Individual and corporate taxation Flashcards
(18 cards)
Who pays income tax?
Income tax is paid by individuals and not companies. This includes employees, sole traders, partners in a partnership and company directors.
What are the three different categories of income for income tax purposes?
- Savings income: savings accounts, interest from bonds etc
- Non-savings income: salaries and bonuses, trading income, rental income and pension earnings
- Dividend income: dividends received on shares
What are the main reliefs and exemptions to income tax?
Personal allowance of £12,570
Marriage allowance-transfer personal allowance to each other up to £1,260 per tax year
Contributions to tax-efficient savings such as ISAs
Loss relief-if a sole/trader partnership has made a loss in one tax year, this can be deducted from next year’s profits to reduce income tax payable
Outline the process for the calculation of income tax.
- Calculate total income (use income receipts)
- Calculate net income-less pension and interest on qualifying loans to a partnership or to buy shares in a close company
- Calculate taxable income-less personal allowance of £12,570. If net income is more than £100k, personal allowance reduced by £1 every £2 above £100k
- Split taxable income-into dividend and savings income, taxable income minus savings income equals non-savings income
- Check whether savings allowance available-basic rate first £1k taxed at 0%, higher rate first £500 taxed at 0%
- Apply tax band and tax rates and add up
Outline the scope of anti-avoidance provisions for income tax.
GAAR (general anti-abuse rules) aim to cut down on tax avoidance schemes.
HMRC apply the double reasonableness test to tax arrangements-can the arrangement be reasonably regarded as a reasonable course of action.
Who pays CGT (capital gains tax)?
CGT is paid on receipt of money that originates from one off sales. Both individuals and businesses pay CGT.
What are the main reliefs and exemptions to CGT?
Annual exemption of £3,000
BADR (Business Asset Disposal Relief)-may reduce CGT to 10% if trading business owned for 2 years, own at least 5% of shares at least 2 years prior to disposal and not exceed £1m lifetime limit
Rollover relief-where sale proceeds of asset are used to buy a new asset within 12 months, thereby deferring CGT until the replacement is sold
Holdover relief-where a donor gifts a qualifying asset, then CGT is transferred to the donee and deferred until the donee sells. Both must jointly elect to claim holdover relief
Outline the process for the calculation of CGT.
- Calculate the sale proceeds of each asset-capital income from one off sales
- Less disposal expenditure-costs of disposal eg agents commission
- Less initial and subsequent expenditure-initial means cost price of asset and costs of acquisition, subsequent means anything that enhances asset’s value
- Less losses carried forward & AE of £3,000-any net capital losses made in previous years can be carried forward along with AE of £3,000
- Apply the tax rates and add up-basic rate is 18%, higher and additional rate is 24%
Outline the scope of anti-avoidance provisions for CGT.
Taxpayers cannot reduce their CGT liability by creating and using artificial losses. They cannot lie and avoid tax by stating they are not resident in the UK when in fact, they are.
Who pays corporation tax?
Corporation tax is paid by companies only. It is based on the financial year, which starts 1 April and ends 31 March the next year.
Outline the process for the calculation of corporation tax.
- Calculate what is income and what is capital
- Calculate trading income profits-all income receipts minus deductible expenditure minus capital allowances minus trading losses
- Calculate taxable chargeable gain-total sale proceeds minus disposal costs minus initial and subsequent expenditure minus indexation allowance minus rollover relief minus chargeable losses equals taxable chargeable gain
- Calculate total taxable profits (TTP)-income profits plus chargeable gains
- Calculate corporation tax payable-TTP £50k or less, 19%. £50k-£250k, 25%. £250k+, 25% to all profits.
What is the tax treatment of company distributions to shareholders?
Dividends are double taxed through both company profits for corporation tax and then income tax is paid by the recipient.
What is a close company and how are they treated for tax purposes?
S439 CTA 2010 states a company is a close company if it is under the control of 5 or less participators. These companies must pay corporation tax on loans to participators. There is no tax effect for the participator if they pay back the loan in full.
What is VAT?
VAT is charged on any supply of goods or services made in the UK where it is a taxable supply made by a taxable person in the course of any business carried on by him-s4 VATA 1984.
What is output tax and input tax?
Output tax-the tax charged by the business on goods/services it sells.
Input tax-the tax paid by the business on goods/services it purchases.
A VAT registered business offsets input tax against output tax and only accounts for the difference to HMRC.
What is the current VAT threshold?
£90,000. A person must be registered if their VAT taxable turnover exceeds this threshold or there are reasonable grounds for believing they will exceed the threshold in the next 30 days.
What are the four rates of VAT?
- Standard rated-20%, default rate
- Reduced rated-5%, heating, car seats for children, elderly mobility aids
- Zero rated-0%, basic food items, books, new houses, public transport
- Exempt-insurance, financial, education services
What is business property relief in relation to IHT?
BPR reduces the value of a business or its assets when working out how much IHT has to be paid.
A person must have owned qualifying business assets for the qualifying period of time (at least 2 years immediately prior to the relevant transfer).
