
dividend rates
Dividend ordinary rate: 8.75%
Dividend upper rate: 33.75%
Dividend additional rate: 39.35%
Middle slice (taxed next) Interest:
taxed at the savings rates
Starting rate for savings: 0%
Savings basic rate: 20%
Savings higher rate: 40%
Savings additional rate: 45%
Bottom slice (taxed first) NSNDI:
taxed at the main rates
Basic rate: 20%
Higher rate: 40%
Additional rate: 45%
51
NSNDI (once worked out NSNDI)
Basic rate of 20% £0–£37,700
Higher rate of 40% £37,701–£125,140
Additional rate of 45% over £125,140
52
Savings income
Starting rate for savings of 0% £0–£5,000
Savings basic rate of 20% £5,001–£37,700
Savings higher rate of 40% £37,701–£125,140
Savings additional rate of 45% over £125,140
53
Working out taxable rate on savings
Add PSA to taxable NSNDI.
54
Dividend income
Deduct dividend allowance from dividend income figure.
Dividend income less dividend allowance (taxed at 0%) = ‘remaining taxable dividend
income’
The remaining taxable dividend income is taxed at the dividend ordinary rate, upper rate and
additional rate. For the tax year 2023/24, the rates are as follows:
55
Rates
Dividend ordinary rate of 8.75% £0–£37,700
Dividend upper rate of 33.75% £37,701–£125,140
Dividend additional rate of 39.35% over £125,140
56
Procedure
To ascertain whether the dividends will be taxed at the dividend ordinary, upper or additional
rate, you must add the dividend allowance to total taxable NSNDI and total savings income.
To the extent that the dividend income falls within the basic rate limit, it will be taxed at 8.75
per cent. To the extent that dividend income falls between the basic rate limit and the higher rate limit, it will be taxed at 33.75 per cent. Any excess over the higher rate limit will be taxed
at 39.35 per cent.
57
Taxation on sole traders
For the tax years up to and including 2022/23, income tax was assessed on the profits of the
accounting period ending in the tax year. However, in the first tax year of trading, a business
was taxed on the actual profits made during the tax year, that is, from the commencement
of trading to the following 5 April. In the second tax year of trading, the application of
the normal rule meant that the business was effectively taxed twice on some of its profits,
although the extra tax paid was recoverable in the closing tax year of the business.
From the tax year commencing 6 April 2024, where a business’s accounting period does not
coincide with the tax year, profits and losses will be apportioned between the different tax
years. This will usually be calculated on the basis of the number of days of the accounting
period falling in each tax year. Whilst from 6 April 2024 this rule will apply to all businesses, it
will have immediate effect for all new businesses starting trading in the 2023/24 tax year.
58
Taxation of partnerships
Chargeable receipts LESS deductible allowances LESS capital allowances = trading profit/loss
-Trading profit then shared between partners in accordance with the agreement (or PA 1980).
59
Borrowing money or shares in partnership
Allowance up to £50,000 or 25% of their total income.
60
Exemption?
Enterprise Investment Scheme (EIS). It allows the
individual to deduct from their income tax liability for the year a sum equal to 30% of the amount
they have invested in the ordinary shares of qualifying unquoted companies. The individual can
subscribe up to £2 million per tax year in the ordinary shares of qualifying unquoted companies.
During the two years before and three years after the share purchase, the taxpayer must not be
‘connected with’ the company, meaning that the combined shareholdings of the taxpayer and
their associates (including spouse and close family) must not exceed 30%..
61
Interest on loan/debentures
Unless company taxed as income tax.
62
Employment income
Bonuses, non-cash benefits and tips also taxable, unfair/wrongful dismissal payouts.
63
Non-cash benefit
Value is cost incurred by employer.
64
Accomdation
Not taxed if-
necessary to perform duties
can perform duties better or is customary.
65
Low-interest loans
Not taxable if supplied by employment up to £10,000.
66
Pensions
Not taxed if paying into HMRC approved scheme.
67
Deductible expenditure
Strict test -
Incurred wholly or exclusively and necessarily in performance of duties. Requirement for necessity.
