Taxation of a business + it's Stakeholders

Question 1

Which direct taxes are applicable to business

Answer 1

Income tax, CGT, corporation

Question 2

Which indirect taxes are applicable to businesses

Answer 2

VAT

Question 3

What are direct taxes cf indirect taxes

Answer 3

Direct taxes are imposed by reference to a taxpayer’s circumstances. Indirect taxes are imposed by reference to transactions.

Question 4

What is a receipt cf an expense

Answer 4

A receipt is money paid TO the business, an expense is money the business pays OUT

Question 5

Two types of receipt and two types of expense

Answer 5

Income receipts, capital receipts, income expenditure, capital expenditure

Question 6

Why is it necessary to distinguish between income and capital expenditure and receipts

Answer 6

In general, income expenditure can only be deducted from income receipts and capital expenditure can only be deducted from capital receipts to reduce overall tax bill

Question 7

What will be classed as an income receipt - guideline definition and three examples

Answer 7

Money received on a regular basis - e.g.

1. Trading profits of any business/profession
2. Interest the bank pays
3. Rent received by a landlord

Question 8

What will be classed as a capital receipt - guideline definition and example

Answer 8

Money from a one-off transaction
E.g. Gain on the sale of the premises owned by the business

Question 9

What will be classed as income expenditure - guideline definition and 7 examples (inc two non-obvious examples)

Answer 9

Money spent as part of day-to-day trading

E.g. Bills for heating and lighting
-Rent
-Marketing
-Stationary expenses
- Staff wages
- General repairs

Question 10

What will be classed as capital expenditure - guideline definition and 3 examples

Answer 10

Money expended to purchase a capital asset as part of the infrastructure of the business or as an enduring benefit for the business - ‘one off’ transactions

E.g. Large items of equipment

Property

Enhancing a capital asset (other than routine maintenance)

Question 11

How do you calculate trading profits

Answer 11

Income receipts less income expenditure

Question 12

What do capital allowances allow

Answer 12

A proportion of the cost of some capital assets (i.e. capital expenditure) to be set off against the trading profits (income receipts) of the business each year during the life of the asset concerned

Question 13

When is tax relief for capital allowances usual usually given

Answer 13

At the time when the capital asset is sold or otherwise disposed of (e.g. by way of gift)

Question 14

Two methods income tax is collected

Answer 14

Self-assessment

Deduction at source (e.g. PAYE) - the payer of a taxable sum is obliged to deduct tax and account for it to HMRC, recipient receives it sum net of tax

Question 15

Total income vs net income vs taxable income

Answer 15

Total = gross income from all sources

Net = total income less available tax reliefs

Taxable = net income less personal allowance

Question 16

Calculating Total income where income has been received by a taxpayer after deduction at source

Answer 16

Need to include gross amount in the calculation, i.e. ‘grossing up’

Question 17

Things to remember when calculating Total Income

Answer 17

Grossing up if necessary
Savings income rules
Divided income rules
Benefits in Kind

Question 18

Calculating Total Income - Savings income rules

Answer 18

Basic rate taxpayers are entitled to their £1,000 of interest and higher rate taxpayers to first £500 of interest recieved on savings at the savings nil rate (the ‘personal savings allowance’). Additional rate taxpayers do not get a personal savings allowance

Question 19

Calculating taxable income - Dividends income rules

Answer 19

No individual pays any tax on first £1000 of dividend income (prior to April 6th 2023 the allowance was £2000) - same for all taxpayers

Question 20

Calculating Total Income - benefits in kind

Answer 20

Benefits in kind are subject to income tax but are NOT subject to deduction of tax under PAYE, instead employer reports them to HMRC

Question 21

Calculating Net Income - relevant tax reliefs

Answer 21

1. Interest paid on qualifying loans - note interest paid TO the bank - is deducted from Total Income
2. Pension scheme contributions

Question 22

Income tax relief for interest on qualifying loans - what are qualifying loans (4 types)

Answer 22

1. Loans to buy an interest in a partnership
2. Loans to contribute capital or make a loan to a partnership
3. Loans to buy shares in (or make a loan to) a ‘close’ company
4. Loans to buy shares in an employee-controlled company or invest in a co-operative

Question 23

Income tax - next step after calculating net income

Answer 23

Deduct taxpayer’s Personal Allowance in order to ascertain Taxable Income

Question 24

Income tax - current personal allowance

Answer 24

£12570, reduced by £1 for every £2 of Net Income above £100,000

Question 25

Income tax - calculation for personal allowance for over £100,000

Answer 25

£12750 - ((Net Income - £100,000)/2) = reduced allowance

Question 26

Income tax - next step after calculating taxable income

Answer 26

Separating out different types of income (non-savings, savings, and dividend) (NSD (never squash donuts)

Question 27

Principle behind CGT

Answer 27

Taxing the profit a person might make from disposing of a capital asset which has appreciated in value during period of ownership

Question 28

When is CGT charged (high level)

