Individual Taxation - Introduction

Question 1

Difference between direct and indirect taxes?

Answer 1

• Direct: based on the taxpayer’s circumstances (e.g income tax, CGT, corporation tax)
• Indirect: based on transactions e.g VAT

Question 2

Income receipts vs capital receipts?

Answer 2

• Income receipts - regular payments (e.g. trading profits, bank interest, rent)
• Capital receipts - one-off or infrequent payments (e.g. gain on a sale of property or equipment)

Question 3

What is income expenditure?

Answer 3

Day-to-day operating costs, such as rent, bills, salaries, loan interest etc

Question 4

What is capital expenditure?

Answer 4

One-off investments in long-term assets like buildings, machinery, or vehicles; or enhancements to capital assets

Question 5

Can income expenditure be deducted from capital receipts?

Answer 5

No - income expenditure can only reduce income receipts; capital expenditure is deducted from capital receipts

Question 6

How are trading profits calculated for tax?

Answer 6

Income receipts - Income expenditure = Trading profits

Question 7

When can capital expenditure be deducted for tax purposes?

Answer 7

Generally, only when the capital asset is disposed of, to reduce the chargeable gain

Question 8

What is a capital allowance?

Answer 8

A tax deduction that allows certain types of capital expenditure to be offset against income receipts over time

Question 9

How do capital allowances differ from depreciation?

Answer 9

Capital allowances are a tax relief mechanism; depreciation is an accounting concept

Question 10

What is the financial year for companies?

Answer 10

1 April to 31 March in the following year. Companies may have a different accounting period

Question 11

What is the tax year for individuals?

Answer 11

From 6 April to 5 April in the following year

Question 12

What is PAYE?

Answer 12

Pay as you earn - employers deduct income tax and national insurance from employee wages and pay it to HMRC

Question 13

What is a current year basis?

Answer 13

Income is taxed in the year it is earned, using the rates for that tax year

Question 14

What is taxable total profit?

Answer 14

A company’s total taxable income and chargeable gains, assessed for corporation tax

Question 15

What is indexation allowance?

Answer 15

A deduction for companies only to adjust capital gains for inflation, based on the Retail Price Index - this was frozen from January 2018