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Business Law and Practice > 5. Taxation of a business and its stakeholders > Flashcards

5. Taxation of a business and its stakeholders Flashcards

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1
Q

Trading Profits

What is the basic formula for trading profits?

A

Chargeable Receipts

LESS

Deductible Expenses

LESS

Capital Allowances

EQUALS

Trading Profit/Loss

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2
Q

Trading Profits

What is a chargeable receipt?

A

Means someone of an income nature rather than a capital nature.

Most common forms of income are from the sale of goods (sales) or services (profit costs).

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3
Q

Trading Profits

What are deductible expenses?

A

They are deducted from the chargeable receipts.

The be deductible the expense must:

  • Not be prohibited by statute.
  • Be of an income nature (hallmark of income is that it normally has an element of recurrance).
  • Be incurred wholly and exclusively for the purposes of trade.
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4
Q

Trading Profits

What are capital allowances?

A

They are deducted from the deductible expenses.

Allow the business to deduct some of the cost of plant and machinary from chargeable receipts, to reduce tax liability.

Serve to encourage investment.

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5
Q

Trading Profits

What is plant and machinary?

A

Includes assets used to help carry on business (eg machines, office equipment, and tools).

But not items that are bought to be sold as part of the business.

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6
Q

What are the two types of capital allowance that can be claimed?

A
  1. Writing Down Allowance
  2. Annual Investment Allowance
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7
Q

Trading Profits

What is the WDA (writing down allowance)?

A

Allows 18% of the total value of P&M in each year to be deducted from chargeable receipts. This 18% is then deducted from the total P&M value to give the WDV.

Eg: 200k P&M, what would be the WDV 1st and 2nd Year?

1: 200k x 18% = 36k.
200k-36k = 164k.

  1. 164k x 18% = 29,590
    164k-29,590 = 134,480
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8
Q

Trading Profits

What is Pooling?

A

If businesses have more than one item of P&M they can pool the assets together to calculate the WDV.

If the sale exceeds the WDV, then the diffrence would be added as a chargeable receipt of the business.

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9
Q

Trading Profits

What is the Annual Investment Allowance (AIA)?

A

Business can deduct the entire amount of P&M in that accounting period from chargeable receipits.

This is subject to a £1m cap.

Group companies have a AIA between them.

Anything that exceeds the £1million can have the WDA claimed.

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10
Q

Trading Profits

What are the reliefs for trading losses?

A
  • Start-up/early trade losses relief
  • Carry across/back one year relief against general income
  • Carry forward relief
  • Terminal Loss relief
  • Carry forward relief on incorporation of buisness
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11
Q

Trading Profits

Can the same loss be claimed for twice under different reliefs?

A

NO

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12
Q

Trading Profits

What is start-up/early trade losses relief?

A

Losses made in the FIRST FOUR years of trade may be set off against any other income in the three tax years before the loss.

  • Can be used against any other income.
  • Involves claim-back of tax paid (from previous job/business)
  • Set against earlier years first.
  • Time limit
    Must be claimed on or before the first anniversary of 31 January following the end of the loss making year. (just think 2 years cause this shit doesnt make sense)
  • Cap Applies
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13
Q

Trading Profits

What is carry across/back one year relief? (CA and CB)

A

The amount of the loss may be deducted from any other income taxable in that tax year (carry across) and/or the preceding tax year (carry back).

  • Can be used against any other income
  • Carry across can be used against chargeable gains in the same tax year if the loss is not absorbed.
  • Time limit
    Must be claimed on or before the first anniversary of 31 January following the end of the loss making year. (just think 2 years cause this shit doesnt make sense)
  • Cap Applies
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14
Q

Trading Profits

What is carry forward relief (CF)?

A

The amount of the loss may be dedcuted from future income profits of the same trade.

  • Set against earlier years first.
  • Can only be used against trading profits from the same trade.
  • Can be carried forward indefinitely.
  • Taxpayer is required to notify HMRC no more than four years after the end of the loss-making tax year.
  • No cap applies.
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15
Q

Trading Profits

What is terminal loss relief (TLR)?

