June 2023 Past Paper Flashcards
Actions to take if client does not repay refund to HMRC
- identify if there was a valid reason for refund
- if unable to find a reason = conclude it was an error on HMRC part
- inform client of repayment or it’ll be a criminal / civil offence
- asap to minimise interest / penalties payable
If client unwilling - consider ceasing to act
- notify tax authorities = no longer act for client , not provide them with any reason
- our firms MLRO= consider making reporting
Calculate taxable gain
On sale of rental property
Sold for : 265,000
Inherited it from her uncle : £221,500
Uncle purchased it for £135,000
Proceed 265,000
Less : cost (probate value) (221,500 )
Less : annual exempt amount (12,300)
Taxable gain: 31,200
What’s the basic rate band remaining
What % and amount is used for CGT
Basic rate band : 37,700
Income : 23,500
Rental Taxable gain: 31,200
Basic rate band remaining:
37,700 - (23,500 -12570)
Percentage to use for rental property for the above amount x 18%
28% to use on the balance
( 31,200 - above figure ) x 28%
What’s the 3 conditions that must be satisfied for an incorporation relief
- Business is transferred as a going concern
- All assets other than cash is sold
- Consideration received includes shares
Calculate CGT payable based on the fact that incorporation relief is satisfied
Chargeable gain :172,000
Value of shares received : £255,000
Which represents 81% of the total consideration.
Total gains : 172,000
Less: incorporation relief
(Chargeable gain x % of shares received out of total consideration)
= 172,000 x 81%
Less: annual exemption (12,300)
CGT @ 10% (BADR)
What’s the special rules for closing years (ignore terminal loss relief)
Penultimate tax year : CYB
Final tax year : profit / loss not yet assessed
Less: overlap profit
In regards to incorporating a business:
How can losses be relieved from the sole traders ttp
- Total income of : CYTY and / or PY
- Chargeable gains of either or both of the same two years
- provided a claims been made agains total income first - The first available income received from the company
E.g salary and / or dividend
How would you relieve the loss as soon as possible assuming that no relief is claimed in respect of the current tax yea
Loss relief agains last years total income
Balance would go to any gains in the current year
Why would be the tax saving:
Total income last year : 23,500
Total loss from current year: (44,500)
Rental property taxable gain : 31,200
CGT for rental property : 6059
Last year income tax saving : ( 23,500 - 12,570 )x 20% = £2,186
Balance : 44,500- 23,500 (used to offset agains income) = £21,000
Rental CGT saving:
Revised chargeable gain 31,200 - 21,000= 10,200
CGT @ 18% ( property & falls with BRB (37,700-23,500-10,200 = 4,000))
10,200 x 0.18 = 1,836
Saving CGT (6059-1836) 4,223
Total tax saved
4223+2186 = 6409
How would a sole trader relieve the trading loss in the future when incorporating a business
The trading loss could be carried forward and added agains the employment income from the company
What would be the tax saving of trading loss from a sole trader carried forward to future incomes from a company
Trading loss : (44,500)
Employment income : 5,500 per month
Original income tax liability:
5.5k x 12 months = 66k - 12,570 = 53,430
BRB 37,700 x 20% = 7540
HRB (53,430 - 37,700) x 40% = 6,292
Total tax = 13,832
Income tax liability w/ trading loss
53,430 - 44,500 = 8930 x 20% = 1,786
Income tax saving = 12,046
Set out matters we should draw to the sole traders attention in order to help them decide how to relieve loss
CY : 2022/23
Summary of tax saving
If loss is relieved asap (against PY income and CY gains) : 6,409 again
Relief in the future (agains future years income) :12,046
-Carrying loss forward would save additional tax of 12,046 - 6,409 = 5,637
- but carrying loss forward would lead to benefits of the loss relief being delayed
- the company might not be profitable in the future this effecting the salary to be paid.
- fortunately offset agains total income 2022/23 doesn’t need to be made until 31st jan 2026 , by that time we will know if Hiromi salary for 2024/25
What’s the tax implication for a company and the shareholder of paying dividend of £7,000
Income tax = 66k
Dividend tax implication for the company :
- dividend is not an allowable payment for TTP
- to have a £7,000 dividend available to distribute, would need to pay CT of:
7,000 x 19%/(100%-19%) = 1,642
Tax implication for a shareholder:
66k= HRTB
0% x 2000= 0
33.75% x 5,000 = 1687
Dividends are not liable to national insurance contributions
State the matters you would draw to the company to maintain and retain the record relating to its business activities.
Record keeping
- company must retain the records for a complete and correct CT return :
- evidence of transaction: receipts, expenses, sales and purchases
- supporting documents : accounts, books and contracts
- repainted for 6 years after the end of the relevant accounting period
- HNRC might impose penalties where insufficient records are retained
- max penalty if £3,000 for each accounting period
Explain the corporation tax treatment for group company buying asset from an unincorporated business :
- brand name
- cost : 50,000
- amortised on straight line basis over 8 years
The amortisation charged in Silves Ltd’s accounts will be an allowable deduction for corporation tax purposes.
In the year ended , the charge will be £6,250 (€50,000/8).
An alternative treatment would be to claim an annual writing down allowance for tax purposes equal to 4% of the cost of the brand, on a straight-line basis,
but clearly this would be less tax efficient for Silves Ltd.
