2. Partnerships (Income Tax and VAT) Flashcards
(192 cards)
1
Q
What are the requirements for a general partnership??
A
2 or more people carrying on a business in common with a view to profit.
2
Q
What is the evidence of a partnership?
A
Joint property and profit sharing.
3
Q
Who can be partners in a general partnership?
A
Individuals or companies.
4
Q
Does a partnership have a separate legal personality?
A
No, a partnership does not have a separate legal personality from that of the partners.
5
Q
What governs partnerships?
A
Partnerships are governed by the Partnership Act 1890.
6
Q
What is the default contract for partnerships?
A
The default contract is provided by the Partnership Act 1890.
7
Q
Do partnership agreements have to be written?
A
No, agreements between partners can be written, oral, or implied.
8
Q
Which sections of the Partnership Act 1890 cannot be overridden?
A
Sections 1 and 2 govern when a partnership comes into existence, and sections 5-18 cover the relationship between partners and third parties, including liability for debts.
9
Q
What are the advantages of operating as a partnership?
A
No set-up formalities, no administrative/accounting requirements, and privacy.
10
Q
What is a disadvantage of partnerships?
A
Unlimited liability.
11
Q
What should be included in a partnership agreement?
A
Name, place of business, commencement and duration, work input, roles, decision making, financial input, shares in income and capital profits and losses, drawings and salaries, ownership of assets, expulsion, dissolution.
12
Q
What is a partnership at will?
A
A partnership with no agreed duration, and any partner can dissolve it by giving notice.
13
Q
What is a fixed partnership?
A
A partnership with a term defined by some event, and notice alone is not enough to dissolve it.
14
Q
What is the default provision for liability in a partnership?
A
Liability can be joint or several (not liable for debts before joining).
15
Q
What is the default provision for property in a partnership?
A
All property is owned jointly and partners are entitled to equal shares.
16
Q
What is the default provision for profits and losses in a partnership?
A
All partners are entitled to equal shares of profits and losses.
17
Q
Is there a default provision for salary in a partnership?
A
No entitlement to salary, but partners can make drawings.
18
Q
What is the default decision-making power in a partnership?
A
Majority rule for ordinary matters connected with the business.
19
Q
What requires unanimity in a partnership?
A
Nature of Partnership, New Partners, Varying Rights of Existing Partners, Removing Partners (impossible to expel partner unless provided in PA)
20
Q
How can a partnership be dissolved?
A
Retirement, Expiry of a fixed term, Death or bankruptcy of any partner, Notice of dissolution, Unlawful occurrence, Applying to the court for a dissolution order
21
Q
What happens when a partnership is dissolved?
A
Automatic dissolution - assets sold, outgoing partner receives share. Partial dissolution - partnership continues with one less partner
f the partnership agreement does not address the issue of payment for the outgoing partner’s share, the outgoing partner is entitled to either interest at a rate of 5% per annum on the value of their partnership share until they receive their share from the other partners, or such sum as
the court may order representing the share of profits made which is attributable to the use of their share
22
Q
Can partners expel another partner?
A
No, unless expressly agreed in an expulsion clause
23
Q
What is initial capital in a partnership?
A
Money partners contribute to the business
24
Q
What are capital profits in a partnership?
A
One-off gains
25
What are income profits in a partnership?
Recurring profits
26
How are proceeds of sale distributed in a partnership?
Creditors paid in full, loans returned to partners, partners paid their entitled share, surplus shared between partners
27
Who has authority to act in winding up a partnership?
All partners, unless bankrupt
28
Can bankrupt/deceased partners have their trustees/PRs act on their behalf?
Yes
29
How is the partners' share calculated upon retirement?
Total assets - liabilities / number of partners (shares)
30
What is goodwill in a partnership?
Part of purchase price representing business reputation and value
## Footnote
Goodwill is difficult to value, but commonly, two years’
profit is taken as the value for goodwill.
31
What are the responsibilities of partners under the PA 1890?
Be open and honest, account for private profits, not compete, bear share of losses, indemnify fellow partners
32
What is personal liability in a partnership?
Liability for negligence and partnership debts
33
When does a partner remain liable for partnership debts?
If the debt was incurred while they were a partner
34
When does a partner escape liability for partnership debts?
If the debt was incurred after they left the partnership and complied with s.36 PA 1890
35
What is a novation agreement in a partnership?
Retiring partner is released from existing debt and firm takes over liability
36
What is the liability of a partner in a partnership?
Joint or several (not liable for debts before joining)
37
What is an indemnity agreement in a partnership?
Agreement between partners to share liability
38
What is the Civil Liability (Contribution) Act 1978?