Travelling to work not - worker performs duties when they arrive.
68
If liable for own tax return?
Required to notify HMRC of this within six months at the end of the relevant tax year. Penalty for default is a fine.
Submission date 31 October.
First payment on account - by 31 January
Second payment on account - 31 July after end
Any balancing payment due on next 31 January.
Payments on half.
69
Penalties for default
Charges interest on any tax unpaid at due date.
70
GAAR - Abusive tax arrangements
Finance Act 2013 allows HMRC to make adjustments to a taxpayer's liability to counteract measures.
Tax advantage - main reason to benefit from avoiding tax.
'Abusive' if -
* whether the effect of the arrangement is consistent with the policy objectives of the tax
legislation;
* whether the means of achieving those results involves one or more contrived or abnormal
steps; and
* whether the arrangements are intended to exploit shortcomings or loopholes in the tax
legislation.
71
Procedure
If in breach of GAAR, will notify taxpayer and set out tax adjustments. Must be 'just and reasonable'
Enablers liable as well in course of business.
Penalty equal to value or financial benefit received.
72
CGT (Capital Gains Tax)
Payable on chargeable gains made by a chargeable person on the disposal of a chargeable assets in a tax year.
73
Chargeable person?
Individuals, PRs (on disposal of asset), partners (on disposal of asset), trustees (on disposal of asset).
74
Chargeable asset?
All forms of property including debts, options and incorporeal property (legal right in property).
75
Step 1 - Disposal of a chargeable asset
Identify the disposal e.g. factory
76
Step 2 - Calculation of the gain
Consideration received for the asset less the cost of the asset.
77
Step 3 - Consider reliefs
78
Step 4 - Aggregate gains/losses
Gains and losses from all sources must be added together, annual exemption of £6,000 deducted.
79
Step 5 - Apply the right tax
Treated as the top slice of income for the tax year.
* If the taxpayer’s capital gains and taxable income added together do not exceed the
threshold for basic rate income tax (£37,700), the rate of tax payable on the gains is 10%.
* If the taxpayer’s capital gains and taxable income added together exceed the basic rate
threshold, the rate of tax for any gains up to the basic rate threshold is 10%, and any
gains which exceed the basic rate threshold are taxed at a rate of 20%.
80
Tax rate for residential property
Not the main residence - surcharge of 8%.
Basic rate - 18% (10+8)
Exceed basic rate - 28%
81
Business asset disposal relief
10% - regardless of income.
If mixed with other assets business taxed first other gains treated as top slice.
82
Tax rate for trustees and PRs
20% or residential 28%
83
(Step 1)
Disposal of part of an asset
Even if the taxpayer only sells or gives away part of an asset it will be chargeable to CGT.
Death not counted (IHT instead)
84
(Step 2)
Subtract initial and subsequent expenditure
Incidental -
* Any incidental costs of acquisition, for example conveyancing fees in relation to the
purchase of a property, or other legal fees, valuation fees and stamp duty; and
* Any expenditure wholly and exclusively incurred in providing the asset, for example, the
cost of building a property
Subsequent -
* Expenditure wholly and exclusively incurred in establishing, preserving or defending
title to the asset. An example of this would be legal fees incurred to resolve a dispute
regarding the title to the property, for example a boundary dispute; and
* Expenditure wholly and exclusively incurred to enhance the value of the asset, which is
reflected in the value of the asset at the time of disposal. An example of this would be
the cost of building an extension to a house. The cost of normal maintenance, repairs and
insurance is not deductible.
85
Indexation allowance
- Owned for period between 31 March 1982 and 5 April 1998
RPI against inflation. HMRC publish tables.
86
Step 3 - Reliefs
87
Rollover reliefs
Sell business assets without paying CGT provided proceeds invested in other qualifying business assets.
Still pay but 'rollsover'
88
Qualifying business assets?
Land, buildings and goodwill.
Fixed plants and machinery.
Used in trade.
Asset is owned by
-sole trader, partnership, individual partner, individual shareholder (5% of company).
89
Time limits?
