Introduction to the taxes Flashcards
(20 cards)
What is income tax?
Taxes income from work. E.g. wages of an employee
What is Capital gains tax?
Taxes the profit made when a valuable asset is sold. E.g. selling shares
What is Inheritance tax?
Taxes the estates of dead taxpayers; and gifts made by them in the years before death
When a taxpayer receives money, what can this be classified as?
- Income receipt
- Capital receipt
When a taxpayer spends money, it has to be classified as an expenditure of an income or capital nature. Why is this?
This determines whether a tax deduction can be made
What did Sankey J say in Pool v Guardian Investment Trust Co [1922] 1 KB 347 referring to capital and income?
“Capital is like a tree; and income is like its fruit”
What does Sankey J mean by the quote he said in Pool v Guardian Investment Trust Co [1922] 1 KB 347?
- A tree is property you already own; which yields fruit as a new, additional item of property.
- So, capital is your current stock of wealth: e.g., land, savings, shares.
- This produces new additions to wealth as income: e.g., land rents, savings interest, share dividends.
What else did Sankey J add to his quote that provided clarity? (and to note)
- Not all income derives from capital – income can also be produced by work.
- Note: not all capital assets produce income; e.g., a home you occupy. Capital is your wealth holding; whether used to make income or not. (So, some trees aren’t fruit trees.)
What are the two key sources of income?
- Capital
- Labour
An item received as income often, immediately after, becomes what?
Capital e.g. income saved rather than spent
What did the case Hudson’s Bay Co Ltd v Stevens (1909) 5 TC 424 (CA) establish?
Selling a capital asset, like land, results in a capital receipt, not income, as it’s merely a conversion of capital from land to cash. Any profit from the sale is a capital gain, reflecting the asset’s increased value rather than new wealth.
What did the case Mackenzie v Arnold (1952) 33 TC 363 (CA) establish?
Where a taxpayer labours to create an asset in their own business – e.g. paints a portrait – its sale by the taxpayer produces an income receipt: because the fruits of one’s labours are income.
To follow on from the principle established within Mackenzie, which case followed by saying ‘the principle only applies so long as the taxpayer still pursues the business?
Withers v Nethersole [1948] 1 All ER 400 (HL)
What case draws a distinction between the business’s “fixed” and “circulating” capital?
Smith & Son v Moore [1921] 2 AC 13 (HL)
What is meant by fixed capital?
Assets that stay relatively permanently within the business for continuous use. e.g. machines used for manufacturing, delivery vehicles, factory buildings
What is meant by circulating capital?
Assets that get sold on, usually as quickly as possible - sometimes in a processed form - to make the profits of the business: e.g. shop stock; or raw materials used in manufacturing.
What is the distinction to classifying receipts and expenditures?
sale or purchase of fixed capital involves a capital receipt or expenditure; with circulating capital it’s an income receipt or expenditure.
What did Golden Horse Shoe (New) v Thurgood [1934] 1 KB 548 (CA) establish?
- Fixed or circulating does not depend on what an asset is, but on how it is used in the business.
- E.g., a machine used for manufacturing is fixed capital; but the same machine, in the business of a dealer in machinery, who buys and re-sells them for profit, is circulating capital.
Principle of Comr of Taxes v Nchanga Consolidated Copper Mines Ltd [1964] AC 948 (PC)?
- Some assets are not fixed or circulating.
- E.g., one business asset is contractual rights held against employees. This is not fixed capital: the rights can end at any time. Nor is it circulating capital: contractual rights against employees are not something the business deals in.
What did the case Bye v Coren (1986) 60 TC 116 (CA) establish?
- Where it is not clear whether a receipt should be taxed as income or as a capital gain, the tax authorities have the right to issue alternative tax assessments, until it is clear which charge is correct.