Answer 28

Where there is a chargeable disposal of a chargeable asset by a chargeable person which gives rise to a chargeable gain

Question 29

Period over which CGT is charged

Answer 29

Tax year (i.e. 6 April to 5 April)

Question 30

When is CGT payable by

Answer 30

On or before the 31 January after the tax year in which the disposal occurs

Question 31

When will a disposal be chargeable

Answer 31

Sale of an asset; gift of an assert; NOT disposal on death (PRs are deemed to acquire the estate at its then market value)

Question 32

What is a chargeable asset

Answer 32

Any form of property that is not specifically excluded

Question 33

What assets are specifically excluded from being chargeable assets

Answer 33

-Principal Private Residence -Motor cars for private use (including vintage cars) -Certain investments - government securities, National Savings certificates, shares and securities held in an ISA, life assurance policies -UK Sterling and any foreign currency held for you or family's personal use

Question 34

CGT - when will a property be a PPR

Answer 34

Occupied the PPR as their only or main residence during the whole period of ownership. A married couple can only have one PPR between them

Question 35

CGT - what will determine chargeable gain

Answer 35

The starting point is always the consideration received (or deemed to have been received) Then consider whether disposal is at arm's length or between connected persons If arm's length then consideration received is the price paid If connected persons (not spouses), HMRC will deem the seller to have received market value irrespective of the actual sale proceeds IF transaction is between unconnected person and at an undervalue then sale is deemed to be market value BUT not if just a bad bargain by seller Gifts = market value

Question 36

CGT - who are connected persons

Answer 36

Direct ancestors (parents and grandparents), lineal descendants, and brothers and sisters NOT lateral relatives e.g. aunt uncle nephew niece Companies under common control Partners in business

Question 37

CGT - chargeable gains and charities

Answer 37

Disposals TO charities are treated as made on a no gain/no loss basis. Gains made BY charities are exempt provided that the gain is made for charitable purposes

Question 38

CGT - chargeable gains on disposals between spouses

Answer 38

Treated on a no gain no loss basis - in effect the spouse receiving the asset takes over the base cost (ie original cost of the asset to the transferor spouse) from the date of acquiring

Question 39

CGT - 3 types of allowable expenditure

Answer 39

Initial expenditure, subsequent expenditure, disposal expenditure

Question 40

CGT - what can make up initial expenditure

Answer 40

The cost price of the asset (base cost) and the incidents costs of acquisition (surveyors' fees, lawyers' fee)

Question 41

CGT - what can make up subsequent expenditure

Answer 41

Expenditure which enhances its value or was incurred in establishing, preserving of defending title to the asset

Question 42

CGT - what can make up disposal expenditure

Answer 42

Incidental costs of disposal (e.g. agents' commission)

Question 43

CGT - capital losses

Answer 43

Might make a capital loss where cost is greater than consideration received on disposal (but not if disposed by gift). CGT charged on overall gains by an individual in a tax year. Capital losses therefore deducted from any capital gains in the same tax year. If insufficient gains to offset full loss then any unrelieved losses can be carried forward - must be used against the first available gains

Question 44

CGT - annual exemption

Answer 44

Every individual is entitled, not companies. Currently £6000, last tax year was £12,300

Question 45

CGT - applicable rate of CGT for companies

Answer 45

Companies do not pay CGT they pay corporation tax - taxes on gains are calculated in a similar way and taxed at corporation tax rates

Question 46

CGT - applicable rate of CGT for individuals

Answer 46

Basic rate taxpayers pay 10% CGT Higher and additional rate taxpayers pay 20%

Question 47

What tax MUST you calculate before CGT and why

Answer 47

Income tax - a person's tax band determines the rate of CGT they pay

Question 48

CGT - applying income to get CGT calculations

Answer 48

Taxable income plus total chargeable gains is... less than £37,700 then CGT = 10% on income alone more than £37,700, then CGT =20% on income less than £37,700 but after gains added combined total exceeds £37,700, then CGT is 10% on the unused part of the basic rate tax band and 20% on everything over

Question 49

CGT - summary of CGT calculation

Answer 49

Sale proceeds/market value LESS disposal expenditure = Net Sale Proceeds Less initial expenditure, less subsequent expenditure = Total Chargeable Gain Less carried forward or carried-across losses, less annual exemption = Taxable Chargeable Gain Apply CGT at appropriate rate

Question 50

CGT - what is Business Asset Disposal Relief also known as (previously)

Answer 50

Entrepreneur's Relief

Question 51

CGT - high level what is the effect of Business Asset Disposal Relief

Answer 51

Reduces the higher rate of CGT (from 20% to 10%) for gains arising on qualifying disposals

Question 52

CGT - Business Asset Disposal Relief - 4types of qualifying disposal

Answer 52

Disposal of: 1. All or part of a trading business 2. Assets in a business that used to trade 3. Shares in a trading company 4. Shares in a company that used to trade

Question 53

CGT - Business Asset Disposal Relief - need a type of qualifying disposal plus...