A

A loss made during the last year of the trade may be set off against trading profits connected to the same trader in the final year and in the three tax years prior to the final tax year.

  • Set against later years first.
  • Can only be used against income profits from the same trade.
  • Time limit
    Claim must be made no more than four years after the end of the loss-making year.
  • Involved claiming a rebate of tax paid
  • No cap applies
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16
Q

Trading Profits

What is carry forward relief on incorporation of business (CFIB)?

A

Allows trading losses to be set off against any income received from the company (dividends/directors fees) when an unincoporated business is transfered to a company wholly or mainly in return for shares (at least 80% of the consideration).

  • Can be carried forward indefinitely.
  • Time limit
    Claim must be made no more than four years after the end of the loss-making year.
  • No Cap Applies
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17
Q

Trading Profits

What is the cap of relief?

A

The greater of 50k or 25% of the tax payers income from other sources in the tax year in realtion to which the relief is claimed.

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18
Q

VAT

When is VAT Charged?

A

VAT is charged on any supply of goods or services made in the UK where a taxable supply is made by a taxable person in the course of furtherance of any business carried on by him.

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19
Q

VAT

What is a taxable supply?

A

A supply is taxable unless it is exempt.

Main exempt are: Education, health services, residential land and insurance.

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20
Q

VAT

What is a taxable person?

A

A taxable person is someone who makes taxable supplies.

They must register for VAT with HMRC if the value of their taxable supplies exceeded 85K in the previous year.

Otherwise registration is voluntary.

Not possible to register if the business only makes exempt supplies.

21
Q

VAT

What happens when upon registering?

A

A VAT number is assigned to the business.

22
Q

VAT

What is the current normal VAT Rate?

A

20%

23
Q

VAT

What other VAT rates are there?

A

0% for zero rated supplies: non-catering food, books and water.

5% for reduced rate: domestic fuel.

0% is not the same as exempt!! They can still be registered.

24
Q

VAT

When must a VAT return be submitted to HMRC?

A

Must be submitted and VAT paid within one month from the end of each quarter.

Rebate will be payable if input tax exceeds output tax.

Full records must be kept.

25
Q

VAT

What is input tax?

A

Input VAT is the VAT paid by a business on its purchases

26
Q

VAT

What is output VAT?

A

Output VAT is the VAT charged by a business on the sale of goods and services

27
Q

VAT

What are the penalities for failing to adhere?

A
  • Repayment with Interst
  • Unlimited fine and imprisonment for up to seven years for tax evasion
  • Fixed financial penalties for failing to keep records
  • The default surcharge of 15% of the tax for persistent default in filing returns.
28
Q

Income Tax

What is a chargeable person?

A

The following, who are liable to pay IT:

  • Individuals (including sole traders)
  • Individual Partners
  • Trustees
  • Personal Representatives
29
Q

Income Tax

What is the Basis of Charge to Income Tax?

A

Income Tax is a tax levied on a person’s income.

30
Q

Income Tax

What makes up a person’s income?

A
  • Salary
  • Dividends
  • Interest Received
  • Trading Profit (For ST and Partners)
  • Profit element of rent received
31
Q

Income Tax

What do chargeable persons pay Income Tax on?

A

Pay on income earned/profits masdr during the Income Tax year.

32
Q

Income Tax

What is the Income Tax Year?

A

06 April - 05 April

Named after the two years that it straddles.

2024/2025 tax year for example.

33
Q

Income Tax

Is income tax progressive?

A

Yes.

The tax rate increases as the income increases.

34
Q

Income Tax

What is the calculation?

A

TNTSPAA

T- Total Income
N- Net Income
T- Taxable Income
S - Split into Non savings, Savings, Dividends (never squash donuts)
P - Personal Allowance
A - Apply Tax Rates
A - Add together

TNTSPAA and Never Squash Donuts (lol)

35
Q

Income Tax

What is taxable income?