Allows court to order another partner to contribute to a debt if only one partner is sued
39
What is the test for binding the partnership?
Gives creditor right to sue any one or all partners for the entire amount
40
What is actual authority?
Permission to enter into a contract on behalf of partnership
41
What is apparent authority?
Sensible for other party to think person could bind partnership
42
When is the firm liable to third parties?
1. Transaction relates to business carried on by the firm, 2. Transaction is one a partner would usually have authority for, 3. Other party did not know partner lacked authority, 4. Other party believes person is a partner
43
What must a partner do to avoid liability for debts?
1. Give notice to existing customers, 2. Put announcement in London Gazette for future customers, 3. Remove name from website/stationary
## Footnote
if partner does all that they will not be deemed to have any liability for debt unless they say they say they are partners moving forward or they let other ppl say that
44
What is restraint of trade?
Includes non-compete, non-solicitation, and non-dealing clauses
45
What is holding out?
When a creditor relies on a representation that a person is a partner in the firm
46
What are the regulations for formation of Limited Liability Partnerships?
Limited Liability Partnerships Regulations 2001 provides default contract, Limited Liability Partnerships (Application of the Companies Act 2006) Regulations 2009 applies certain sections of CA 2006 to LLPs
47
What charges can an LLP own?
Property and both fixed and floating charges
48
How are decisions made in an LLP?
General: Majority decision, Changing terms: Unanimity
49
What is the minimum number of members required for incorporation?
Two members
50
What happens if there is only one member for a period of 6+ months?
They will be jointly and severally liable for all debts incurred (usually debts after the 6 month)
51
What form and fee are required for incorporation?
LL IN01 form + applicable fee
## Footnote
no need to file an LLP agreement
52
What is the registered office address used for?
Service of official documents
53
What forms are required for adding new members?
LL AP01 (individual member) LL AP02 (corporate member)
54
What form is required when a member leaves?
LL TM01 form
55
Within how many days should the TM01 form be filed when a member leaves?
Within 14 days
## Footnote
same number of days for notice applies if new member is added to LLP
56
What is the liability of partners in an LLP?
Limited to the amount they put into the business
57
Which liquidation regime applies to both the LLP and its members?
Insolvency Act 1986
58
What are the potential liabilities of members in an insolvent LLP?
Misfeasance, fraudulent trading, wrongful trading
59
What are the advantages of operating as an LLP?
Limited liability, fixed and floating charges, flexible structure, appointment of an administrator
60
What are the disadvantages of operating as an LLP?
Administrative/accounting requirements, public inspection, tax provisions on insolvency
61
What taxes do sole traders and partnerships pay?
Income tax and capital gains tax + VAT
62
What taxes do companies pay?
Corporation tax + VAT
63
What are capital profits?
One-off gains, such as an office building increasing in value
64
What are income profits?
Recurring in nature, e.g. trading profits or rent received by a partnership that owns properties
65
How are trading profits calculated for income tax?
Trading profit = income from business
66
How are trading profits calculated for corporation tax?
Trading profit = income from business, but under different statutes
67
What determines if an item is considered income or capital profit?
If the business can sell the item at a profit, it is income. If the expenditure has the quality of recurrence, it will be income in nature
68
What is the Income Tax (Trading and Other Income) Act 2005?
Legislation governing income tax for trading and other income.
69
What are the Corporation Tax Acts 2009 and 2010?
Legislation governing corporation tax.
70
How is trading profit/loss calculated?
Chargeable receipts minus deductible expenditure minus capital allowances.
71
Do all businesses use the same calculation for trading profit/loss?
Yes, but trading loss reliefs vary.
72
What are chargeable receipts?
Money received for the sale of goods and services.
73
What is the rule for chargeable receipts?
They must be income in nature and recurring.
74
What is the definition of trade?
Operations of a commercial character where goods or services are provided to customers for reward.
75
What is deductible expenditure?
Expenditure incurred 'wholly and exclusively' for the trade.
76
What is income in nature?
Recurring income.
77
Give examples of deductible expenditures.
Salaries, rent on commercial premises, utility bills, stock, contributions to an approved pension scheme, raw materials, and interest payments on borrowings.
78
What is the purpose of capital allowances?
To encourage businesses to invest in essential machinery.
79
What is the effect of capital allowances?
They make up a proportion of the value of capital items, such as plant and machinery.
80
What is WDA?
Writing down allowance, which is 18% of the value of the business' plant and machinery.
81
What is the written-down value of an asset?
The reduced value of the plant and machinery after applying WDA.
82
What is pooling?