Answer 53

Satisfaction of the conditions

Question 54

CGT - Business Asset Disposal Relief - conditions for disposing of all/part of a business

Answer 54

Business must be a trading business AND the business must have been owned for at least two years prior to the date of disposal

Question 55

CGT - Business Asset Disposal Relief - conditions for disposing of assets in a business that used to trade

Answer 55

Business must have been owned for at least two years before it ceased to trade Assets must have been used in the business when it ceased to trade The assets must have been disposed of within three years of the business ceasing to trade

Question 56

CGT - Business Asset Disposal Relief - conditions for disposing of shares in a company

Answer 56

Company must be, and have been for at least two years before the date of disposal, a trading company Shares must have been held for at least two years Person disposing of the shares must have been an officer or employee of the company who holds at least 5% of the ordinary voting shares and is entitled to at least 5% of the profits available for distribution and 5% of the net assets on a winding up, for at least 2 years at date of disposal

Question 57

CGT - Business Asset Disposal Relief - conditions for disposing of shares in a company that used to trade

Answer 57

Shares owned for at least 2 years before company ceased to trade Officer or employee of the company who held at 5% of ordinary voting shares, entitled to 5% if profits available for distribution and 5% net assets on winding up, for at least 2 years before ceased to trade Disposed of within three years of company ceasing to trade

Question 58

CGT - is Business Asset Disposal Relief automatically applied

Answer 58

No taxpayer must claim it before the first anniversary of 31 January following the tax year in which the disposal was made

Question 59

CGT - what is the Lifetime Allowance on Business Asset Disposal Relief

Answer 59

£1 million of qualifying gains - anything over would be charged at the normal rate applicable to that individual

Question 60

CGT - what is Investor's Relief

Answer 60

Reduces the higher rate of CGT (i.e. 20% to 10%) for gains arising on disposals of qualifying shares

Question 61

CGT - What is the lifetime limit on Investor's Relief

Answer 61

£10 million

Question 62

CGT - Investor's relief - what makes shares qualifying

Answer 62

1. Fully paid ordinary shares issued to an individual for cash consideration on or after 17 Match 2016 2. Company is and has been since shares were issue a trading company or holding company of a trading group 3. At time of issue none of the company's shares were listed on a recognised stock exchange 4. Shares held by the individual for three years and continuously since issue 5. Individual (or any connected person) is not, nor at any time since date of issue has been, an officer or employee of the company or a connected company

Question 63

CGT - effect of business relief

Answer 63

Defer liability to CGT

Question 64

CGT - what are the two main business reliefs

Answer 64

Replacement of business assets relief - Rollover relief AND Gift of business assets relief - 'hold-over relief'

Question 65

CGT - what is rollover relief (replacement of business assets relief)

Answer 65

A taxpayer can elect to postpone the CGT liability it realises on the sale of certain business assets by 'rolling over' the gain into the replacement asset

Question 66

CGT - what assets does rollover relief apply to

Answer 66

Land, buildings, fixed plant and machinery, and goodwill - new asset doesn't need to be the same type as the old one

Question 67

CGT - effect of rollover relief

Answer 67

The acquisition cost of the replacement asset is reduced by the amount of the gain being rolled over - any tax relief is postponed until the replacement asset is sold and no new qualifying replacement asset purchased in its place

Question 68

CGT - what is hold-over relief

Answer 68

Where an individual gives away a business asset, and both donor and donee claim hold-over relief, the donor will have no liability to CGT BUT donee's aquisition cost for CGT purposes is reduced by the amount of the donor's deemed gain - in effect the CGT liability is postponed until donee ultimately disposes of the asset

Question 69

CGT - what is the effect of holdover relief

Answer 69

the CGT liability is postponed until donee ultimately disposes of the asset

Question 70

CGT - when is hold-over relief available

Answer 70

Where the business asset is gifted OR where the business asset is sold at an undervalue, BUT then the holdover relief can only be available on the gift element (the difference between the price paid and the market value)

Question 71

CGT - what assets can holdover relief be claimed on

Answer 71

Goodwill Assets used in the business Shares in a trading company not quoted on the stock market

Question 72

What is corporation tax charged on?

Answer 72

Income receipts, less (deductible expenditure, capital allowances and trading losses) = income profits + Sale proceeds, less (allowable expenditure, indexation, capital/trading losses) = Chargeable gains = Total taxable profits

Question 73

What is deductible expenditure?

Answer 73

Interest paid on loans, wages, office rent, utilities

Question 74

What is the 'full expensing' capital allowance?

Answer 74

A company can claim 100% expenditure on new qualifying plant & machinery during a tax year (most short-term assets are qualifying - vans, office equipment, IT equipment, tools) - 100% of cost can be deducted from income receipts

Question 75

What is the annual investment allowance?

Answer 75

Can deduct 100% of the expenditure on qualifying plant & machinery each year up to £1m

Question 76

How must a company pay its corporation tax? Companies with a TTP or £1.5m or less

Answer 76

Pay HMRC within 9 months and 1 day after the end of the accounting period