Introduction to the taxes - L1

Question 1

What does income tax cover?

Answer 1

Income from work (wages, business profits) and property/investments (rent, interest, dividends).

Question 2

What is capital gains tax?

Answer 2

Tax on profits from selling valuable assets (e.g., holiday home, shares).

Question 3

What is corporation tax?

Answer 3

Tax on company income and capital gains, introduced in 1965.

Question 4

What is inheritance tax?

Answer 4

Tax on the estate of a deceased person and certain gifts before death; introduced in 1986.

Question 5

Why is the classification of income vs. capital important?

Answer 5

It determines which tax applies and whether a tax deduction is allowed.

Question 6

What is the key moment for classification in tax?

Answer 6

At the time of receipt and expenditure.

Question 7

What are other names for income receipts and expenditures?

Answer 7

Revenue receipts and expenditures.

Question 8

What did Bird v IRC [1989] state about income and capital?

Answer 8

They are mutually exclusive — a receipt is either income or capital, not both.

Question 9

What analogy did Sankey J give in Pool v Guardian Investment Trust Co [1922]?

Answer 9

Capital is the tree; income is the fruit.

Question 10

What does the tree and fruit analogy mean?

Answer 10

Capital is existing wealth that generates income. Income can also come from work.

Question 11

What is a capital receipt according to Hudson’s Bay Co v Stevens (1909)?

Answer 11

Money from selling a capital asset, like land, is a capital receipt, not income.

Question 12

What is a capital gain?

Answer 12

Profit from the increase in value of a capital asset.

Question 13

What did Buckley J state in Coutaulds Investments Ltd v Fleming [1969]?

Answer 13

Capital gain is the growth of the tree, not its fruit.

Question 14

When is the sale of an asset considered income (Mackenzie v Arnold [1952])?

Answer 14

When the taxpayer creates the asset through their own labour (e.g., painting a portrait).

Question 15

When does the labour-income principle not apply (Withers v Nethersole [1948])?

Answer 15

If the taxpayer is no longer pursuing the business.

Question 16

What is fixed capital?

Answer 16

Assets used continuously in business, e.g., machines, buildings.

Question 17

What is circulating capital?

Answer 17

Assets bought/sold for profit, e.g., stock or raw materials.

Question 18

What determines the nature of the asset (Golden Horse Shoe v Thurgood [1934])?

Answer 18

How the asset is used in the business, not what it is.

Question 19

Can some assets be neither fixed nor circulating?

Answer 19

Yes, e.g., employee contractual rights (Comr of Taxes v Nchanga Copper Mines [1964]).

Question 20

What role does precedent play in classification?

Answer 20

It helps resolve difficult cases (Heather v P-E Consulting [1973]).

Question 21

What if precedent doesn’t give a clear answer?

Answer 21

Courts often follow standard accountancy practices (Odeon Associated Theatres v Jones [1973]).

Question 22

What happens if it’s unclear whether income or capital tax applies?

Answer 22

Tax authorities can issue alternative assessments (Bye v Coren [1986]).

Question 23

What is the key test for capital vs. income expenditure?

Answer 23

Spending on fixed capital = capital expenditure; on circulating = income/revenue expenditure.

Question 24

What taxes affect business and individual wealth?

Answer 24

Corporation tax (business), income & capital gains tax (individuals), inheritance tax (estates/gifts).

Question 25

What is the main source of tax revenue for the government?

Answer 25

Income tax ## Footnote Income tax has been around for about 200 years and taxes income from work and investments.

Question 26

What does capital gains tax apply to?

Answer 26

Profit made when a valuable asset is sold ## Footnote Before its introduction, profits from selling assets were tax-free.

Question 27

When was corporation tax introduced?

Answer 27

1965 ## Footnote It is a separate tax on the income and capital gains of companies.

Question 28

What does inheritance tax tax?

Answer 28

Estates of deceased taxpayers and gifts made before death ## Footnote Inheritance tax was introduced in 1986.

Question 29

What is the distinction between income and capital in tax legislation?

Answer 29

It has never been defined by statute; it is left to the courts. ## Footnote Receipt classification determines applicable tax.

Question 30

How are receipts classified for taxation?

Answer 30

As income or capital receipts ## Footnote This determines whether income tax or capital gains tax applies.

Question 31

What is a tax deduction?

Answer 31

A total amount an individual can claim to reduce their tax liability ## Footnote Examples include charitable donations and business expenses.

Question 32

What are income receipts and expenditures also called?

Answer 32

Revenue receipts and expenditures

Question 33

What metaphor did Sankey J use to differentiate between capital and income?

Answer 33

Capital is like a tree; income is like its fruit ## Footnote Capital represents existing wealth while income represents new wealth generated.

Question 34

What is the effect of selling a capital asset?

Answer 34

Produces a capital receipt, not income ## Footnote It is a change in the form of capital held.

Question 35

What does the principle from Mackenzie v Arnold state?

Answer 35

The sale of an asset created by the taxpayer's labor produces an income receipt ## Footnote This contrasts with someone else selling the same asset, which would produce a capital receipt.

Question 36

What is the difference between fixed and circulating capital?

Answer 36

Fixed capital stays permanently within the business; circulating capital is sold quickly to generate profits ## Footnote Examples include machinery (fixed) vs. shop stock (circulating).

Question 37

What determines whether a sale or purchase is classified as capital or income?

Answer 37

The nature of the asset: fixed or circulating ## Footnote Fixed capital involves capital receipts; circulating capital involves income receipts.

Question 38

What does the term 'capital asset' typically refer to in tax law?

Answer 38

Fixed assets ## Footnote Unless specified otherwise, it generally does not include circulating assets.

Question 39

What is the importance of accountancy practice in tax classification?

Answer 39

Courts often follow generally accepted classifications by the accountancy profession ## Footnote Accountants make initial practical decisions on tax laws.

Question 40

What happens if there is uncertainty in classifying a receipt?

Answer 40

Tax authorities can issue alternative tax assessments ## Footnote This ensures a correct assessment is issued within the time limit.

Question 41

What is the key test for classifying business expenditures?

Answer 41

If the expenditure is for a fixed capital asset, it is capital expenditure; if for circulating capital, it is revenue expenditure.

Question 42

What is the relationship between capital gains and capital assets?

Answer 42

Selling capital assets generates capital receipts and potential capital gains ## Footnote Capital gains may be liable to capital gains tax.

Question 43

What type of tax is corporation tax?

Answer 43

A tax on income and capital gains of companies.

Question 44

What is the legal precedent that helps distinguish between income and capital?

Answer 44

Heather v P-E Consulting Group Ltd ## Footnote It illustrates the difficulty of borderline cases in classification.