WDA calculated on the value of the whole pool of plant and machinery.
83
Does pooling apply to all plant and machinery?
No, it only applies to plant or machinery that has been bought or is owned.
84
What is the Annual Investment Allowance (AIA)?
An allowance that encourages businesses to invest in essential machinery.
85
What is AIA?
Allowance for businesses to deduct the cost of plant and machinery from chargeable receipts.
86
What is the current AIA limit?
£1 million.
87
How does AIA work for a group of companies?
They will only receive one AIA for the group.
88
What is the relevance of AIA for second-hand assets?
It is relevant for companies.
89
AIA- Applies to what business? What is the allowance? On what assets?
AIA-
Both companies and unincorporated businesses
100% allowance, capped at £1 million
New OR second-hand and refurbished
## Footnote
LOOK AT PAGE 150- REMEMBER THESE ARE CAPITAL ALLOWANCES WHICH U ADD TOGETHER ALONG WITH DEDUCTIBLE EXPENSE THEN DEDUCT FROM INCOME TRADING (CHARGABLE RECEIPTS))
90
What is full expensing?
Deducting 100% of the cost of plant and machinery from chargeable receipts.
91
Who is eligible for full expensing?
Companies only.
92
What happens on disposal of an asset under full expensing?
A balancing charge is applied equal to the disposal value.
93
What type of assets are eligible for full expensing?
Brand new assets only.
94
What is an accounting period?
A period of usually 12 months that shows the profit or loss made by a trade.
95
Relief for a trading loss: APPLIES TO WHAT?
unincorporated businesses: sole trader & partnerships
96
What is the purpose of trading loss reliefs?
To allow a taxpayer to deduct a trading loss from other income.
96
Are they entitled to more than one loss relief?
Where the taxpayer is eligible for more than one relief, they may choose which relief to claim.
If, after claiming as much relief as is available under one provision, there are still some
unabsorbed losses, the taxpayer can claim relief for the balance of the loss under another
provision if they are eligible.
97
Who can claim trading loss reliefs?
Sole traders and partnerships.
98
What is start-up loss relief?
Relief applicable when a loss is suffered in the first 4 tax years of a new business.
99
What can a start-up loss be set against?
Total income in the 3 years prior, including previous businesses.
100
What can be claimed back from HMRC under start-up loss relief?
Some of the income tax paid in the 3 years prior.
101
What is the deadline for claiming start-up loss relief?
On or before 31 January.
102
What is the cap for start-up loss relief?
£50,000 or 25% of the taxpayer's income in the tax year.
103
What type of income does start-up loss relief apply to?
Income from sources other than the trade which produced the loss.
## Footnote
It enables the taxpayer to claim back from HMRC some of the income tax they paid in their previous business or employment in the three tax years prior to the tax
year of the loss (some or all of which they may have paid at the higher rat
104
What is carry-across relief?
Treating trading losses in an accounting period as losses of that tax year.
105
How can carry-across relief be used?
To set the losses against total income from the same tax year or the preceding tax year.
106
What are the two options for setting off losses against total income?
Set against total income from the same tax year until that income is reduced to zero, with the balance of the loss being set against total income from the tax year preceding the tax year of the loss; or set against total income from the tax year preceding the tax year of the loss until that income is reduced to zero, with the balance of the loss being set against total income from the tax year of the loss
107
When must a claim for loss relief be made?
## Footnote
Can you see the disadvantage of using start-up, carry- across and carry-back relief?
On or before 31 January
## Footnote
Mary will lose the benefit of her personal allowance in the tax years where total incomeis reduced to zero, because losses must be set against total income, not just enough of
the income to take total income down to £12,570, the level of the personal allowance.
108
What is the cap for loss relief?
£50k or 25% of the taxpayers income in the tax year in relation to which the relief was claimed. Only applies to income from sources other than the trade which produced the loss.
109
What are the requirements for setting off losses against capital gains?
Must be capital gains made in the same tax year and must be done on or before 31 January
## Footnote
This relief allows the taxpayer to set trading losses against chargeable gains in the same tax year, and APPLIES when a taxpayer has claimed carry- across relief but not all of the loss has been absorbed
110
What is carry-forward relief?
Carry forward trading loss for a tax year and set it against subsequent profits which the TRADE produces in the subsequent years.
111
How long can a loss be carried forward?
Loss can be carried forward indefinitely until the loss is exhausted.
112
When must a taxpayer notify HMRC of intention to claim carry-forward relief?
No more than 4 years after the end of the tax year in which the loss was suffered.
113
What is carry back of terminal trading loss?
If loss incurred in final 12 months of trading, it can be carried across and set against trading profits in the final tax year.