Acquire replacement within one year before or three years after disposal.
90
Application?
Claim relief within four years from end of tax year. Loses annual exemption if apply for rollover relief.
91
Rollover relief on incorporation of business
Gain rolled over into the shares which the seller receives as consideration for the sale of the assets to the company. CGT payable when the individual disposes of the shares.
92
Conditions for relief to apply
- carried on as same business but with different owner
-consideration must all be in shares issued by the company (percentage can roll over)
- business must be transferred with all of its assets ignoring cash
93
Application?
Gain is rolled over by notionally deducting it from the cost of acquisition of the new shares.
94
Annual exemption?
Lost if apply. HMRC automatically applies no need to submit.
95
Hold-over relief on gifts
Gift certain business assets. If donee disposes charged tax on their own gain and the donor's gain.
96
Conditions?
- only on gifts
-business assets - e.g. used in trade, by partner or sole-trader.
-shares in trading company which are not listed on recognised stock exchange.
-shares in personal trading company
- assets owned by the shareholder and used by their personal trading company
Both donor and donee must elect to apply for the relief. Within four years from disposal.
97
Application?
Calculated by taking market value as consideration for disposal. Deemed gain then deducted from the market value of the asset producing a low acquisition cost.
When later disposed notional acquisition cost and any qualifying expenditure is deducted from sale price.
98
Business asset disposal relief
Reduced to flat rate of 10%
Sole trader or partnership-
business or part of it is disposed
assets are disposed following cessation of the business.
Must have been owned
-throughout the period of two years ending with date of disposal
-throughout the period of two years ending with cessation of the business
99
Company shares
May qualify if -
trading company
must hold at least 5% of ordinary share capital and 5% voting rights. 5% profits available, 5% on winding up, 5% of proceeds of sale if the whole of the ordinary share capital (beneficially entitled).
Must be satisfied within the two years of disposal or ending with date company ceased to be a trading company.
Companies that hold substantial cash reserves or investments may not be a trading company.
100
Effect
Taxpayer pays flat 10% rate. Up to lifetime cap of £1 million.
Must claim on or before the first anniversary of 31 January following the tax year in which qualifying disposal was made.
100
Tangible moveable property
Wasting assets are generally exempt. Predictable life of less than 50 years.
Antiques - exempt if under £6,000.
100
Private residence relief
Dispose of dwelling house including ground of up to half a hectare. Occupation required.
100
Damages for personal injury
Exempt
100
Step 4 - Aggregate gains/loss - deduct annual exemption (6,000)
Gains and losses from all sources added together. Can choose to apply AE on higher rates if gains on different rates.
101
Reliefs
Business asset disposal relief cannot apply to gains which are rolled over on replacement of qualifying assets.
Rollover relief cannot generally be used with holdover
If rollover reliefs on incorporation applies - business asset disposal and annual exemption cannot be used.
Annual exemption can be used to reduce gains before applying business asset disposal relief.
101
Calculating
Must be done separately according to category.
Losses and exemptions calculated in best way possible. Exemptions deducted from gains that would be higher rate.
101
Step 5 - Apply the correct rate of tax
Three categories of chargeable asset -
assets which are not residential property (10% or 20% depending on income)
assets which qualify for business asset disposal relief (10% flate)
residential property (surcharge of 8%) on normal rates of 10 and 20
101
Unabsorbed losses
Can be carried forward indefinitely
-work out gain or loss on each disposal during tax year
-deduct any losses of the current year from gains
-deduct any losses brought forward from previous years to reduce remaining gains to the limit of AE
-deduct AE from remaining gains
101
Partnerships
Apportioned between partners.
Each partner pays a part based on percentage of ownership.
They each choose their own reliefs.
Individual disposals - e.g. buying in CGT is payable
LLP treated as body corporate when ceasing to trade, partnership when alive.
101
Step 1 - Calculate Income Profits
Trading income
- can be property income and loan income.
102
Disposals between spouses
No gain or loss between spouses
When recipient disposes of it (deferred) .
Can use other AE and benefit from lower rate taxpayer.
Value not on market but what spouse paid for it.