A

Income after the deduction of allowable reliegs and personal allowances.

This figure tells us if someone is a basic rate, higher rate or additional rate tax payer.

36
Q

Income Tax

What is a basic rate tax payer?

A

0-37,700

Personal Savings Allowance of £1000

37
Q

Income Tax

What is a higher rate tax payer?

A

37,701 - 125,140

Personal Savings Allowance of £500

38
Q

Income Tax

What is an additional rate tax payer?

A

Over 125,140

No Personal Savings Allowance

39
Q

Income Tax

What are the Income Tax Bands?

A

Basic - 20%

Higher - 40%

Additonal - 45%

Always calculate Non-Savings Income FIRST

40
Q

Income Tax

What is Savings Starting Rate?

A

If non-savings income is 5000 or less, this means the first 5000 is charged at 0%.

Anything above 5000 is charged at the appropriate rate.

41
Q

Income Tax

What are the dividend rates?

A

Basic: 8.75%

Higher: 33.75%

Additional: 39.35%

Don’t forget to subtract the dividend allowance of £500 for 2024/25!

42
Q

Income Tax

Worked Example

A

Taxable Income: 200,000
NS: 175,000
S: 5,000
D: 20,000

  1. Tax NS first:
    a. 20% on first 37,700 = 7,540.
    b. 40% on 125,140 - 37,701 = 34,975.60.
    c. 45% on 175,000 - 125,141 = 22,436.55.
    Add together: £64,952.15.
  2. Tax S second:
    a. No savings allowance as additional rate tax payer.
    b. Additional rate on savings = 5000 x 0.45 = 2,250.
  3. Tax D Last:
    a. Minus £500 (allowance)
    b. Dividend rate of 39.35% to 19,500 = 7,673.25

Add all together: £74,875.40 Total Tax Payable.

43
Q

Income Tax

What is the personal allowance?

A

£12,570

44
Q

Income Tax Sole Traders

What are they taxed on?

A

On profits that they make from their trade?

45
Q

Income Tax Sole Traders

When must they register with HMRC?

A

MUST register within 3 months of starting their business.

46
Q

Income Tax Sole Traders

What capital allowances are available for STs?

A

Sole traders can take advantage of capital allowances on the purchase of plant and machinery

Main capital allowances available for sole traders are
- Annual Investment Allowance (£1,000,000)
- Writing down basis of 18 per cent

47
Q

Income Tax Sole Traders

How do STs calculate their profit?

A

Sole traders calculate profit according to their Accounting Period, which may be different to the Accounting Year (ends 5 April)

  • As a result, sole traders are taxed according to profit made during the Accounting Period, except for the first year, where they are taxed up to the Accounting Year)
  • To calculate profit, a sole trader can deduct business expenses (e.g. utilities) from their trading income
48
Q

Income Tax Sole Traders

What is Loss Relief and How is it Used?

A

Sole trader can use loss relief to reduce income tax
- I.e. trading losses sole trader has made in running their business

  • Can offset these losses against profits in the current or previous tax year
  • Cap on reliefs: £50,00 or 25 per cent of total Taxable Income
  • Any unused losses can be carried forward- Sole trader may, in some circumstances, use any unused trade loss relief (after using it against all profits) to reduce capital gains
    tax (CGT) liability by reducing chargeable gains.
49
Q

Income Tax

How are Partners Taxed?

A

Profits arising from a partnership are distributed to partners equally (under the Partnership Act 1890) or, if there is a partnership agreement, what is written in said agreement (usually according to capital contributions)

  • Profits are taxed to income tax – partnership itself pays no tax
  • Partners include their profit figures on their tax returns are taxed on those profits as per the income tax calculation
  • Partners are taxed on profits mad during the Accounting Period of their partnership
  • Partners can use the same loss relief claims as a sole trader.

Business Law and Practice (6 decks)

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