114
Is there a cap on the amount that can be relieved under carry back of terminal trading loss?
No, there is no cap on the amount that can be relieved.
115
What may happen if a tax rebate is received under carry back of terminal trading loss?
Trading profits from previous years will be reduced.
116
What types of income can carry back of terminal trading loss be applied to?
Can only be applied to trading income, not to non-trading income or capital gains.
117
When must a claim for carry back of terminal trading loss be made?
No more than 4 years after the end of the tax year to which the claim relates.
118
What is carry-forward relief on incorporation of business?
Taxpayer incorporates business mainly in return for shares, trading losses can be carried forward and set against any income they receive from the company.
119
What is the requirement for carry-forward relief on incorporation of business?
80% or more of the consideration for the business transferred must be shares in the company.
120
What is the cap on reliefs?
Some reliefs are subject to a cap for any one tax year.
121
What is the cap for start-up relief and carry-across/carry-back relief?
The cap is the greater of £50,000 or 25% of the taxpayer's income in the tax year.
122
What is the impact of the cap on reliefs?
The cap only applies to income from sources other than the trade which produced the loss.
123
What is VAT?
VAT is charged every time a business supplies goods or services.
124
What is the standard rate of VAT?
The standard rate of VAT is 20%.
125
What is output tax?
Output tax is the tax that a VAT registered business is required to charge the customer on its taxable supplies.
126
What is input tax?
Input tax is the VAT incurred on the purchase of goods and services that are liable for VAT.
127
What does supply of goods and services include?
Supply of goods and services includes intangible goods, such as interest in land or supply of electricity.
128
What are exempt supplies?
Exempt supplies include residential land, postal services, education, and health services.
129
What are zero-rated supplies?
Zero-rated supplies include books, certain food and water, and children's clothes.
130
Who is considered a taxable person?
A taxable person is someone who makes or intends to make taxable supplies and is registered under the VAT Act 1994.
131
What is the registration threshold for VAT?
The registration threshold is £90,000 of taxable supplies in the preceding 12 months.
132
What are the obligations of a registered VAT person?
A registered VAT person must submit a tax return to HMRC and pay the VAT owed within 1 month.
133
What is a tax invoice?
A tax invoice shows information such as the VAT number, the value of supply, and the rate of tax charged.
134
Who must provide a tax invoice?
A person making a taxable supply to a taxable person must provide a tax invoice.
135
Is there a cap on the amount that can be relieved?
No, there is no cap on the amount that can be relieved.
136
When must HMRC be notified of the intention to claim relief?
HMRC must be notified no more than 4 years after the end of the tax year to which the loss was suffered.
137
What is the rule if after applying reliefs of one provision, there is still a loss?
Reliefs of another provision can be applied if eligible.
138
What is the maximum cap for start-up relief and carry-across/carry-back relief?
The maximum cap is the greater of £50,000 or 25% of the taxpayer's income in the tax year.
139
What is the registration threshold for VAT?
£90,000 per annum
140
Who is obligated to register for VAT?
Anyone making taxable supplies of more than £90,000 per annum
141
Can those making less than the registration threshold choose to register for VAT?
Yes, they can choose to register but are not obliged to
142
Can a partnership be registered in the name of the partnership itself?
Yes
143
What is Income Tax?
Tax paid on all income, including dividends, interest, and pensions
144
Who pays Income Tax?
1. Individuals
145
What is the tax year?
6 April to 5 April of the following year
146
What are the three types of income for Income Tax purposes?
1. NSNDI (Non-savings, non-dividends income)
147
What are the tax rates for NSNDI?
20% tax for £0-£37,700, 40% tax for £37,700-£125,140, 45% tax for £125,140+
148
What are the types of income that are charged income tax?
1. Trading income, 2. Property Income, 3. Savings and Investment Income, 4. Employment and pensions income, 5. Misc Income
149
What is the formula for calculating Income Tax payable for trading profits (or losses)?
Chargeable receipts - deductible expenditure - capital allowances
150
What is the formula for calculating net income?
Total income - allowable reliefs (interest on QLs - pension contributions)
151
What is the formula for calculating taxable income?
Deduct personal allowance (£12,750) from net income
152
What is non-savings income?
Taxable income - savings income - dividends income
153
What are the five steps of calculating income tax liability?
Step 1: Calculate total income
Step 2: Deduct any allowable reliefs The resulting sum is net income
Step 3: Deduct any personal allowances The resulting sum is taxable income
Step 4: Separate NSNDI, savings income and dividend income, and calculate the tax on each type of income at the applicable rate(s) (starting rate, basic rate, higher rate and additional rate)
Step 5: Add together the amounts of tax from Step 4 to give the overall income tax liability
154
Income tax payable: What is the purpose of reducing the overall liability by income tax deducted at source?