102
Buyback of shares
Liable when -
buyer trading company
to raise cash to pay IHT or for benefit of company trade
shares owned for at least 5 years
selling all shares or reducing percentage by at least 25% to a max of 30%.
102
Payment of CGT
31 January following end of tax year.
Provisional calculation from sale of residential property and pay within 30 days.
Installment (10) when -
disposa was a gift
qualifying asset is land, controlling shareholding or any shareholding where unquoted
conditions for hold-over relief to apply must not be met.
102
IHT and BPR
Reduction of 100% of value where a business or interest in business and shares that are not on recognised stock exchange.
50% where;
Shares with voting control
Land, building, plants used in business
Must be owned for at least two years
Must be a replacement for business property where combined period of ownership is two years.
102
Corporation Tax
103
Step 2 - Calculate Chargeable Gains
- Identify a chargeable disposal
-Calculate the gain
-Apply reliefs
-Aggregate remaining gains or losses
104
Chargeable disposal
Like CGT, not income stream from company - different rules on goodwill and IP.
105
Calculation
Proceeds of disposal (or market value in the case of a gift or sale at an undervalue) LESS costs of disposal=
NET DISPOSAL
LESS
other allowable expenditure (initial and subsequent expenditure) = Gain before indexation
LESS
indexation allowance
=
GAIN
106
Sale at undervalue?
Below market value
If gift element - market value used (to a connected person *controls the company)
Unused loss can be carried forward against future chargeable gains
107
Indexation allowance
Apply initial and subsequent expenditure to the percentage increase in the RPI from date expenditure occurred.
Deduct from the gain.
108
Stage 3 - Apply reliefs
109
Rollover relief on the replacement of qualifying business assets
Postpone payment of qualifying asset when consideration received to acquire another asset
110
Qualifying asset?
Land and buildings
Not
-Shares
-Goodwill and IP
111
Time limits?
Within one year before or within three years after
Gain notionally deducted from the acquisition cost of the replacement asset.
112
Add income profits and capital gains
Company's total profit for the accounting period.
113
Step 4 Calculate The Tax
The corporation tax year runs from 1 April to 31 March. If accounting year different then company will pay tax at rate on a proportion of its profit at the new rate
114
Relief for a trading loss
115
Carry-back relief
If remaining losses in accounting year can carry back to 12 months prior to gain a rebate. Can carry against other profits in the same year.
116
Terminal carry-back relied for trading losses
When a company ceases to trade, it can carry back any trading losses and set them against the company's total profits from any accounting period falling in the three years before the start of that final 12 months, taking later periods first.
Claims must be made within two years from the end of the accounting period.
117
Carry-forward relief
Carry forward trading losses and set it against subsequent profits in the next accounting period.
Claim made within two years of the end of the accounting period.
Max - 5 million plus 50% of remaining total profits after deduction of the allowance.
If doesnt meet condition can still set it against same trade profits.
118
Close companies
- Controlled by five or fewer participators
-33.75% if loaning to participators. Refunded when loan paid off
No tax payable if -
ordinary course of money-lending
no more than £15,000 and borrower works full time for the company and owns no more than 5% of ordinary shares.
119
Group relief
Can transfer losses between groups.
One company must be the 75% subsidiary of the other.
Accounting period must overlap.
120
Chargeable disposals
Arrange for another company to dispose of a good so tax more favourable.
75% subsidiary.
Must be 51% of principal.
Transferred on tax neutral basis.
121
HMRC
Must inform within first accounting period.
Must do so within three months from the start of that accounting period.
122
Payment
Self-assessment, 12 months from the end of the relevant accounting period. Payable within nine months and one day from the end of the accounting period.
Large companies must pay tax (1.5m over) in 4 instalments.
Six months and 13 days after the start of the accounting period.
Three months from the instalment date
Three months from second instalment date
Three months and 14 days after the accounting period.
Companies over 20m-
1. Two months and 13 days after the start of the accounting period;
2. Three months from the first instalment due date;
3. Three months from the second instalment due date; and
4. Three months from the third instalment due date.
123