To determine the income tax owed to HMRC.
155
Gross figure: What does this term refer to?
The number before tax was deducted.
156
Blind allowance: What is the purpose of this allowance?
## Footnote
There is also this allowance
To provide an additional £3070 deduction.
## Footnote
If an individual has gross property income or gross trading income below £1,000 annually, this income is tax-free and doesn’t need to be reported to HMRC.
157
Marriage allowance: What is the purpose of this allowance?
To allow the transfer of £1260 of personal allowance to a spouse.
## Footnote
Where a person does not have enough income to use their personal allowance fully for that tax year, they can transfer £1,260 of their personal allowance to their spouse or civil partner.
This is not available if the recipient is a higher or additional rate taxpayer
158
Personal Allowance: How is it reduced for income above the £100,000 limit?
Reduced by £1 for every £2 of income above the limit.
## Footnote
12570(X-100k)/2
159
Personal Savings Allowance: Who does not receive this allowance?
Additional rate taxpayers.
160
Additional Rate Allowance: What is the amount of this allowance?
£0 for earners over £125k.
161
Dividend Income - Allowances (nil rate band): What is the amount of tax-free dividend income for all rate taxpayers?
£1,000.
162
Dividend Income - Allowances (nil rate band): What is the higher rate of tax for dividend income above £5400?
33.75%.
163
Taxation of Sole Traders: What taxes do sole traders pay?
Income tax (+ CGT or IHT depending on circumstances & nature of trade) + VAT (if over £85k).
164
Taxation of Partnerships: How are profits shared between partners?
Partners will share capital and profits between them.
165
Taxation of Partnerships: What taxes do individual partners pay?
Income tax and capital gains tax.
166
Taxation of Partnerships: What taxes do corporate partners pay?
Corporation tax.
167
Taxation of Partnerships: How is tax liability calculated when partners join or leave a partnership?
Using apportionment.
168
Income tax relief on borrowings: What is the purpose of this relief?
To provide tax relief on borrowed funds for business purposes.
169
What is a qualifying loan?
Loan used to buy a share in a partnership or lend money to a partnership, with interest deductible from total income.
170
What is the cap on tax relief for qualifying loans?
Greater of £50,000 or 25% of taxpayer's total income (less allowable pension contributions).
171
What is the effect of the qualifying loan rule?
Limited to income from sources other than the trade that produced the loss.
172
When is tax relief availability restricted for partners of LLP?
In certain conditions.
173
How are shareholders taxed?
They pay tax on dividends.
174
What are the income tax consequences for a shareholder if a close company writes off a loan to a participator?
The shareholder will have income tax consequences.
175
What is a share buyback?
When a shareholder sells shares back to the company, resulting in a profit that is subject to income tax.
176
What are the income tax reliefs available for shareholders?
1. Borrowing money to purchase shares in a close company or lending money to a close company. 2. Enterprise Investment Scheme allows deduction of 30% of the amount invested in qualifying unquoted companies.
177
What is the tax treatment for a lender receiving interest on a loan?
The lender must pay income tax on the interest received.
178
What types of income are subject to income tax for employees and directors?
1. Employment income (including non-cash benefits and National Insurance). 2. Pensions income. 3. Social security income.
179
What can an employee deduct from their employment income?
Deductible expenditure that is necessary for performing their duties (e.g., traveling expenses).
180
What are the methods of collecting income tax?
1. Deduction at source. 2. Self-assessment (e.g., for rental income, requires a tax return). 3. Tax return (must be filed by 31 January following the tax year).
181
When must a tax return be filed if it is a paper return?
No later than 31 October following the tax year.
182
When must a tax return be filed if it is not a paper return?
By 31 January following the tax year.
183
When must HMRC be notified of a tax return?
Within 6 months of the end of the relevant tax year.
184
Tax Avoidance
Using tax law to reduce tax bill
185
GAAR
General Anti-Avoidance Rule
186
Abusive Tax Arrangements
Arrangements with main purpose of obtaining tax advantage
187
Reasonableness Test
Arrangement cannot be reasonably regarded as reasonable course of action
188
Consequences of Abusive Tax Arrangements
HMRC may request just and reasonable adjustments to tax paid
189
Tax Evasion
Illegal methods to reduce tax payments
190
Close Company
Under control of 5 or fewer shareholders or directors
191
Substantial Property Transaction
Director must declare interest to board, can't vote or count in quorum
